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Chapter 8

INSIDER TRADING

I. INSIDER TRADING: A REAL OR AN IMAGINARY EVIL?

A. Current Regulatory Attitudes

While many of the problems associated with the efficient functioning

of an orderly securities market have received extensive public and

legislative attention, perhaps the most notorious has been that

referred to with deceptive simplicity as "insider trading".

The term itself immediately conjures to the lay mind visions of the

worst kind of market manipulation by company directors and officers

at the expense of the average investor. It raises the spectre of

dishonest management utilizing "inside" information to make vast

profits through the buying or selling of shares from or to the

necessarily uninformed investing public. As such, it seems at first

sight to be clearly "unfair", to be morally wrong in the sense that

the uninformed investor is denied the opportunity of participating

"equally" in the market. Further, it seems to be directly

contrary to the basic principle of full disclosure upon which the most

enlightened regulatory systems are currently based.

It is precisely because the regulation of what is known as insider

trading is, in many jurisdictions, predicated only upon such basic and

1021

emotional over-simplifications that this study will be concerned to

examine the fundamental question of whether or not such regulation

should be included in future Australian and regional securities

legislation. To this end, current definitional concepts of insider

trading will be examined, as will the philosophical bases for the

introduction of current regulatory provisions in this field.

The area of corporate and investor activity which comes within the

scope of "insider trading" regulation is so widespread as to make it

crucial that the decision to either regulate or not regulate is

founded upon the clearest possible understanding of the basic

philosophical issues involved.

B. What is "Insider Trading"?

One of the factors which has resulted in the current diversity of

opinion as to the necessity for regulating insider trading is the

lack of a precise and generally accepted definition of the phenomenon.

It has been defined in extremely broad terms (dealings in corporate

securities where one party has and the other party does not have

access to confidential information which has a substantial bearing on

the value of those securities"),^ as well as in more restricted terms

('Insider trading arises wherever persons, including corporations,

having fiduciary responsibilities, purchase or sell shares and the

transactions are wholly or in part motivated by 'inside' information?acquired in the performance of their functions as fiduciaries").

1022

The difference in scope exhibited by even these two definitions,

the former not being based upon the existence of any fiduciary

relationship and the latter being strictly limited to situations in

which that relationship occurs, illustrates clearly that any

consideration of the basis for the regulation of insider trading must

be related to the particular definition or concept of the phenomenon

which occurs in particular jurisdictions.

It is sufficient at this stage merely to identify the general nature

of the phenomenon and to postpone a detailed examination of its

various "forms", so that they may be considered in conjunction with

their respective philosophical bases.

In general terms, then, insider trading may be said to relate to

activities whereby A, who has, in respect of a company, certain

knowledge or information, deals in the securities of that company

with B, and obtains an advantage in that dealing through his

possession of that knowledge or information. Whether or not such

activity on the part of A should be the subject of moral and/or legal

stricture will depend upon a number of important factors. First, the

relationship of A to the particular company concerned. Will A ’s

position be the same if he is a director; a senior management officer;

a junior management officer; a substantial shareholder; a shareholder;

or friend of a director, officer or shareholder; or a taxi-driver who

unavoidably overhears two directors discussing company affairs in his

taxi on the way to the airport?

1023

Secondly, what must be the nature of the knowledge or information

which A possesses? Must it be information which vitally affects

the company’s performance and thus the price of its securities?

Mast it be information which is not known, or could not be expected

to be known, by the person with whom A deals in the company’s

securities?

Thirdly, how is it to be determined whether A in fact has received

an advantage or B has suffered a disadvantage as a result of A

possessing, and B not possessing, that knowledge or information? How

does B establish that he would not have entered the same transaction

if he had been aware of the information possessed by A?

These and similar questions have been answered in different ways

in different regulatory jurisdictions. Before proceeding to an

examination of the philosophical bases of the existing Australian

legislation in this area, this study will examine the bases of the

legislation which exists in the United Kingdom, Canada and the United

States and in derivative systems in the Asian Region. These are

some of the major jurisdictions which have felt it necessary to

regulate this area of the securities industry and a consideration of

the philosophies utilized to justify such regulation might be

expected to cast light upon the rationale for the existing Australian

statutory provisions.

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XI. THE UNITED KINGDOM

A. Percival y. Wright

Historically1, the fiduciary position of company directors in the3United Kingdom was governed by Percival v. Wright, In this case,

certain shareholders of a limited company approached the company's

secretary to determine whether he knew of any person wishing to

purchase shares. After correspondence in respect of the sale price,

the chairman of the company and two other directors agreed to purchase

the shares, and the transfers to them were approved by the company's

board.

It was subsequently established that during and prior to these

negotiations, the chairman and the company's board were being

approached by a potential purchaser of the whole of the company's

undertaking. These discussions, which involved share prices

exceeding those paid to the vendors of the shares by the company's

directors, were not successful, no firm offer being made which the board4

was able to place before the company's shareholders.

The vendors of the shares to the directors sought to set aside their

sale on the ground that the defendant directors should have

disclosed the fact of the negotiations . with the potential purchaser

when discussing the purchase of their shares.

1025

It was argued for the plaintiffs that the directors were in a

fiduciary position towards them as shareholders and that as such

they ought to have disclosed the negotiations with the potential

purchaser, thus enabling them to retain their shares and possibly

to receive an increased price should those negotiations have proved 5successful. Significantly, however, counsel for the plaintiffs

conceded that the defendants would not have been bound to disclose

information acquired in the ordinary course of management, such as,

e.g., "a large casual profit, the discovery of a new vein, or the

prospect of a good dividend”, while arguing that they were still

obliged to disclose the ’’special information” acquired during their

negotiations for the sale of the entire undertaking-^ Counsel for

the defendants predictably argued against the existence of any7fiduciary relationship between the plaintiffs and the defendants-

SwinfenEady J. seized upon the admission by counsel for the plaintiffs

that a director purchasing shares was not obliged to disclose such

incidents of the ordinary course of management as a large casual profit,

the discovery of a new vein or the prospect of a good dividerd: and

refused to accept that this position was altered as soon as negotiations

for the sale of the company's undertaking were commenced. He stated:

The true rule is that a shareholder is fixed with knowledge of all the directors' powers, and has no more reason to assume that they are not negotiating a sale of the undertaking than to assume that they are not exercising any other power.8

In holding that the directors were under no obligation to disclose

the negotiations to the shareholders, he acknowledged that there had

been no unfair dealings, as the directors had not approached the

shareholders, but rather they had been approached by the shareholders

who had themselves named the price which they wished to receive. While

this left open the question of whether his finding would have been

different had the directors in fact approached the shareholders, it is

submitted that the mere reversal of the factual situation in this

respect would not have been sufficient to create the fiduciary duty

which he found did otherwise not exist.

Swinfen Eady J.’s finding was to dominate company law thinking in this

area for many years, and it was not until later serious examination

of the problems arising in this increasingly complex field that

steps were taken to overcome the effects of the decision.

B. The Jenkins Report

Although some provisions relating to disclosure by directors were9

introduced into the Companies Act, 1948, following the recommendations10of the Cohen Committee, the most significant recommendations were 11

11made by the Jenkins Committee in 1962. . Agreeing with the approach

adopted by the Cohen Report, the Jenkins Committee sought additional

means of protecting other parties to a share transaction where the

directors of the company were acting, in that transaction, on the

1026

1027

basis of information known to them but not to the general body

of shareholdersP

Acknowledging the position of Percival v. Wright, the Committee

saw its unhappy result as being that "a director who has by reason

of his office acquired in confidence a particular piece of

information materially affecting the value of the securities of his

company (or any company in the same group) will incur no liability

to the other party if he buys or sells such securities without

disclosing that piece of information"^

While this was an accurate assessment of the effect of the early

decision, the Committee's rationale for recommending legislation

to alter this situation was disappointing:

This seems to us to be wrong. We have come to the conclusion that the law should protect a person - whether or not a member of the company or companies concerned - who suffers loss because a director has taken unfair advantage at his expense of a particular piece of confidential information about the company or any other company in the same group in any ^transaction relating to the securities of such companies.

This statement provides no reasoned argument for its adoption, and

begs a number of questions, particularly as to whether any such

information will give the director an "unfair" advantage at the other

party's expense. One might have expected that the adoption of such

an important policy by the Jenkins Committee would have been

1028

accompanied by detailed argument rather than by an unsubstantiated

moral opinion.

The Committee, after adopting this particular philosophical

approach to the question of the duties of directors, recommended,

inter alia, that directors should observe the utmost good faith * 17 18 19 20

towards the company in transactions with it}^ that they should

not utilize any money, other property, or information acquired by

virtue of their positions as directors or officers of the company

to gain an improper advantage for themselves at the expense of17the company, and that a director who, in transactions relating

to securities of his company (or other companies in the same group)

"makes inproper use of a particular piece of confidential information

which might be expected materially to affect the value of those

securities" should be liable to compensate persons who suffer from18those actions on his part unless they knew that information .

While the United Kingdom government adopted certain other recommend­

ations of the Committee in respect of the disclosure of directors'19shareholdings, transactions in those holdings, etc., the two

20major recommendations in respect of insider trading were not

incorporated into the Companies Act, 1967.

To this author, the actions of the United Kingdom Government were

undoubtedly correct. In implementing provisions requiring full

disclosure by directors of their dealings in their company's securities,

1029

it remained consistent with the basic disclosure philosophy

which has historically been characteristic of that country’s

companies legislation. To have introduced provisions rendering21directors liable to either the company or to persons with whom

they deal on the basis of possessing certain "inside" information,

merely on the basis of the (in this respect) unsubstantiated

recommendations of the Jenkins Committee, would have been extremely

unwise.

These recommendations of the Jenkins Committee, which would have

effectively introduced rigorous controls over certain "inside"

activities, would have been of only limited application had they

been implemented. They related only to the activities of company

directors and did not extend to the wide range of other persons who

might from time to time find themselves in possession of "inside"

information.

C. Some Recent Developments * 22

The "problem" of insider trading has received substantial recent

publicity in the United Kingdom. While rather restrained comments

were expressed by the Watkinson Committee, which conceded the

difficulties inherent in the situation and refrained from recommending22that statutory provisions against insider trading be enacted,

Mr. Jim Slater of the merchant banking firm Slater, Walker, was

1030

somewhat less restrained in his call for the prohibition of all

dealings by directors and their families "during takeover negotiations23or when they are in possession of similar privileged information".

Mr. Slater, who regarded directors as being dishonest when they used

confidential price sensitive information to decide whether or not

to buy or sell shares, proposed a rather wide definition of the

term "insider":

First of all it is essential to define clearly what is meant by the term "insider".

Presumably it means "someone who knows what is going on inside".

This of course embraces directors and their families and should also embrace solicitors, accountants, and stockbrokers, joint stock investment and merchant bankers and other professional advisers.

Indeed, printers, secretaries and telephonists could reasonably be classified as "insiders", as could any other person who is put in a position of having special knowledge concerning the affairs of a company which is not available to shareholders as a whole.

It would be impracticable to require disclosure of dealings by such a wide range of "insiders", other than directors and their families. But share transactions by these insiders ought nevertheless to be restricted. 4

To this author, the importance of Mr. Slater’s article lies in the

fact that it provides a substantial argument against the regulation

of insider trading, and this for two reasons. First, Mr. Slater

does not attempt to explain why persons in possession of certain

1031

information should be prevented from entering transactions in which

they utilize that information. It is merely assumed that such a

practice is necessarily wrong and should therefore be the subject

of rigorous statutory provisions. Secondly, Mr. Slater’s own

attempt to define the term "insider" illustrates the utter

impossibility of the regulatory concept. How, realistically, can

share transactions by "printers, secretaries and telephonists" be

restricted? Indeed, why should they be restricted? Unless answers

are provided to these basic philosophical questions, such calls for

the strict regulation of insider trading cannot be accorded serious

attention.

While the Watkinson Report stopped short of advocating the

enactment of statutory provisions prohibiting insider trading,

the Joint Report of the Takeover Panel and the London Stock

Exchange concluded that the practice was wholly reprehensible

and that legislative measures should be taken to stop it. The

Report conceded that the extent of so-called insider trading had

been much exaggerated and that it was impossible to measure its

precise extent, yet concluded that such dealing, properly defined,

should be made a criminal offence.

Again, however, as with the Slater and Watkinson arguments, no

substantive justification was given for the assumption that insider

trading is "wrong". To this author it is inadequate, when seeking

1032

to introduce controls over this form of activity, merely to state

that it is somehow wrong or immoral, without providing detailed

evidence of the incidence of such activity and of its detrimental

effects. In none of the recent United Kingdom developments,

cited above, was this done.

The failure to examine this basic question has extended, in the

United Kingdom, even to academic commentaries. A recent25examination of insider trading which discussed the rights of both

vendors and purchasers of shares and recommended consideration of

United States and Australian regulatory procedures in this area,

failed completely to question why such regulation was necessary. In

a brief introductory discussion of "The Problem", two examples

were given, the first relating to a take-over situation in which a

person privy to the decision could obtain shares in the offeree

company at a low pre-bid price and re-sell at a higher price after26the announcement of the take-over bid. It was not explained why,

in the absence of fraud or misreprensentation on the part of the

person with the "inside" information, it is necessary to legislate

against such activity, activity which is, in fact, merely one

of a number of forces operating in the market which will determine

the price of the offeree company's securities.

1033

The second example given related to a non-takeover situation such

as that which occurs where the director of a market research company

obtains confidential information as to another company (through

his work in preparing a research paper for that company) and as a

result of that information invests in the latter company’s shares at

a profit to himself. Again, no argument was presented to establish

that such activity should be the subject of prohibitory legislation.

In this situation, the director is not even utilizing information in

respect of his own company, but in respect of an entirely different

company; one wonders where the damage or loss occurs as a result

of his actions.

D. The "Justice” Report

One of the more significant cases presented in favour of the

regulation of insider trading was contained in the recent report27of the British Section of the International Commission of Jurists,

which adopted the very wide definition of the concept discussed28earlier in this chapter. This Report was significant because it

did at least pose the question of whether what it defined as insider

trading should be penalized by law. Its answers to this question

were, however, disappointing.

It acknowledged both that as an intellectual exercise it was possible

to justify the practice (citing in this respect Professor Marine's

1034

thesis) and that it was "a fair, if rather negative, argument in

support of the practice that, at any rate in the case of quoted

securities, the 'outsider’ will probably have suffered no loss".

However, the British Section's Sub •'Committee then concluded that

insider trading was wrong and ought to be illegal, advancing two

reasons for this conclusion. First, it was argued that "deliberate

non-disclosure of material facts is just as wrong as deliberate

misrepresentation - at least where the other party to the contract is

not yet in a position to discover the truth - and ought to be subject

to similar penalties". This is, however, again an argument founded

upon a moral, rather than a legal,base. Additionally, it commits the

error of equating a stock market sale situation with a party-to-party

contract situation. In the former, a purchaser or vendor of

securities who has "inside" information deals through a broker who

contracts with a remote vendor or purchaser respectively, which remote

vendor or purchaser may or may not be aware of that "inside"

infoimation. This is a vastly different situation to that in which

one party to a contract is guilty of a deliberate misrepresentation

which he knows will be acted upon by the other party to that contract

to the latter’s detriment.

Secondly, the Sub-Committee thought that it was "contrary to good

business ethics that a man holding a position of trust in a company

should use confidential information for his personal benefit,

and that good business ethics ought to be supported and reinforced31by legal sanctions" .

29

Again, no attempt was made to elaborate

1035

upon the vague concept of the "good business ethics", to which

insider trading was alleged to be contrary.

More importantly, however, the Sub-Committee’s attitude was

inconsistent with its later expansion of the definition of insider

trading. While its second argument above is limited to persons

"holding a position of trust in a company", its definition of the

term "insider" is considerably wider in scope. It includes directors,

employees of the company, and "any other persons having access, in

the course of their employment, business or profession, to32confidential information relating to the company", such as, for

example, the company’s solicitors, accountants and merchant bankers.

The "good business ethics" argument, which was of doubtful persuasive

force when applied to the directors of a company, loses even that

degree of force when applied to the employees of a company.

There are, to this author, four additional faults with the

Sub-Committee’s Report. First, it was critical of the failure

of the 1967 Companies Act to include the "more radical" recommendations

of the Jenkins Committee in this area, In this respect, the

Sub-Committee adopted the erroneous argument that if insider trading

was unobjectionable, the new provisions which were incorporated into

the Act were unnecessary, but that if insider trading were wrong, it

was unlikely that it would be effectively stopped by ex post facto

disclosure of those dealings- This argument ignored the crucial

1036

aspect of insider trading, that is, that it is unobjectionable if

there are onerous disclosure provisions in effect. As long as the

investing public is or can be made aware of the details of insider

trading carried on directly or indirectly by the directors of a

company, no additional regulatory measures need be taken. As this

author's views are developed in detail later in this Chapter, it

is sufficient at this stage to note that the Sub-Committee's

approach to the basic question of regulating this area was founded

upon a false premise.

Secondly, the Sub-Committee's recommendation in respect of the

proof of insider trading represents an unacceptable shifting of the

usual burden of proof; it argued that there should be a rebuttable

presumption that an insider "was aware of information which would be35

likely to have been known by or disclosed to someone in his position".

It is extraordinary that it should be recommended that an "insider",

himself a person less than satisfactorily defined, should be obliged

to rebut the presumption that he was aware of information "likely to

have been known by or disclosed to", someone in his position. How

would such a person establish what types or kinds of information would

or would not come within these vaguely articulated categories?

Surely, the onus must lie upon a plaintiff to establish both that a

defendant is an "insider" and that he was in fact aware of the "inside"

information, reliance upon which allegedly gave that particular

defendant an advantage over that particular plaintiff.

1037

Thirdly, the major thrust of the Sub-Committee's recommendations

was that insiders should be prohibited from dealing in a company's

securities "without disclosure of information about the company's

affairs likely to have a substantial effect on the value of those36securities". While this author does not agree that this is a

correct approach to the question of insider trading, the Sub-Committee

detracted from the strength of even this recommendation by limiting

the duty of disclosure only to that information which could be

regarded as derived from or belonging to the company and the effect

of which on the value of the company's securities would be37substantial. Additionally, it conceded that the possibility of

providing a statutory definition of what constituted a substantial

effect was doubtful, and that the problem of definition would have38to be left to the courts.

Finally, the Report acknowledged the flaw in its own earlier

general justificatory argument in respect of deliberate mis­

representation when it urged that in party-to-party contact the39"wronged'party should have the rights of rescission or damages ,

but that in the Stock Exchange context, insider trading "should be

made a specific criminal offence, punishable by imprisonment or 40fine". For the reasons expressed above, this author declines to

accept either of these recommendations.

1038

E. Report of the City of London Solicitors* Company

In January, 1973, a Working Party of the Company Law Sub-Committee

of The City of London Solicitors' Company prepared a report on insider 41trading which canvassed the background to the issue in the United

Kingdom, Canada, the United States and the European Economic 42Community and examined in some detail the Justice Report on insider

trading. The Working Party accepted the Justice Report's definition

of "insider trading" as including directors and employees of a

company, but would have made exceptions in respect of certain persons

having access to confidential information in the course of their43employment, business or profession. The rationale for granting these

particular exemptions from the definition (if one accepts, as the

Working Party did, that insider trading should be regulated) viz.,

that of the inevitability of their receiving confidential information,

is not compelling. The argument that they must be allowed to utilize

such information in order to support the market in a client company's 44securities, surely leaves it open to banks and stockbrokers to

trade to their own advantage in such securities.

Additionally, the Working Party did not accept the Justice Report's

recommendations in respect of the duty of disclosure in the insider

trading situation, preferring to place emphasis upon penalising any

dealings in securities which were based upon material confidential 45information. Again, to this author, this represents an erroneous

1039

approach to the whole question of insider trading: the emphasis

should be placed upon disclosure of all dealings by company directors

in order that the investing public may be made aware of such dealings.

It will be readily apparent which such dealings have been based upon

confidential information and, should the level of such dealings be

unacceptably high to a particular individual or institutional

investor, he has the right of withdrawing his investment from that company.

The major fault of the Working Party's Report is, however, that which

has afflicted the other material considered in this Chapter, viz.,

that no adequate justification was given for the alleged need for

penalising insider trading. The Report’s introductory discussion

of the problem of insider trading could advance no better reason

than the following to substantiate the existence of the problem:

It is apparent that there is a problem of insider trading because, apart from instances which come to the knowledge of solicitors and others, the matter has recently been given some publicity not only by the Report of the Justice Sub-Committee but also by a number of those holding prominent positions in the financial world, such as Lord Shawcross,Sir Martin Wilkinson and Mr. Jim Slater, and there has been fairly widespread comment in the financialpapers^

No attempt was made in this argument to detail "the instances which

come to the knowledge of solicitors and others": if the "problem"

did in fact exist, as alleged, surely it would not have been too

onerous a task for the Working Party to have provided a number of

concrete illustrations. Also, as the earlier portion of this

1040

Chapter has revealed, the statements by individuals "holding

prominent positions in the financial world" do themselves contain

no satisfactory examination of the basic question of the need for

regulatory action in this particular area of the securities markets.

Additionally, in its conclusions, the Working Party stated, again

without substantiation, that:

Insider trading is offensive not only morally but also because such trading is inconsistent with a fair market in the quoted securities so traded. It is an existing evil and is one which should be made a criminal of fenced

While the emotional content of this proposal may be ignored, one

might have expected that some evidence would be adduced to establish

that such trading was in fact inconsistent with a fair market.

Thus the Report of the Working Group also fails to establish that

there is in fact any need to legislate against the practice of

insider trading, and one is obliged to look elsewhere for evidence

to this effect.

F. A Progressive White Paper * 48

In a recent White Paper which otherwise exhibited a refreshing

willingness to re-consider the more established tenets of the regulation48of company operations, the United Kingdom Government adopted a

1041

hard-line approach towards insider trading. Relying primarily upon

the background provided by the Justice Report, the Joint Report of

the Take-over Panel and the Stock Exchange, the Report of the City of

London Solicitors’ Company and the Jenkins Report, it concluded that

”in principle insider dealings should be the subject of a criminal 49

offence".

As has been stated above, these reports do not themselves adequately

justify the regulation of insider trading, and thus the reliance

upon them by the White Paper would in itself take the question no

further. However, the Government advanced a general proposition to

justify the regulation of this activity:

The efficient operation of the market as a source of capital, as a measure of industrial success and hence as a means of achieving a desirable and efficient disposition of resources, requires that relevant information should be fairly available, and that all investors should be able to back their knowledge and judgment rather than that favoured individuals should be able to take private advantage of confidential information.

While as a general statement of the necessity for the operation

of the full disclosure principle in the securities markets, this

proposal is unobjectionable, it does not suffice on its own, to

justify the specific regulation of insider trading. If by the term

"favoured individuals",the White Paper was referring only to company

directors, it is this author's view that provisions requiring

disclosure of all their dealings in their own company's securities

1042

provide adequate safeguards to the investing public. If the term

was meant to include, as does the White Paper’s definition of an

"insider", "directors, employees, major shareholders and professional

advisers of a company, together with the near relations of each of

these people"^ then the proposal becomes unworkable. The

character of the forces operating within any securities market to

determine the purchase or sale price of any particular security at a

given time is so complex as to make nonsense of the claim that the fact

that a professional adviser of a company (such as an accountant or a

solicitor) purchased or sold particular securities through the public

market on the basis of confidential information in his possession,

necessarily either affected the efficient operation of that market as

a whole, or disadvantaged the other party who purchased or sold the

particular securities. While the position as between parties to a

direct transaction may be different if there is fraud or misre-

sentation involved, the argument utilized by the White Paper will not

stand critical examination in its most important application, viz.,

the stock exchange markets in public company securities.

Again, then, no adequate justification has been provided for the

introduction of legislation to restrict insider trading. In fact,

this author’s proposal that emphasis instead be accorded to the

complete disclosure by directors of dealings in the securities of

their own companies is supported by the White Paper's recommendation

1043

that directors be required to make notification of such dealings to

their company within the shortest practicable period.

G. Does United Kingdom Experience Justify Regulation?

Clearly the debate which has taken place in the United Kingdom on

the question of insider trading has not really considered the

validity of the basic premise that insider trading is wrong and

should therefore be the subject of regulatory legislation. In spite

of the amount of time and effort devoted to the methods of

regulation, the scope of the definition of an "insider", and the

civil and criminal liability provisions, it has not been established

that in fact the need exists for any other form of regulation than

that imposed upon company directors in respect of dealings in the

securities of their own company. In this situation, one must have

regard to the experience of other jurisdictions in an attempt to

encounter proposals which reflect an examination of the basic

philosophical premise and, as a result, do in fact support the

regulation of insider trading.

1044

III. THE UNITED STATES

A. Background

The regulation of insider trading in the United States represents the

most detailed and comprehensive attempt yet made to control this area

of the securities markets. From inauspicious beginnings in the

Securities Act of 1933 and the Securities Exchange Act of 1934,

remedies have been developed which go far beyond those existing in

other jurisdictions.

These remedies have appeared gradually, and as a result of

administrative and judicial interpretation, rather than as the result

of concerted legislative action. They represent successful attempts

by both the Securities and Exchange Commission and the courts to

restrict a wide range of activities of particular individuals and to

provide rights to persons allegedly aggrieved as a result of these

activities.

While they did not result from any concerted legislative design to

regulate insider trading as such, the current United States remedies

in this area have been utilised as precedents by other jurisdictions

which have intended to introduce a complete system of statutory

regulation of insider trading. To this author, before any other

jurisdiction can safely rely upon the American experience in this area,

two important questions must be answered. First, is the current

1045

American position, arising as it does largely from administrative

and judicial interpretation, necessarily appropriate for incorporation

into a wholly statutory scheme? Secondly, if the current American

remedies did not result from any specific legislative design, was

adequate consideration given at any stage of the development of those

remedies to the basic philosophical question of whether there was a

need for the introduction of such remedies?

This study will be concerned initially to examine the latter question,

as it is only in the event of it being answered in the affirmative

that one would proceed to consider the former question in detail.

This examination will take the form of a brief discussion of the

current remedies utilized in the United States, followed by a

consideration of the bases upon which those remedies are alleged to

rest.

B. Current Regulatory Provisions

1. The Securities Act of 1955

This statute does contain provisions which, while not specifically

designed for that purpose, do regulate aspects of insider trading.

Section 11 imposes liability, in respect of registration statements,

for the making of untrue statements of material fact or omitting to

state a material fact which was required to be stated, or necessary

1046

to make the statements not misleading. Applicable to a broad53range of possible defendants? this section allows persons merely

54acquiring the company’s securities to bring actions, there is no

requirement that reliance upon the defective portion of the

registration statement be established. Although due diligence55

procedures apply to the Section 11 liability, they have been narrowly 56interpreted, and it is not difficult for a plaintiff to succeed once

the fact of the false statement or omission is established. Once

successful, damages are calculated in accordance with a statutory

formulaP

Section 12 applies the Section 11 principle to those situations in which58a registration statement has not been filed, but, as distinct from

Section 11, it requires the existence of privity of contract for an59

action to be maintained, The action will lie for either rescission

of the contract of sale and the return of the securities, or damages

if the securities have been subsequently disposed of by the purchaser-^

Finally under the 1933 Act, Section 17, which is a general anti-fraud

section, has been interpreted in some decisions as giving to those61plaintiffs alleging fraud the right to sue under the section;

These provisions of the Securities Act of 1933 are thus heavily

oriented towards offences involving the selling of securities, as is

to be expected from a statute concerned primarily with the distribution

1047

of securities rather than with their post-distribution trading. While

they may be effective in this area in prohibiting the making of false

statements or material omissions, they do not and cannot serve to

regulate the whole of the spectrum of activities covered by the

concept of insider trading. It is for this reason that one must look

to the provisions of the post-distribution statute, the Securities

Exchange Act of 1934, for complementary regulatory machinery.

2. The Securities Exchange Act of 1934^

(i) Section 16

This section has attempted to deal with the problem of insider

trading in two ways, the first a reporting requirement0 and the

second a provision enabling the recovery of certain profits made

by the "insider"?^

Section 16 (a) obliges the beneficial holders of more than 10% of

any class of any equity security registered under Section 12 of the65Act, and directors or officers of the issuing company, to file

with the SEC (and, where appropriate, with a national securities

exchange) a statement of the amount of all equity securities of which

they are the beneficial owners. Such statements must be filed at the

time of registration of the security on a national securities exchange

(or at the time a Section 12(g) registration statement becomes effective)

or within 10 days after the person becomes a beneficial owner,

director or officer.

1048

Additionally, the provision requires such persons to file, within

10 days of the end of each month in which there has been a change in

his ownership, a statement detailing his securities ownership at the

end of that month and the changes which have occurred in it during the

month.

This subsection is thus a reporting provision, designed to achieve

full disclosure not only of the securities held by specified

persons, but also of their dealings in those securities. The

disclosed information is made a matter of public record once disclosed,

and, at least in the case of the SEC, is published in a regular Commission

report. However, there is a substantial time-lag between the

occurrence of the event and the expiration of the period within which

it must be reported which detracts significantly from its effectiveness

as a disclosure device. To this author, such disclosure should be

mandatory within 7 days of the occurrence of the prescribed event, and

heavy penalties imposed for failure to comply with this requirement.

While Section 16(a) is, or could be, an effective disclosure device,

the question which must currently be answered is as to its

effectiveness as a tool for the regulation of insider trading.^

To accurately answer this question, Section 16(a) must be considered

together with Section 16(b). The latter provides teeth for the

former in that it allows a company to recover, from the "insiders”

listed in subsection (a), any profits made by them from any sale

1049

or purchase (or purchase and sale) of any of the company's equity

securities within any period of less than six (6) months. Actions

for the recovery of this profit (which actions must be brought

within two years of the profit being realized) may be instituted

by the company or (in the event of it either failing to do so,

or failing to diligently prosecute same) by any of the company’s67security holders in the name of and on behalf of the company.

Specifically intended for "the purpose of preventing the unfair use

of information which may have been obtained by [such] beneficial

owner, director or officer by reason of his relationship to the68issuer", the section does not require it to be established in any

recovery action that the "insider" has in fact utilized inside

information. Once the facts of the status of the defendant

as an "insider", and of the occurrence of the transaction within

any six months period are established, recovery follows without69proof of actual use of inside information-

While Section 16(b) has given rise to a plethora of explanatory 70rules and has resulted in both a large number of interpretative 71

71 72judicial decisions and widespread academic comment, it has not

escaped criticism as a method of regulating insider trading. Perhaps

the most frequently expressed reservations about the combined Section

16 machinery are those relating to the lengthy time period which

may expire before the actual transaction is publicised, the lack of

incentives to outsiders to bring derivative actions, the limitation

1050

of the section's operations to directors, officers and 10% beneficial

shareholders, and the generally narrow interpretation which the73section has received from the courts. It has been in part because

of criticisms to this effect that other remedies have been developed

to deal with what is seen as the problem of insider trading. The

most important of them has been the SEC's Rule 10b-5 under the

Securities Exchange Act of 1934.

(ii) Rule 10b-5

Section 10 provides that it is "unlawful for any person, directly

or indirectly, by the use of any means or instrumentality of inter­

state commerce or the mails, or of any facility of any national

securities exchange:- ••• (b) To use or employ, in connection with

the purchase or sale of any security registered on a national

securities exchange or any security not so registered, any

manipulative or deceptive device or contrivance in contravention of such

rules and regulations as the Commission may prescribe as necessary or

appropriate in the public interest or for the protection of investors".

Originally designed merely as a general prohibition of manipulative

and deceptive practices, Section 10(b) has achieved a lasting place in

the annals of securities legislation as a result of the SEC's adoption74in 1942 of the now-famous Rule 10b-5.

1051

The rule is in the following terms:

10(b)-5. It shall be unlawful for any person, directly or indirectly, by the use of any means or instrumentality of interstate commerce, or of the mails, or of any facility of any national securities exchange,

(a) to employ any device, scheme or artifice to defraud,

(b) to make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading, or

(c) to engage in any act, practice or course of business which operates or would operate as a fraud or deceit upon any person, in connection with the purchase or sale of any security.

By design similar in its provisions to the terms of Section 17(a)

of the Securities Act of 1933, Rule 10b-5 was itself also intended

as an anti-fraud and anti-manipulative device. It has, however, as

the result of an extended process of administrative and judicial

interpretation, become very much more, and it now provides the basis

for the civil liability of defendants in insider trading situations.

From being initially a fairly straightforward rule relating to

manipulative practices, it not only supplies the SEC with the most

effective weapon in its current anti-insider trading arsenal, but also

provides the federal government with what has been described as a

growing federal corporation law.^

1052

The possibilities raised by implying civil liability on the part

of a person who has utilized inside information, to those persons

who have purchased or sold securities without that inside information,

and without the presence of privity of contract, are almost limitless.

For this reason it is essential that, prior to the introduction of

legislation into Australia or the Asian region which would establish

a liability situation equivalent to that which now exists under

Rule 10(b)-5 in the United States, consideration be given to the manner

in which the SEC and the courts in that country have expanded the rule,

and particularly that it be established whether or not the expansion

has been consistent with the aims of both the legislature in enacting

Section 10(b) and the SEC in promulgating Rule 10(b)-5.

Thus, although it has, for obvious reasons, been described only briefly

in this study, the major United States regulatory machinery in respect

of insider trading comprises Sections 11, 12 and 17 of the Securities

Act of 1933 and Section 16 and Rule 10(b)-5 of the Securities Exchange

Act of 1934. It is now proposed to consider the rationale for these

provisions and their administrative and judicial interpretation, in

order to determine whether they do in fact represent a considered and

logically designed attempt to regulate what is genuinely regarded as an

undesirable market practice, or whether they are merely a collection of

provisions designed for other purposes, certain of which have been

interpreted to suit changing regulatory mords, and this without adequate

appreciation of their significance for the securities markets.

1053

C. The Rationale

1. The 1935 and 1934 Acts

While Sections 11, 12 and 17 of the Securities Act of 1933 have been

utilized in the insider trading area, they were clearly not designed

for this purpose. Concerned as Congress was, in that statute, with

the question of the initial distribution of securities, the sections

were clearly not inserted after any conclusion had been reached as to

the desirability or otherwise of regulating insider trading, which is

essentially a feature of the post-distribution market.

The Securities Exchange Act of 1934 was, however, specifically intended

to regulate many of the excesses and irregularities which had occurred

and were then occuring in the secondary securities markets. Should

there have been any detailed examination of the question of insider

trading and any specific decision taken that it be the subject of

regulatory provisions, one would expect to find evidence to this effect

in the report of the Congressional hearings which preceded the enactment

of the statute. The hearings before the Senate Committee on Banking and 77Currency did reveal a number of instances in which individuals with

large shareholdings, officers and directors, operated in such a manner

as to derive substantial profits, usually on the basis of syndicate or

pool operations.

Following extensive public hearings between April, 1932, and May, 1934,

the compilation of a record exceeding 12,000 pages and the receipt of

1054

more than 1000 exhibits, and against a background of revelations of79what were regarded as manipulative devices, the Senate Report

described certain of the evidence which it had received in respect of80the activities of directors, officers and principal stockholders81Prefacing their remarks by an often-cited and emotive paragraph,

the Committee described only one particular type of activity, viz.,

participation by directors, officers and principal stockholders

in pool operations of various kinds. The pool in the shares of

American Commercial Alcohol Corporation, for example,was arranged with

the knowledge of certain directors, officers and principal stockholders

of that corporation, who themselves held secret interests in the pool.

The same persons also had a secret interest in the profits of an

underwriting agreement in respect of additional capital stock which was82offered to stockholders in the corporation. Considered alone, this

illustration provides evidence not so much of insider trading by such

persons, but rather of their participation in activities which, at

least in the case of directors, amounted to a breach of their fiduciary

duties to their company.

The pool activities of the chairman of the governing board of the Chase 83National Bank, although they resulted in profit for him and for his

family corporations, reveal no evidence of the pool activities having

been conducted on the basis of, or the profits having resulted from, the

use of inside information. There was no evidence presented, in the

Senate Report, of the market price of the shares which were sold having

been in any way influenced by the possession of inside information

78

1055

by Chairman Wiggins or his family corporations. Yet, without any

examination of the activities actually carried out by Wiggins, his

case is loosely grouped with others, by one writer in this area?^

as constituting operations participated in by corporate insiders which

would justify statutory regulation of insider trading.

The activities of the chairman and a number of directors and officers

of the Sinclair Consolidated Oil Corporation were also described in some

detail by the Senate Report, but in the context of pool operations,

short selling and what almost amounted to "wash" sales. Yet, again,

although substantial profits were made by these persons as a result of

market trading in the securities of their own corporation, it was not

alleged in the Senate Report that such trading took place on the basis

of "inside" information, or that other persons who sold securities

to or purchased securities from such "insiders" were disadvantaged in

those transactions as a result of not possessing any such information.

Finally, the Senate Report examined the pool activities carried out in85relation to the General Asphalt Co., and it was in this particular

situation that evidence of the use of inside information by directors

of a coup any was at last produced. The chairman of the company's

executive committee, together with a director of the company (who was

also a member of the brokerage firm which managed the pool)

participated in a pool operation involving the company's securities,

prior to the inception of which no dividends had ever been declared

by the company. Immediately after the pool was created, however, and

1056

before a simplification of the company’s financial structure

(designed to allow dividend payments on its common stock) was effected,

the pool purchased substantial numbers of the company’s securities.

Although the market value of those securities rose after the

announcement of the decision to pay a dividend, it subsequently fell

as a result of the October 1929 crash. However, during both 1930 and

1931, the company continued to pay dividends on its common stock,

despite the fact that it had an overall deficit position in both years.

The Senate Report, correctly, found it difficult to believe that the

conduct of the two directors was not influenced by their interest in

the pool, and that the broker-director was not "guided by his intimate

knowledge of the condition and plans of the company-confidential knowledge

which he derived as a fiduciary, and was by every legal and ethical

standard bound to refrain from using for his own personal profit"?^

As the Senate Report cited additional illustrations only by name and87without providing details, the single reported instance of what is

to-day regarded as insider trading was that of the pool in the General

Asphalt Co., yet it was on the basis of these findings that Section 16

of the Securities Exchange Act of 1934 was introduced. In its only

justificatory explanation, the Senate Report indicated that

The Securities Exchange Act of 1934 aims to protect the interests of the public against the predatory operations of directors, officers, and principal stockholders of corporations by preventing them from speculating in the gg stock of the corporations to which they owe a fiduciary duty.

1057

and that

By this section [Section 16] it is rendered unlawful for persons intrusted with the administration of corporate affairs or vested with substantial control over corporations to use inside information for their

i r OQown advantage?y

To this author, the illustrations and the justificatory statements

of the Committee raise a number of important questions. First, the

examples cited in detail in the Senate Report were, without exception,

pool operations, and no consideration was given to (and no illustrations

provided in respect of) the obligations of directors, officers and

principal stockholders in non-pool operation situations. As pool

operations were themselves prohibited by other provisions of the 1934 90Act/ any general statutory regulation of the non-pool activities

of alleged "insiders" should at least have been supported by appropriate

illustrations of the harm caused by such activities.

Secondly, the justificatory argument advanced by the Senate Committee,

insofar as it relied upon the existence of a fiduciary duty on the

part of directors, was unobjectionable. Where a fiduciary relationship

exists, there must be no breach of that relationship; where it does not

exist, however, no fiduciary duties should be artificially created. In

the insider trading situation, this means that where the activities of

a director in trading in the securities of his corporation do amount to

breach of a fiduciary duty, then such activities should be penalized.

Where, however, a company's securities are traded by a person not in a

fiduciary relationship with the company, then, in the absence of fraud

1058

or misrepresentation, no penalties should be attached to such activities.

To this author, neither the officers of, nor the principal shareholders

in, companies are necessarily part of a fiduciary relationship. To

whom do they owe any fiduciary duty which would preclude them trading

in the securities of their company on the basis of information which

comes into their possession?

Assuming arguendo that the Committee believed that the practices

which it detailed in its report properly required regulating and were

detrimental to the health of the country’s securities markets, the form

of regulation which it recommended warrants close examination. The

provisions of Section 16 were designed to require ’’insiders” to

disclose their dealings in the company’s securities and to afford a

right of action to the company to recover profits made in such

transactions within any particular six month period. In enacting these

provisions, Congress was thus acknowledging that any duties owed by the

statutory "insiders" were owed to the company and not to individual

shareholders as such. Had Congress’ definition of "insider" been

limited to directors of the company, it would have been in accordance

with the earlier Percival v. Wright principle, and would as such have

been unobjectionable. As foreshadowed above, however, the widening

of the statutory liability to include officers and certain shareholders

goes well beyond that principle and opens a Pandora's Box of

unnecessary legal technicalities and complexities.

1059

Thus, the provisions of Section 16, while they did result in the

application of regulatory provisions to what in this author’s view is

an unnecessarily and unjustifiably wide range of persons, did limit

the right of recovery to the company itself. Congress’ intention in

this particular respect is clear; had it intended that other

categories of plaintiffs should be entitled to recover against alleged

"insiders”, it would have made specific provision to that effect. As

elaborated upon below, the fact that the right of recovery is today

available to so many different types of plaintiffs is a result not of

the actions of Congress, but of the SEC and the Courts in inter­

preting a rule made some eight years after the enactment of the legislation.

Thirdly, although one specific illustration is given in the Senate

Report of the use of inside information, and brief reference is made to

such use both in one of the Report’s justificatory arguments and in

Section 16(b) itself, the whole thrust of Section 16 is that of the

disclosure of dealings by statutory "insiders". The statutory

provision was the result of the exposure of various secret pool operations

in which directors, officers, and principal stockholders had in some

instances participated. The revelation of these hitherto secret

activities on the part of directors, officers, etc., exposed the need

for regulatory provisions which would oblige such persons to publicly

declare the extent of their holdings in their own companies and the

changes in those holdings. This disclosure provision (Section 16(a))

was accompanied by a prohibitory provision (Section 16(b)) which

enabled a company to recover short-swing profits from directors, officers,

1060

etc., who did trade in their company’s securities. The prohibitory91provision was not, however, despite its recital, dependent upon the

establishment of the use of inside information by the defendant; it

applied, and still applies, irrespective of whether or not the "insider"

utilized such information. Congress was thus not attempting

specifically to regulate insider trading as such, but was rather

concerned to achieve disclosure of the corporate dealings of certain

persons and to dissuade such persons from the temptation to trade,

in the short-term, in the securities of their own companies.

Against this background, the admitted inability of Section 16 to deal

adequately with what is to-day regarded as the problem of insider 92trading is explicable: the section was not infect intended by 93

93Congress to fulfil any such purpose* In this situation, one must

carefully examine the rationale of the extension of the other major

regulatory provision in this area, Rule 10b-5, to determine whether it

justifiably extends the initial regulatory concept established by

Congress, or whether it has, without Congressional mandate, ventured

unwisely into new and uncharted regulatory waters.

2. Rule 10b~5

(i) Congressional and Commission Intent

Although it is clear that Section 10(b) of the 1934 Exchange Act was

itself designed only as an anti-fraud provision, the rule promulgated

under this section, Rule 10b-5, has been utilized by the courts and the

1061

SEC to provide a private civil law remedy to a wide range of persons

who are aggrieved as the result of certain securities transactions. It

has been argued both that this "creation" of a private civil law remedy

has not been in accordance with the intention of Congress in enacting94either the 1933 or 1934 Acts, and, conversely, that the courts have

been correct in construing detailed statutory provisions in accordance95with the particular act's "dominating general purpose".

In support of the former proposition, it has been argued, inter alia,

that both the 1933 and 1934 Acts were carefully drafted and that, as

substantial consideration was given to the question of civil liability,

where it was intended that that liability would be granted, it was

carefully circumscribed; that Section 16(b) was intended to prevent

the misuse of inside information; and that Section 10(b) was designed

to be "a catch-all which the Commission could utilize to thwart new and96cunning manipulative devices not then known" . To this author, in the

absence of convincing evidence to the effect that Congress did intend

the Commission to utilize Section 10(b) to make rules providing private

civil remedies in the insider trading area, it cannot properly be

implied that Rule 10b-5 is currently serving the purpose which was

intended by Congress. Indeed, the "statutory" argument which has been

adopted by some courts to justify the expansion of Rule 10b-5 into a

civil remedy provision relates to an entirely different section

(Section 29(b)) of the statute.

1062

While the controversy over the legislative intent of Congress in

respect of the alleged implied civil liability provision in Section

10(b) will probably never be coupletely satisfactorily resolved, the

intent of the SEC in promulgating Rule 10b-5 itself is clear. Milton

Freeman, Attorney and Assistant Solicitor at the Commission during the

period in which the rule was introduced, has stated that the initiative

for the rule came from the reported activities of the president of a

Boston company who was purchasing the stock of his own company and

informing stockholders of the company’s bad position, while knowing that

its earnings were going to be quadrupled. The draft rule prepared by

Freeman and Jim Treanor (then Director of the Commission’s Trading and

Exchange Division) resulted from them considering the provisions of

Sections 10(b) and 17 together, and was approved by the Commissioners

with the comment on the part of one Commissioner that ’’Well, we are97against fraud, aren't we?".

In Freeman's own description:

It was intended to give the Commission power to deal with this [fraud] problem. It had no relation in the Commission’s contemplation to private proceedings.How it got into private proceedings was by the ingenuity of members of the private Bar starting with the Kardon case. It has been developed by the private lawyers, the members of the Bar, with the assistance or, if you don’t like it, connivance of the federal judiciary, who thought this was a very fine fundamental idea and that it should be extended^

Thus, while there is inadequate evidence that Congress intended that

Section 10(b) should provide a private remedy to aggrieved investors,

1063

it is clear that the Commission itself did not intend that the rule

it introduced should have this effect.

In order to determine whether the administrative and judicial expansion

of this rule, which has resulted in the current strict regulatory

position in the United States, is of relevance and value to the

Australian and the regional scene, this study will now examine the

bases of that expansion, both before and after the important Texas Gulph

Sulphur decision.

(ii) Pre-Texas Gulph Sulphur Developments

The first of the long line of cases which was to convert a simple

anti-fraud rule of the SEC into the basis for the development of a

federal corporations law in the United States was Kardon et. al. v.99

National Gypsum Co. et. al. Based upon a situation involving a

fradulent misrepresentation on the part of the defendants which

induced the plaintiffs to sell certain stock for less than its

correct value, the major question in the case was the applicability

of Section 10(b) and Rule 10(b)-5. While conceding that there was no

specific provision in the act or Section 10 itself which expressly

allowed civil suits by persons aggrieved as the result of breaches of

the section or the rule"^ Judge Kirkpatrick allowed the suit on

two premises.

1064

First, he viewed the disregard of the command of a statute as a wrongful

act and a tort, relying in this respect upon the Restatement, Torts,101Vol. 2, Sec. 286. He did not require that the statute in

question specifically provide for the existence of the right, but

regarded it as "so fundamental and so deeply ingrained in the law that

where it is not expressly denied the intention to withhold it should„ 102

appear very clearly and plainly • Rejecting the argument that three

other sections of the act which declared certain behaviour illegal

all provided for civil actions by persons injured and that therefore

the legislature did not intend the right to exist in respect of Section

10, he stated:

Where, as here, the whole statute discloses a broad purpose to regulate securities transactions of all kinds and, as a part of such regulation, the specific section in question provides for the elimination of all manipulative or deceptive methods in such transactions, the construction contended for by the defendants may not be adopted. In other words, in view of the general purpose of the Act, the mere omission of an express provision for civil liability is not sufficient to negative what the general law implies.

This "tort" theory of the civil liability implications of Section

10(b) and Rule 10b-5 has been relied upon by later decisions, but

the theory itself has not escaped criticism. Doubts have been

expressed as to the general applicability of the Restatement principle

to all criminal statutes, and as to the process of conversion whereby

actions which before the 1933 and 1934 legislation were based on the

1065

law of fraud and deceit were, after these acts and the rule itself,

transformed into actions in negligence.'^

Secondly, Judge Kirkpatrick allowed the plaintiffs' cause of action

on the basis of the 1938 amendment to Section 29(b) of the Exchange

Act, which amendment introduced a statute of limitations for actions

brought on SEC rules made under Section 15(c) (1) of the Act. This

latter section, like Section 10(b), did not provide specifically for

the bringing of private actions, and it was argued that the

implication was that "Congress meant the original statute to be

interpreted as providing for civil suits under it'V^ This argument

was adopted by Judge Fitzpatrick, as was the proposition that such106suits would include actions for rescission and for money damages.

107This second argument has been approved in a number of instances and

it is generally conceded that it is a stronger base for civil liability108than is the tort theory. It remains, however, essentially a

question of statutory interpretation, on which contrary views continue

to be expressed^^

Thus, after these early cases on Rule 10b-5, the position was that an

aggrieved plaintiff was able to institute a suit for rescission or

damages where the action as a result of which he suffered constituted a

breach of the provision of the rule. The exact nature of the remedy,

and its relation to the area of insider trading was not, however, at all

clear. An important step in this clarification process occurred with

1066

the SEC’s 1961 decision in the case of Cady, Roberts 5 Co. This

was a disciplinary proceeding against a partner of a registered

broker-dealer firm who executed orders for discretionary accounts

in the period between his being informed of the dividend action taken

by the board of the company whose securities were involved and the

public announcement of that dividend action. The decision of the 111Commission spelt out clearly its view of the scope of Section 10

and Rule 10b-5 of the 1934 Act and Section 17(a) of the 1933 Act:

These anti-fraud provisions are not intended as a specification of particular acts or practices which constitute fraud, but rather are designed to encompass the infinite variety of devices by which ^12 undue advantage may be taken of investors and others-

Confirming that the rule applied to "any persons", the Commission

reiterated the view which it and the courts had taken as to the duties

of insiders, viz., that they must "disclose material facts which are

known to them by virtue of their position but which are not known to

persons with whom they deal and which, if known, would affect their

investment judgment", and stated that it regarded failure to disclose in113those circumstances as a breach of the anti-fraud provisions.

As well as, in this passage, firmly equating insider trading with

breach of the anti-fraud provisions, the Commission went on to

delineate its concept of the extent of the obligation imposed by those

provisions. Refusing to limit the categories of persons involved to

110

1067

officers, directors and controlling shareholders, it advanced two

criteria for defining those categories;

First, the existence of a relationship giving access, directly or indirectly, to information intended to be available only for a corporate purpose and not for the personal benefit of anyone, and second, the inherent unfairness involved where a party takes advantage of such information knowing it is unavailable to those with whom he is dealingV-4

As thus stated by the Commission, the categories are, to say the least,

uncertain. They would encompass any persons, whether they acquired

the relevant information either deliberately or inadvertently and

they would encompass the use of such information by any such persons.

Additionally, while they would certainly encompass the Cady, Roberts $ Co.

situation itself, they do not define what is meant by "a relationship

giving access”, nor ’’information intended to be available only for a

corporate purpose". Further, how is it to be established by the

"insider", that the particular information is unavailable to the other

party with whom he is dealing? Must that other party prove fraud on

the part of the "insider" or is it merely enough to establish that the

"insider" dealt in his company's securities while possessing the

requisite knowledge?

The Commission did indicate that the broad anti-fraud concepts of the

securities acts would not be limited by the common law notion that

directors or officers stood in a fiduciary relationship with existing

stockholders from whom they purchased but not with members of the

1068

public to whom they sold. It distinguished cases cited by the

respondents in which relief was denied to purchasers or sellers

of securities in exchange transactions:

115

The cited cases concern private suits brought against insiders for violation of the anti-fraud rules. They suggest that the plaintiffs may not recover because there was lacking a ’’semblance of privity” since it was not shown that the buyers or sellers bought from or sold to the insiders.These cases have no relevance here as they concern the remedy of the buyer or seller vis-a-vis the insider. The absence of a remedy by the private litigant because of lack of privity does not absolve an insider from responsibility for fraudulentconduct.ll 6

The overall effect of Cady, Roberts $ Co. was thus of great importance

in the development of the Rule 10b-5 remedy in respect of insider

trading. It equated such trading with breach of the anti-fraud 117provisions, considerably widened the categories of obligations

which it regarded as being subject to those provisions, and rejected

the privity argument as a basis for avoiding liability. It did,

however, leave unresolved a number of important questions, including

those detailed above, the resolution of which was to take place some

years later. (iii)

(iii) Texas Gulph Sulphur

The facts which gave rise to this classic decision^ are too well119known to be stated in this context and attention will accordingly

be given to the nature of the relief sought by the Commission, and

the District Court and Circuit Court judgements.

The Commission sought three major avenues of relief. First, it sought

an order that the individual defendants make rescission offers to

those persons who sold stock in the company to them during the relevant

period. Secondly, it sought an order that the defendants make

restitution to those shareholders who had sold to persons allegedly

acting on confidential information which had been disclosed to them by

the defendants. Thirdly, it sought an order cancelling the options120taken by the defendants during the relevant period.

The District Court made a number of important findings, which included

the following.

(1) That there was no necessity to establish the elements of

common law fraud in either private actions under Rule 10b-5 or in

regulatory or enforcement proceedings instituted by the Commission under 121Section 27. 2

(2) That Section 16 of the 1934 Act does not cover the field so far

as the regulation of insider trading is concerned, and that the

enforcement of Section 10(b) and Rule 10b-5 are not limited by122Section 16.

1069

1070

(3) That trading by an insider on the basis of material undisclosed

information constitutes a deceptive practice in violation of the 1934123Act and the 1942 rule- and specifically, that since Section 10(b)

applies to "any persons", it includes "insiders" who are not officers,124directors, or major shareholders- This latter finding was

particularly important, as it gave judicial endorsement to the Commission’s

extension of the "insider" concept in Cady, Roberts § Co., and, as such,

represented another significant expansion of the scope of the

provisions governing insider trading.

(4) That liability for failure to disclose applies to purchases125made on national stock exchanges as well as in face-to-face transactions

and that, where "legitimate business reasons require a period of non­

disclosure, the insider should forego transactions in his company’s126securities during that period"- Again, the Court relied upon the

Commission’s wide Cady, Roberts $ Co. principle, and gave it judicial

endorsement. 5

(5) That liability existed only in respect of the non-disclosure of127material information. In this respect, the Court adopted an

earlier definition of material information (viz., that "which in

reasonable and objective contemplation might affect the value of the128corporation’s stock or securities") as well as the Cady, Roberts 5 Co.

criterion of information which, if known, would clearly affect129

"investment judgement". Additionally, the court indicated that the

1071

test of materiality must of necessity be a conservative one and

cited with approval a statement of a former Commission official to this

effect!30

(6) That a period of time be recommended by the Commission after

the expiration of which it would be permissible for insiders to trade131in their company’s securities. The Commission, however, took the

view that it was desirable to retain flexibility in this area in order132to maximize the effectiveness of the provision.

The District Court in Texas Gulph Sulphur found that only two defendents

had violated the statutory provisions and the case went on appeal to the

Second Circuit Court of Appeals. In its own right, however, the

District Court decision was of importance for its clarification of

a number of the concepts involved in the area of insider trading, and

for its approval of the Commission’s earlier administrative extension of

the scope of certain of these concepts.

133The judgement of the Circuit Court* delivered on August 13, 1968,

takes the form of majority and dissenting opinions, both of which will

be examined in this study. First, the majority opinion reached a

number of important conclusions.

(1) It approved the District Court’s adoption of the Cady, Roberts $ Co.

expansion of the term ’’insider":

1072

Anyone in possession of material inside information must either disclose it to the investing public, or, if he is disabled from disclosing it in order to protect a corporate confidence, or he chooses not to do so, must abstain from trading in or recommending the securities concerned while such inside information remains undisclosed. ^

The scope of the application of the insider trading regulatory

provisions was thus confirmed; they applied to any persons in

possession of material inside information, and were not in any way

limited to directors, officers and major corporate stockholders.

(2) On the important question of 'Materiality", the Circuit Court

adopted Fleischer's criterion, that is, that the duty to disclose or

abstain arose only in "those situations which are essentially extra­

ordinary in nature and which are reasonably certain to have a sub­

stantial effect on the market price of the security if .[the extraordinary

situation isj disclosed" . While adopting this standard, the court

explicity rejected the District Court's acceptance of the conservative

test of materiality and indicated that it would include, as material

facts, those facts "which affect the probable future of the company

and those which may affect the desire of investors to buy, sell, or136hold the company's securities". Its summation of the materiality

standard was as follows:

In each case, then, whether facts are material within Rule 10b-5 when the facts relate to a particular event and are undisclosed by those persons who are knowledgeable thereof will depend at any given time upon a balancing of both the indicated probability that the event will occur and the anticipated magnitude of the event in light of the totality of the company activity?-^

1073

Because of the crucial significance of the materiality concept to the

whole question of the regulation of insider trading, one might have

hoped for a more precise definition from the Circuit Court, particularly

as it departed in this respect from the earlier opinion of the District

Court, and as its findings were based upon a fairly generous inter-138pretation of congressional intent in this area.

Justice Moore and Chief Judge Lombard, in their rigorous dissent from

the majority ruling^correctly^in this author's view, identified the

serious problem resulting from the majority's "materiality" standards.

The latter found that particular drilling results were material

because they "might well have affected the price of TGS stock"; yet

the same standard may be properly applied to, for example, the results

of labour negotiations designed to avert a threatened strike, or the

making of important new discoveries (which may or may not be successful)139in a large pharmaceutical company. The dissenting judges wisely

recommended that the Commission make specific recommendations to

Congress to introduce certainty into this area and, as well, incidentally,

into the area of the proper waiting period which must expire before140trading by insiders is permitted.

Thus, in relation to one of the most important questions determined by

the Texas Gulph Sulphur litigation, that of materiality, substantial

differences of principle existed between the majority and dissenting

members of the court. To this author, this divergence of opinion

1074

necessarily detracts from the authority of the decision itself, and

from the weight which it should be accorded by the legislators of

other jurisdictions seeking guidance in this complex area.

(3) On the question of when insiders may act upon the

information which they possess, the Circuit Court disagreed with the

District Court's interpretation of Cady, Roberts $ Co., adopting the

principle that "Before insiders may act upon material information,

such information must have been effectively disclosed in a manner

sufficient to insure its availability to the investing public"?^

The majority interpreted that principle in such a manner as to find

against one defendant who at 10.20 a.m. on the date on which the

relevant information was released at a press conference (which began

at 10.00 a.m. and finished some ten or fifteen minutes later) acted

on that information by telephoning his broker and ordering the

purchase of shares for the accounts of family trusts of which he was142the trustee but not the beneficiary. This particular defendant

should, according to the majority, have waited until the information

had appeared over the widest circulating media (in this case, the

Dow Jones broad tape) before acting on it to his own advantage.

Again, this appears to this author to be another area in which finite

standards are required, and to be one in which, unless such standards

are adopted, confusion and uncertainty must prevail.

(4) The Circuit Court indicated clearly that proof of specific

intent to defraud was unnecessary in either SEC enforcement proceedings

1075

or private actions under Rule 10b^5, and also that the Rule would

encompass actions based upon negligence as well as upon active fraud.

While serious reservations about this latter finding were expressed by144Mr. Justice Friendly in a separate concurring opinion and have

been expressed elsewhere?'^ this view remains the current law.

Again,however, because of the divergence of opinion which does exist,

caution must be exercised in examining this particular aspect of

the American regulatory machinery.

(5) The Circuit Court disposed of the question of "tippee"

liability by holding that as the "tippees" of one of the defendants

were not themselves defendants in the action, the court was not

called upon to decide whether "if they acted with actual or

constructive knowledge that the material information was undisclosed,

their conduct is as equally violative of the Rule as the conduct

of their insider source, though we note that it certainly could be146equally as reprehensible".

As has been correctly pointed out, "tippees" had at the time of the

Texas Gulph Sulphur opinion already been expressly held liable in a 147lower court, and it might be expected that similar liability would

in the future be imposed by the Second Circuit Court itself. This

was another ill-defined area of liability in the United States

regulation of insider trading. The basic question of whether at all,

1076

and if so in what circumstances, liability should be imposed upon

people who receive information from insiders, required close

examination. Must such "tippees" have actual or constructive

knowledge that they are utilizing inside information? What of the

second level of "tippees", that is, persons to whom the original

"tippees" pass on the information in question? Will they also be

liable? To whom will ’’tippees" be liable? To the company or to

the persons who sell to or purchase from them? How will damages

be calculated? These and other important questions must be

satisfactorily answered before any legislator makes a firm commitment

to legislation which attempts to regulate this aspect of insider

trading.

(6) Finally, the Circuit Court dealt with the difficult problem

of defining the Rule’s "in connection with" requirement. Relying149again upon a generous interpretation of Congressional intent, the

majority held that the phrase did not limit the operation of the

section to those situations in which the persons or corporations who

issued a misleading statement could only be found to have violated the

provision if "they engaged in related securities transactions or150otherwise acted with wrongful motives" • The majority thus saw

the provision as operating "irrespective of whether the insiders

contemporaneously trade in the securities of that corporation and

irrespective of whether the corporation or its management have an1 multerior purpose or purposes in making an official public release.

1077

In perhaps their most trenchent criticism of the majority judgement,

the dissenting justices characterized the argument set out immediately

above as "unwarranted as a matter of statutory construction and152unwise as a matter of policy", and stressed that the section was

meant to cover "fraudulent acts integrally connected with securities 153transactions". The dissentients argued on the basis of a number

of authorities, in all of which the defendants had participated in

securities transactions and had carried out deceptive activities of

which the securities transaction formed an integral part.^*^

Finally, they sounded a prophetic warning note:

It should be realized that the construction given 10b-5 will turn it into a comprehensive regulatory provision applicable to all corporate and individual statements, but without any of the detailed standards necessary to implement such a program. ^

That this has in fact been the result of the judicial and administrative

interpretation of the Rule is proof enough of the wisdom of this

dissenting judgement.

Texas Gulph Sulphur has thus been the paradigm case in the regulation

of insider trading in the United States, In extending the "materiality"

and "insider" provisions, in dispensing with the need for "intent" in

either private or enforcement actions, and in refusing to allow the

1078

restriction of the scope of the regulatory provisions by the phrase

"in connection with", the Circuit Court of Appeals moved the

regulation of insider trading onto a new plane, one onto which, in

this author’s opinion, it was never designed to be moved.

The fact that there was a strong dissenting judgement in the court,

and the subsequent qualifications and reservations which have been

expressed about the case / ° make it a very dangerous precedent for

overseas legislators to follow. Texas Gulph Sulphur has moved the

regulatory machinery in respect of insider trading so far beyond what

was initially contemplated by Congress that no cautious overseas

legislator can afford merely to adopt the Texas Gulph standards

without closely examining both the original congressional intent, and

also the various steps which have led to the present situation.

(iv) Post-Texas Gulph Sulphur Developments

As could be expected, and certainly as the SEC would have wished,

post-Texas Gulph Sulphur developments have continued the trend begun

by the Kardon case and continued, through Cady, Roberts $ Co., to157Texas Gulph Sulphur itself. Despite warnings that the future * 158

development of Rule 10b-5 would lead not only to chaos, but also to158"more chaos" the SEC and the courts have continued to expand its

scope of operations. The rule has become so firmly entrenched that

the fact that one of the most distinguished American securities

commentators sees large areas where the application of the rule has yet

1079

to provide an answer, seems not have have raised in his mind any

serious doubts as to the overall value of the rule and the manner in

which it has been developed.

The rule has been extended in a number of important respects. First,

it has been held that it enables a shareholder to bring a derivative

suit alleging a fraudulent abuse of control of the affairs of a company

(which abuse, incidentally, involves no deception) as long as that160abuse "touches" a purchase or sale of securities- The results of

this particular extension have been described as follows:

The results are consistent with the recent trend of expanding the federal securities laws to embrace situations once thought to fall within the exclusive domain of State corporate law. Whether the development of this federal law of corporations was within the contemplation of Congress in 1934 is extremely doubtful; however, the trend has been established and shows no signs of reversing or even slowing. &

It is this degree of uncontrolled expansion of remedies without

Congressional mandate which leads this author to advise prospective

Australian and regional securities legislators to approach the American

experience in this particular area with extreme caution.

Secondly, the courts and the Commission have further extended the

liability arising from the use of inside information to "tippees" and

probably also to "sub-tippees". Building upon the base of Ross v. Licht>

159

the definition of insider trading in Cady, Roberts $ Co. and its approval

1080

in Texas Gulph Sulphur, the Commission in the Investors Management163disciplinary proceedings indicated that liability would be imposed

upon tippees when the following conditions were satisfied:

162

That the information in question be material and non public; that the tippee, whether he receives the information directly or indirectly, know or have reason to know that it was non-publie and had been obtained improperly by selective revelation or otherwise, and that the information be a factor in his decision to effect the transaction- 4

The liability for the use of inside information which was once limited

to a narrow range of "insiders" and subsequently expanded to a very

wide range of "insiders", was thus expanded even further to

encompass persons who were not themselves insiders but who had merely

received information from such persons. There is not even a requirement

either that such "tippees" have a special relationship with the issuer,

or that they have actual knowledge that the disclosure of the

information to them was a breach of a fiduciary duty."^

The original Texas Gulph Sulphur litigation itself was continued on

remand by the District Court, which imposed upon one of the defendants

liability for the profits of his tippees, although declining to

impose such liability in respect of "sub-tippees". Although this

further step was declined in this particular case, subsequent developments

have established that the anti-fraud provisions will apply to such167

remote tippees (or "sub-tippee^'). One wonders where this expansion of 168168remedies available under Rule 10b-5 will end.

1081

Thirdly, it appears that the SEC may envisage insider trading liability169extending to the use of market information, as distinct from

information emanating from a corporate source. The extension of

insider trading concepts into this area would have the effect of opening

a whole new vista of regulatory activity, the boundaries of which are

at this stage undefinable. Again, this projected widening of the

regulatory machinery must be regarded by overseas legislators as yet

another reason for approaching the American experience with caution,

and, specifically, for attempting to define clearly and concisely the170basis of the alleged need for regulating insider trading .

D. The Academic Controversy

1. The Marine Thesis

Undoubtedly the best-known and most controversial defence of the171practice of insider trading has been that of Manne , a defence which

although published before the District Court judgement in Texas Gulph 172Sulphur, remains the subject of academic debate even today.

Manne approached the regulation of insider trading from the point of

view of an economist, rather than a lawyer, believing that, as such, the

question should be considered not as a matter between two individuals

which called for judicial resolution, but rather in a broader

perspective, that of the allocation of income or resources among large173groups of individuals . While this certainly differentiated Marine’s

1082

approach to the problem from that of securities lawyers generally,

the value of the distinction can be established only by the quality

of the argument presented. For reasons detailed below, it is this

author’s view that Manne has failed in most aspects of his endeavour.

Extremely critical of the lack of quality of analysis in the early174writings on insider trading, Manne also deplored the fact that there

was no real discussion in the 1933-1934 Congressional hearings or in

either the Senate or House reports of whether insider trading was175wrong: it seems always to have been merely assumed that it was.

Additionally, criticism was expressed by Manne of the 1963 Special

Study's failure to intervene effectively in this area and of the strong

influence of Chairman Cary of the SEC, through the Cady, Roberts $ Co.

decision and in other ways, in broadening the ambit of the

regulatory provisions.

To this author, Manne's initial conclusion, that "in the literature on177insider trading, almost no careful analysis of the subject exists" ,

is indisputable. This is only the first step, however, in any argument

defending insider trading, and, as is indicated below, although certain

of his other propositions are also sound, one of Manne's basic

premises does not withstand close examination.

Manne did remain on firm ground, however, in his criticism of

developments in the law under both Section 16(b) and Rule 10b-5 of

the 1934 Act. In respect of the former, while making the valid point

1083

that United States corporation law attempts simultaneously to cover178large publicly held corporations and small, privately held ones,

he attacked the "special facts" doctrine established in Strong v. Repide

and correctly pointed out the limited scope of, and the faults inherent180in the drafting of, Section 16*

179

Again, in this author's view, he correctly identified the problems181associated with the haphazard growth of the 10b-5 remedy and

appreciated both the long-term significance of the Cady, Roberts § Co.182decision and its short-term relevance for the then recently-

183instituted Texas Gulph Sulphur proceedings•

After making an interesting distinction between "first-category" and184"second-category" information in the insider trading context, and

describing the effect of allowing insider trading in various 185situations, Manne advanced the somewhat dubious argument that, on

the premise that "the time required for full exploitation of

information by insiders is generally quite short, the odds against any

long term investor's being hurt by an insider trading on undisclosed186information is almost infinitessijnally small". While Manne's

propositions in support of this argument are themselves doubtful, the

argument itself suffers from the weakness that it deals extensively

only with one segment of the investing public, and makes no specific

provision for the other important element, viz., short-term traders

who purchase or sell entirely on the basis of approaches made to them by

persons in possession of "inside" or confidential information. Marine's

1084

attempt to shift the emphasis from this group of individuals to that

of the long-term investor, without adequately accounting for the

position of the former, remains one of the weaknesses of his overall

thesis.

Manne's real difficulty arose, however, in his argument seeking to

justify insider trading on the basis of it constituting a proper

reward to the "entrepreneur” in the modem corporation. He defined an

entrepreneur as follows:

Being an entrepreneur is a functional condition relating to innovational activity and does not connote a status or class of persons. We cannot identify entrepreneurs as a separate social class, as we might landowners or capitalists or labor. Furthermore, entrepreneurial activity itself is not always easy to identify or distinguish in advance. /

Despite the vague nature of this definition, Manne sought to

distinguish the entrepreneur from both the manager and the capitalist.

In respect of the former, the basic ground for distinction was that it

is known in advance what a manager will do, and that his services may188accordingly be "purchased like any commodity in the marketplace",

but that the functions carried out by the entrepreneur are not

predictable in their detail. To this author, this attempted

distinction, the acceptance of which is critical to Manne's thesis, is

not sustainable. The immense variation in function which is required

of many managerial positions in today's corporations, and the huge

scope which such positions offer for the introduction of new or

1085

innovatory concepts, makes it impossible to effectively distinguish

them from what was described by Manne as entrepreneurial activity.

Additionally, Marine’s attempted distinction between the entrepreneur

and the capitalist also failed. The distinction which it was argued

existed was that the capitalist was one who invested funds in, for

example, the replacement of depreciated facilities, on which interest

would in return be received, whereas the entrepreneur was he who

organized or created uncertainties, and who created the conditions189necessary for true profit. Again, the distinction which Manne

sought to make is so confused, the overlapping between the two

"categories" so prevalent, that it cannot possibly be sustained.

Yet it is on the basis of being able to specifically separate the

entrepreneur from both the manager and the capitalist that Manne's

major thesis rests. This is, that the entrepreneur must be suitably

rewarded for performing his given function, that that reward is the

profit, the surplus which results from "an economically successful190new combination of factors" t and that this reward can take only one

particular form, viz., the right to utilize inside information as to

the entrepreneur's activities before that information is reflected in

the prices of the securities of the corporation with which he is

associated.

After relying in part upon a weak negative premise to stress the need191 192for entrepreneurial motivation , Manne rejected high salaries,

bonuses and stock options as suitable forms of entrepreneurial

compensation, and concluded that:

1086

Insider trading meets all the conditions for appropriately compensating entrepreneurs. It readily allows corporate entrepreneurs to market their innovations. As we have seen, this is not a direct marketing of the idea but rather a "sale" of information about an innovation. Thus, although we do not allow entrepreneurs a direct proprietary interest in their ideas, we can allow recovery for their ideas by permitting them to exploit information about the existence of the ideas in a market primarily based on information,1"3

This, then, is the core of Marine’s thesis, that the entrepreneur should

be compensated by allowing him to trade, on the market, on the basis

of the information which he has in respect of his innovatory contribution

to the corporation concerned. To this author, there are three major

faults with this proposition. First, it assumes that other persons in

the market will not be disadvantaged by allowing the entrepreneur to

so operate, while Manne’s own earlier arguments to this effect were

less than completely convincing. Secondly, it assumes that it is

possible to restrict the entrepreneur’s activities to trading on

information which is related only to his particular innovatory contribution.

So far as can be determined from his study, Marine did not address himself

to this problem. Thirdly, even if Manne’s view that an entrepreneur

should be compensated in this way were accepted, this would amount only

to a justification of insider trading in an extremely limited context

and for an extremely limited purpose. No wider conclusions could be

1087

drawn as to the desirability or otherwise of insider trading generally.

Should persons other than the entrepreneur, for example a director of

the company who encouraged and authorised the entrepreneur to carry out

his innovatory work, also be allowed to trade on the basis of that

information before it becomes generally available? Is not that

director himself an entrepreneur? Manne seems to have appreciated

the existence of this problem, as indicated in his statement that "It is,

however, extremely difficult to identify individuals performing the

entrepreneurial function or to know the precise moment at which an

individual perforins an entrepreneurial act. The self same act may

constitute an entrepreneurial service in one company and a management194function in another". No satisfactory solution to the problem is

proposed by Manne.

Although Maine's central "entrepreneurial" theory is not accepted by

this author, for the reasons detailed above, Manne did make a significant

contribution to the debate on insider trading by, inter alia,

detailing the problems of enforcing the then existing regulation of

the practice. He was, for example, correctly critical of the

difficulties involved in effectively differentiating between "inside"195and "outside" information; of the unsuccessful "blanket" approach

196of Section 16; and of the faults with the "stop-trading" method 197of regulation.

Finally, Manne raised interesting questions as to the responsibilities

of government employees in respect of insider trading. In situations

1088

where, for example, government approval is needed for mining or

commercial development which will necessarily, when a matter of

public knowledge, cause the company's shares to rise in price, what

restrictions exist to prevent the employees of that particular department

from purchasing the company's shares prior to the granting of the

governmental approval? It is interesting to note that Manne would

distinguish such insider trading from that carried on by entre-198preneurs and does in fact strongly condemn the practice.

Marine's contribution to the important question of the regulation of

insider trading has thus been of great significane. While his

central thesis, that of the appropriate reward to the entrepreneur,

is not accepted by this author, his criticisms of the lack of

consideration of the basis for the existing regulations, the faults

inherent in those regulations and the practical impossibility of

effectively regulating insider trading, are all sound. An indication

of the relevance and the effect of his thesis is to be found in the

academic reaction which its publication has engendered.

2. The Reaction

Even before Professor Manne's book was published, his thesis was the

subject of comment at a panel discussion on federal control of inside 199information at which, inter alia, the question of the quantitative

nature of any "information" payment to entrepreneurs was raised.

Manne, who participated in the discussion, conceded that this was a

1089

difficult question and that the eventual reflection of the information

in the market price of the company’s stock is "the best approximation

we have to the actual value of the innovation"?^

Subsequent to this initial discussion, Marine’s thesis received wide

publicity and was greeted with reactions which included, inter alia,

polite scorn and rejection on the non-substantive ground of his

dismissal of the moral or public opinion factor; detailed and

thoughtful consideration resulting in doubt as to the general underlying202premise and as to certain specific arguments ; detailed consideration

resulting in acceptance of the "no injury caused by insider trading"

proposition combined with difficulty in either accepting or rejecting

the entrepreneurial argument and a call for examination of the problem

in a much wider social context?^ and the expression of doubts as to

both the information and the reasoning processes utilized by the author

and the suggestion that the whole exercise was a "brilliant spoof"?^.

Whatever Marine’s initial intentions in producing his book, however, it

has remained the subject of continued academic debate, involving,205inter alia, a senior lawyer of the Securities and Exchange Commission

E. Benefits of the United States Experience

Because it has the most comprehensive current regulatory scheme designed

to deal with insider trading, the United States must merit the attention

of Australian and regional legislators working in this area. It is

1090

crucial, however, that before such persons proceed to adopt the

American experience to their own respective securities industries, the

background to that experience be carefully considered. It must be

appreciated, for example, that there is substantial doubt as to the

existence of any Congressional mandate for the current regulatory

pattern and that Section 16 has proved a largely unworkable provision

in terms of regulating insider trading. It must also be appreciated

that the current situation is the result primarily of the administrative

and judicial extension of anti-fraud rule not designed for that

purpose; that controversy exists as to the validity of some of the

judicial decisions which gave rise to that extension; and that later

courts have followed those earlier decisions without reconsidering

the basic philosophies involved.

Finally, it must be realised that problems exist in the current

Texas Gulph Sulphur - dominated regulatory scheme (for example, those

relating to materiality, the range of the concept of "insiders",

and the full extent of the liability of "tippees" and "sub-tippees")

and that concern has been expressed as to the uncontrolled nature of

the growth of judicial legislative power in this area. Only on the

basis of all of these factors can Australian and regional legislators

properly consider the current United States regulatory machinery in

respect of insider trading.

1091

IV. CANADA

A. Report of the Royal Commission on Banking and Finance * 206 207 * 209

Although the brief submitted to the Royal Commission by the Toronto206Stock Exchange described provisions of both the Criminal Code and

the By-Laws of the Exchange which dealt with the "manipulation” of207

stock prices? no mention was made of insider trading as such and

no indication was given than the Exchange had such activity within

its contemplation. No submissions in respect of the practice were201made to the Commission by the Montreal and Canadian Stock Exchanges.

209The Report of the Royal Commission did, however, attack what it saw

as the weakness of the then current requirements governing the

disclosure of corporate insider trading in Canada. It was critical

of the fact that a company director or officer

Is in an advantageous position to use special knowledge of the company's affairs for his own benefit, often to the disadvantage of the shareholders at large, yet the Ontario Corporations Act provides for the disclosure of directors' trading at an annual meeting only upon the request of a shareholder or shareholders representing ^ 2 1 0 least one per cent of the issued capital of the company.

1092

Expressing reservations also as to the relevant provisions of the

federal companies legislation, the Porter Report referred favourably

to Section 16 of the United States Securities Exchange Act of 1934

(which the 1963 Special Study of the Securities Markets had then211recently recommended be extended to the over-the-counter market)

and concluded that

The Canadian shareholder is relatively exposed to insider abuse. We recommend therefore the adoption of disclosure requirements similar to those now in effect in the United States but extended to all public companies. These requirements might be included in the Securities Acts and administered by the securities commissions, although the stock exchanges should take an independent lead in this matter. A similar tightening up in the enforcement of stock exchange and securities act provisions with respect to the dissemination of insider tips and rumours could well be carried out P-2

This statement by the Royal Commission was notable for four reasons.

First, it gave no indication that any consideration had been given

to the basic policy question of whether insider trading should be

the subject of regulation. It merely assumed this to be the case,

without citing any illustrations of abuse of their positions by

company directors or officers.

Secondly, it recommended that the provisions of Section 16 of the

1934 United States Act be followed, while it must at that time have

been obvious that Section 16 was not working efficiently and that

it was being interpreted strictly by the courts of that country.

1093

It is difficult to see why, in this situation, the Royal Commission

should have recommended that it be transposed to the Canadian

securities industry.

Thirdly, it seems remarkable that, in the context of insider trading,

the Royal Commission made no reference to the developments which were

occurring in the United States in the expansion of Rule 10b-5. The

SEC's decision in Cady, Roberts § Co. had been given in 1961, and the

expansionary trend was becoming obvious by 1964.

Fourthly, the Commission made a positive recommendation to extend

the then current United States disclosure requirements to all public

companies. This was, in this author’s view, a sound recommendation.

As has been argued consistently throughout this study, the

mechanisms of investor protection are essentially concerned with the

public company and with the protection of the interests of

investors in those companies, rather than with the private or

closely held company.

B. The Kimber Report

213As in so many other areas, the Kimber Report played a decisive

role in the development of this particular aspect of the Canadian

regulatory system, its substantive recommendations finding

legislative expression in the Ontario Securities Act, 1966, the

provisions of which were subsequently followed in a number of other

provincial jurisdictions.

1094

Despite this fact, however, and despite the Committee’s commitment to214the preservation of public confidence in the securities market^ no

indication is given in the Committee’s report that any examination was

made of the basic question of why insider trading should in fact be

regulated. Conceding both that no statistical information was

available to indicate the volume of such trading and that it was not

improper per se for an insider to deal in securities in his own 215company, the Committee concluded that it was improper for such a

person to use confidential infomiation acquired through his position

to profit by trading in his company’s securities. The only attenpt to

justify this conclusion is found in the following two passages in the

Report.

The ideal securities market should be a free and open market with the prices thereon based upon the fullest possible knowledge of all relevant facts among traders. Any factor which tends to destroy or put in question this concept lessens the confidence of the investing public in the market place and is, therefore, a matter of public concem?16

and

We believe that the law should clearly provide that the use by insiders, for their own profit or advantage, of particular information known to them but not available to the general public is wrong and that the law should give appropriate remedies to those aggrieved by such misuse^/'

1095

In respect of the Committee's first statement, it was not

established in the Report that insider trading did in fact "destroy

or put in question" the concept of a free and open market. Again, as

with the Porter Report, one would have expected the Kimber Report to

have contained, or at least made reference to , detailed, specific

examples of situations in which such trading did have the alleged

affect. In respect of the second statement, no basis is given upon

which the moral judgement that such activity is "wrong" might be

founded.

Despite this failure to consider the philosophical basis of the need

for the regulation of insider trading, the Committee made a series of

substantive recommendations for such regulation, the most significant

of which were as follows. First, that the definition of "insider"218should include directors, "executive" officers only and 10%

substantial shareholders, and should not include junior officers,

other employees, professionals such as lawyers, accountants and

financial agents and "tippees" such as spouses, relatives, friends,219etc. While this author agrees with the exclusion of the

categories named above, it is felt that all employees, including

"executive" officers, should be excluded, as the arbitrary cut-off

point selected by the Committee does not effectively distinguish one

employee from another for the purpose of insider trading. If, however,

all employees were excluded from the provision, it could still be

left to the company's directors themselves to enforce, by means of

1096

appropriate sanctions, restrictions on insider trading by particular

employees if in their opinion such restrictions were warranted. This

suggestion would effectively extend the proposal of the Committee

that the policing of the trading activities of junior officers be

left to the company’s management. This would have the effect of

leaving only directors liable for insider trading, and, as will be

elaborated upon below, should it be decided that such trading be

regulated in Australia, this author proposes that liability be in

fact limited to coup any directors only.

Secondly, the Committee recommended that there should be an ’’insider”

reporting requirement and that it should extend over the same period

as that of the United States 1934 Act, viz., that notice of the

transaction be given within ten days after the end of the month in220which the transaction takes place • While this author believes

that such a much shorter reporting requirement is essential, the

Committee’s other recommendation, that the reporting requirement apply

to all public companies and that private companies be excluded, is,

as indicated above, consistent with this author’s argument.

Thirdly, the Committee recommended that the company have a specific221cause of action against an insider who profits from imp roper trading,

but that in the event of the coup any not pursuing its remedy, it be

left to the initiative of the Ontario Securities Commission, rather

than an individual shareholder, to bring an action against the

1097

insider in the name of the company. This is a sound recommendation

and one designed specifically to overcome the problems raised by the

emergence of the "Section 16(b) Bar" in the United States.

Finally, the Committee urged that the creation of a right in the

company against the insider not be allowed to interfere with any

private actions which a particular shareholder might have against 223that insider, and at the same time sought to ensure that the

proposed legislation be drafted to avoid the imposition of double224liability upon such persons. Again, this was a sound

recommendation and one which, it has been suggested, could with225benefit be adapted to the United States scene.

Thus, although the recommendations of the Kimber Committee were

legally sound, provided that one accepted the basic need for the

regulation of insider trading, they did nothing to supply any evidence

to substantiate that need. As with the recommendations of the Porter

Report in this area, this does detract significantly from their value.

C. The Kelly Report

Although this report: did not specifically comment on insider

trading, the situation which the Royal Commission was appointed to

investigate, viz., the trading of shares in a company associated with

the Texas Gulph Sulphur discovery at Timmins, Ontario, was itself an

222

1098

insider trading situation- Its significance for the purpose

of this study lies only in the fact that it contributed towards a

growing awareness on the part of securities administrators in Canada

of the practice of insider trading.

D. The Proposed New Business Corporations Law 228 229 230

228The drafters of this proposed statute noted the acceptance by both

the Kimber Committee and the Jenkins Committee of the principle of

regulating insider trading and, without questioning the reasons for

such acceptance, decided merely to accept the soundness of the229principle. This did represent a lost opportunity to reconsider the

question of the need for and the extent of such regulation, as neither

the Jenkins Committee nor the Kimber Committee really addressed

themselves to the basic question of the soundness of the overall

principle.

The proposed new business corporations law went on to extend many of

the Kimber Report’s recommendations and to propose a significantly230more rigorous method of controlling insider trading. While the

exact nature of such proposals is not the direct concern of this

study, it should be noted that they were made on the basis of the

erroneous belief that the basic principle of regulating insider

trading had been considered by both the Kimber and Jenkins

227

Committees.

1099

The regulation of insider trading is currently effected at both

dominion and provincial level in Canada. At the former level, the new

Section 98 of the Canada Corporations Act, which follows basically the

pattern of Section 16 of the 1934 United States Act, was introduced

after the Porter Report which, as we have seen, did not address

itself to the question of whether insider trading should be regulated.

At provincial level, the leader in the legislative field has, as

usual, been Ontario, and the provisions of its Securities Act and

Corporations Act largely follow the recommendations of the Kimber

Report which, as we have also seen, did not consider the basic,

philosophical question of the need to regulate the activity known

as insider trading.

In this situation, while the Canadian regulatory model in this area231may be put forward for consideration of its substantive provision^

it must be appreciated that these have apparently been introduced

without any adequate consideration being given to the need to

regulate the practice of insider trading as such.

E. The Legislation

1100

F. The Commentaries

232In one of the major works to date on Canadian securities regulation,

the first edition (published in 1960) described the provisions of

Section 16 of the United States 1934 Act, primarily in relation to233Canadian officers, directors and shareholders and referred only

fleetingly to the provisions of the Canadian dominion and234provincial legislation. The supplement to this work (published in

1966) acknowledged that there was at the time of the first edition,

"no very great concern in Canada over trading by insiders of a

corporation in securities of that corporation, possibly to the235detriment of either the corporation or other parties to the trades",

and stated that there had been tremendous interest shown in the

subject since that time. Again, however, no consideration is given

to the basic question of whether the practice should be regulated,

reference merely being made to the Kelly, Kimber and Jenkins Reports

and the 1965 amendments to the Federal Corporations Act. °

Additionally, in another learned comment upon the then new provisions237of the Ontario Act of 1966, no reference was made to the need for

such regulatory provisions, their content and proposed effect being238merely stated, and their need, presumably, merely assumed.

G. The Rationale

While it is surprising that there seems, at least in the

comprehensive material available to this author, to have been little

consideration given in Canada to the basic question of whether insider

trading should be regulated, the rationale perhaps lies in two

important factors. The first is the proximity, physically as well as

legally in this particular area, of Canada to the United States. In

the latter jurisdiction the need to regulate insider trading has been

assumed (although, as we have seen, again without any real foundation)

since the early 1930's, and while there were no significant developments

in this field in Canada prior to the early 1960's, the vast American

experience would have been unavoidable to the consciousness of the

Canadian securities lawyer and the Canadian legislator.

Secondly, and associated with the first factor, is the Texas Gulph

Sulphur litigation. The critical events which gave rise to the

celebrated United States decision did occur in Ontario province

itself, and the side-effects of that event would have reinforced the

consciousness of the American experience in this field described

immediately above.

For these reasons, while regard may be had by Australian and regional

legislators to the Canadian substantive provisions in this complex

field, this must be only on the understanding that there has, in that

1102

country? been little adequate questioning of the basic need to regulate

insider trading, but rather a conditioning process as a result of

constant exposure to the regulatory system of its neighbour.

1102

coillltry, been little adequate questioning of the basic need to regulate

insider trading, but ra,ther a conditioning process as a result of

constant exposure to tne regulatory system of its neighbour~

1103

V. THE ASIAN REGION

A. General Background

The practice of insider trading, which as described above has given

rise to extensive judicial and administrative law-making in some

jurisdictions, has been accorded significantly less attention in the

Asian region. While it would be naive to conclude that the practice

has not existed in the region, the lack of development of regulation

in this field may be the result of a number of factors. First, the

Asian countries examined in this study, with the post-1945 exception

of Japan, represent developing, rather than developed economies, and

accordingly the major focus of their respective legislatureshas been

the creation of viable capital markets. It is not a priority function

of the complex task of initially establishing such markets to be

concerned with the future regulation of sophisticated secondary

market practices such as insider trading, proxy regulation and

margin trading.

Secondly, India, Malaysia, Singapore and Hong Kong have all, until

recently, regulated their respective capital markets primarily by

means of companies legislation based upon either the United Kingdom or

Australian legislation, or both. This legislation has, historically,

not concerned itself in detail with the regulation of insider trading

in the way in which it has been regulated in North America, and

particularly in the United States. The recent developments in both

1104

the United Kingdom and Australia evidence a movement away from a

situation of almost total reliance upon companies legislation to

greater dependence upon securities industry-oriented legislation.

This movement is now itself being reflected in the regulatory

procedures of, especially, Malaysia, Singapore and Hong Kong, but

has yet to be significantly reflected in India.

Thirdly, Japan, the Philippines and Thailand are in rather different

situations, as with their primary philosophical influence in this

area coming from the United States, they reflect its regulatory

procedures much more clearly than do the other Asian countries

examined. However, in respect of insider trading, while the

appropriate provisions have, in Japan and the Philippines, been

included in the statute books, they have not been the subject of

extensive judicial or administrative attention. Thailand is in yet

a different situation as, even though its existing statutory

provisions do detail the responsibilities of directors, they are not

concerned with the practice of insider trading as such, and a239recent report on its capital market has failed to recommend that

any steps be taken to alter this position.

1105

B. India

1. Early Commentaries

There is a significant dearth of material on the practice of insider

trading in India. The report which gave rise to the important

Securities Contracts (Regulation) Act, 1956 and the Securities

Contracts (Regulation) Rules, 1957^^ while it specifically based its

recommendations on the necessity of prohibiting unhealthy, while241permitting healthy, speculation, , did not indicate in which category,

if either, it included what is now known as insider trading. This was

despite the fact that in a comment upon an earlier report in the same 242field, it was specifically recommended that

The [Companies] Act should be thoroughly overhauled, particularly in the matter of stock market dealings by directors, managing agents and other officers as well as in regard to publication of periodical progress reports, financial statements and similar other information? 43

2. Statutory Provisions

While the Securities Contracts (Regulation) Act, 1956, itself contains

no provisions regulating the practice of insider trading, the 1957

Rules do, in respect of the requirements for listing on a recognized

stock exchange, contain provisions which at least require disclosure by

certain of the persons who would be regarded as "insiders” in other

jurisdictions. A public company applying for listing must furnish

1106

to the appropriate exchange details of the highest ten holders of

each class or kind of its securities as at the date of the 244application. Additionally, such companies must undertake to forward

to the exchange, immediately after each annual general meeting, an

annual return containing such details. While these provisions, on their

own, do not amount to a comp rehens ive disclosure device, they are no

doubt meant to be considered in conjunction with Sections 307 and 308

of the Companies Act, which require the maintenance of a register of

directors' shareholdings and impose a duty on directors and persons

deemed to be directors to disclose their shareholdings.

Even considered together, however, these statutory provisions comprise

no more than an incomplete disclosure device covering directors and

certain shareholders. Whether this result occurs because insider

trading does not exist to any significant degree in India, or if it

does, because it is not regarded as an immoral or illegal practice,

is open to conjecture.

C. Malaysia and Singapore

1. Companies Legislation

The companies acts of both Malaysia and Singapore, which are in almost

identical terms, are based largely upon the "uniform" companies

legislation of the various Australian States, which are in turn

1107

derived from the United Kingdom companies statute. They contain

provisions regulating the conduct of directors and officers of

corporations which require, inter alia, that directors disclose their245interests m contracts, property etc, that companies not make loans

to directors except under certain specified circumstancesthat a247register of directors’ shareholdings be maintained and that

directors furnish to the company such information as may be

’’necessary or expedient” to enable the company or its officers to248comply with the requirements of the Act.

Additionally, and most importantly, Section 132, which is based upon,

but expands, the Australian ’’uniform” act's Section 124, inposes upon

a director the duty to at all times ”act honestly and use reasonable

diligence in the discharge of the duties of his office" and upon an 249 250officer or agent of the company the obligation to "not make

use of any information acquired by virtue of his position as an

officer or agent of the company to gain directly or indirectly an

inproper advatnage for himself or for any other person or to cause

detriment to the company". Any breach of the provisions of the

section makes the offender liable to the company for profits made by

him (and also the damage suffered by the company) as well as guilty, 251of an offence against the act.

While it is, to this stage, in accordance with the appropriate

Australian provision, the Singapore and Malaysian section has added

1108

an additional subsection (4) which is similar in only certain

respects to the new Section 124A introduced into some only of the

Australian State acts in 1971.

The subsection in the Malaysian and Singapore legislation provides

that an officer or agent who directly or indirectly gains an improper

advantage for himself or any other person through dealing in shares or

debentures of the company (or options in relation thereto) by the use

of information acquired by virtue of his position shall be liable to

compensate any person who is either deprived of an actual or potential

benefit or suffers loss as a result of the use of such information.

This provision is much wider than its Australian counterpart, partic­

ularly in that it places no qualifications upon the nature of the252information which, if utilized, will give rise to the liability.

Thus the Companies Act provisions of both Malaysia and Singapore in

respect of insider trading, adopted, with one variation, from the

Australian State provisions, represent no substantially greater

degree of consideration of the basic question of the need to regulate

insider trading than do those of Australia. Since the enactment of

their companies legislation, however, there have been important

developments in both countries which do warrant consideration.

1109

2. Securities Industry Legislation

253Although the Ferris Report recommended only that directors, their

immediate families (and companies controlled by them) and direct or

beneficial holders of more than 10 per centum of a company’s shares254should, on a monthly basis, disclose changes in their share ownership,

255the securities industry acts introduced into both Malaysia and 2 56Singapore in 1973 did go well beyond this. The Singapore Act

included a Section 87 which is, with a small number of variations, an

adaptation of the SEC’s Rule 10b-5. Section 87 does, of course,

delete the Rule 10b-5 reference to the use of any means or

instrumentality of interstate commerce or the mails, or the

facilities of any national securities exchange. However, while

including the three sub-provisions of the Rule, it qualifies them all

with the phrase which is used in the United States Rule (with the

singular form of "securities”) to qualify only sub-provision (3),

viz., "in connection with the purchase or sale of any securities".

The Singapore Government has thus imported the whole Pandora’s Box of

Rule 10b-5 with its myriad problems and complexities. Although the

scope of the provision seems to have been realized by one 257commentator, it is hardly adequate justification for its future

application in Singapore to state that while Part X of the Act, which

includes Section 86, "is intentionally wide, much of its application

is quite precise as seen in the body of case law already developed in

1110

2SRthe U.S.A.n In fact, the "body of case law" which exists in the

U.S.A. is, as indicated above, of prohibitive complexity and difficulty.

It is to be hoped that Singapore will take advantage of the

unfortunate American experience in this area to ensure that, as well

as importing Rule 10b-5, it does not import its accompanying problems.

In contrast to Singapore, Malaysia did not adopt the terminology of

Rule 10b-5, but, perhaps wisely in the long-term, introduced a259simpler provision limited to false or misleading statements. While

only time and judicial interpretation will finally tell, it might be

safely forecast at this stage that Malaysia will avoid the problems

certain to be experienced by Singapore in this field.

D. Hong Kong

1. The Investor Protection Report 260 * * * *

260Although long reliant upon a Companies Ordinance derived from early

English companies legislation, change was inevitably forced upon the

Hong Kong Government by, inter alia, market developments in the late

1960's and early 1970's. The first Investor Protection Report,

while considering many other aspects of market regulation, did

examine the question of what transactions in securities should be

prohibited.

1111

It was, in this respect, guided primarily by the provisions, which

it admitted were "confessedly experimental in nature", of the New

South Wales Securities Industry Act, 1970, Section 71 of which

prohibited certain market rigging transactions. For reasons which

remain unclear, the Committee decided to replace this Section (which

did not deal with insider trading) with a section comprising sub-262paragraphs (1) and (3) of the SEC’s Rule 10b-57 No reasons were

given in the Committee’s Report for this particular recommendation and

one is left to wonder at the basis upon which it was made.

2. The 1974 Legislation

Whatever the undisclosed reasons for the Committee’s recommendation in

respect of insider trading, it was not adopted by the Government whenoz: 7

it drafted the Securities Ordinance, 1974. Instead, it adopted a264detailed substantive provision which, inter alia, makes any person 265

265guilty of an offence who, through his association with a corporation,

has knowledge of specific information relating to its operations or to

its securities, and who directly or indirectly deals in those

securities and by so doing gains a direct or indirect advantage for

himself or another person, or discloses that information to another

person for the purpose of enabling that other person to gain a direct

or indirect advantage by using that information to deal directly or

indirectly in those securities?*^

1112

Additionally, an offence is committed where a person obtains such

information from or through a person who he knows, or has reasonable

grounds for believing, has an association with the company and uses

it to gain a direct or indirect advantage or to deal directly or268indirectly in the company’s securities.

Any person who commits these offences and gains an advantage is liable

both to any other person for the amount of any loss incurred by the

latter as the result of that advantage having been gained f . or to

the corporation for any profit which accrues to the person committing270the offence by reason of his having gained that advantage.

271Provision is made for calculating the profit or loss; the Commiss­

ioner of Securities is empowered, where he deems it in the public

interest, to bring an action on behalf of the corporation or other272person to recover a loss or profit; and a statutory period of

273limitation is imposed.

This section is based directly upon, but is an expansion of, Section

75A of the New South Wales Securities Industry Act, 1970. While, as

will be elaborated upon below, that section is itself much too wide

in its scope, the Hong Kong section is even less acceptable in that it

broadens the offence of using inside information to include the

obtaining of a benefit ’’for another person” ; it specifically makes274an unlimited degree of "tippees” liable and it is based upon an

impossibly wide definition of a person associated with a company.

1113

While the reforming zeal of the Hong Kong Government is understandable,

particularly in the light of market developments over the last two years,

one wishes that a little caution had been exercised in the drawing of

this provision. Based upon the largely untried New South Wales

section, it has expanded its scope to include certain of what it may

have been imagined are the "benefits” of current United States

developments in this area. Unfortunately, only a period of practical

application of the provisions will reveal the problems inherent in

these "benefits".

E. The Philippines

275As the Philippines Securities Act was based directly upon United

States legislation, it is not surprising that the insider trading2 76provision utilized in the former is a direct adaptation of Section

16 (a) and (b) of the Securities Exchange Act of 1934. As277elaborated upon by a Securities and Exchange Commission rule, the

section requires disclosure of shareholdings by "insiders" and

provides for the recovery of short-swing profits, although not

imposing the United States two year statute of limitations in the

latter respect.

Additionally, portion of the United States SEC Rule 10b-5 is included

in the anti-manipulation section of the Philippines Act, which makes

the following activity unlawful:

1114

If a dealer or broker or other person selling or offering for sale or purchasing or offering to purchase the security, to make, regarding any such security, for the purpose of inducing the purchase or sale thereof, any statement which was at the time and in the light of the circumstances under which it was made, false or misleading with respect to any material fact, and which he knew or had reasonable ground to believe was so false or misleading?78

While the "knowledge" requirement may distinguish judicial interpret­

ation of this provision from that of Rule 10b-5, it has been suggested

that, in respect of the former, "Future application in the

Philippines will necessitate reference to the well developed279jurisprudence on the subject in the United States". Again, as

with Singapore and Hong Kong, the complex problems which will

inevitably result from the importation of Rule 10b-5 and its

jurisprudence should be avoided at all costs, and the opportunity

taken to review the whole basis of insider trading liability.

Because of the wholesale adoption of United States provisions in this

area into the Philippines regulatory system, it is unlikely that any

substantial consideration has been given to the basic question of

the need to regulate insider trading. As, apparently, no case law

has yet developed in that country in respect of its version of

Rule 10b-5, any re-assessment should be initiated at this stage,

before any of the "advantages" of the Rule have the chance to become

entrenched in the Philippines regulatory system.

1115

F. Japan

As with the Philippines, the importation of the United States

securities model into Japan included an equivalent of Section 16 of281the Securities Exchange Act of 1934/ providing both for disclosure

and the recovery of short-swing profits. In the 1953 amendments,

however, the provision requiring reporting was repealed, and partly

as a result of this action, the remainder of the provision has not

been utilized.

The Section, its amendment and its overall effect have been described

as follows:

The underlying theory of this legislation, however, is so foreign to Japanese thinking about the nature of the corporate structure and the relationship between management and shareholders that no shareholder has ever used this remedy. Moreover, the 1953 amendments of the law deleted the provision requiring periodic reporting of insider transactions, purportedly for the very vague reason of "lack of practical effect". This amendment blunted this weapon in the shareholder’s arsenal beyond all effectiveness. It is regrettable that the reporting provision was eliminated, since some abuses of insider position have been recently reported in the press?83

In addition to the Section 16 equivalent, the Japanese legislation

also contains a provision very similar in wording to the SEC’s Rule 28410b-5. This article does not, however, operate in the same manner

as the American rule^^

1116

While again it appears that the United States provisions were

adopted piece-meal and without detailed examination of their

philosophical bases, they have to date not been implemented, and the

problems which have occurred in the United States have thus been

avoided. There is, however, a proposal to re-examine the regulatory2 86situation in relation to, inter alia, insider trading. It is to be

hoped that that will consist of a full consideration of both the need

for regulation of the practice and also of the desirable extent of

such regulation. Only in this way will it be possible to avoid the

current confused United States situation.

G. Thailand

While provisions of the Civil and Commercial Code of Thailand do287specify the fiduciary obligations of directors of limited companies,

and, in particular, do give the company (or, in the event of it

refusing to act, any of the shareholders) the right to sue the directors288for compensation for injury caused by them to the company, it is

not clear to what extent, if at all, these provisions have been

utilized in respect of insider trading.

Additionally, as the Robbins Report did not make specific

recommendations in respect of insider trading, Thailand has its

options fully open in this area. It has an opportunity to consider

1117

whether it desires to regulate the specific practice and, if so, to

profit by the diverse experience of other jurisdictions both inside

and outside the Asian region and to introduce a limited and workable

scheme of regulation in this area.

1118

VI. AUSTRALIA

A. Introduction

The methods of regulating insider trading which have been examined in

this study evidence a variety of developmental patterns. Varying from

the gradual (although dramatic) judicial and administrative extension

of the remedy in the United States through the almost wholesale

adaptation of that remedy in countries such as the Philippines and

Japan, to the adaptation of an untried Australian model in Hong Kong,

these differing developments inevitably raise questions as to the

desirability of regulating the practice of insider trading and, if the

need to do so is accepted, the proper scope of regulatory provisions.

As Australia is currently in the process of examining its own

securities industry, and as the present Commonwealth Government is

committed to the introduction of federal securities legislation, this

country is presented with an ideal opportunity to closely consider its

current regulatory provisions governing insider trading, to compare

them with those which have been developed in other jurisdictions, and

perhaps most importantly, to re-assess the basic philosophical questions

of whether the practice should be regulated and, if so, to what

extent?

1119

B. Early Legislation

The "uniform" companies acts of the Australian States provided

specifically that company directors should at all times "act honestly

and use reasonable diligence" in the discharge of the duties of their

office. They also prohibited an officer of a company from

using any information acquired by reason of his position "to gain

directly or indirectly an improper advantage for himself or to cause291detriment to the company". Breaches of the section gave rise to

liability to the company for profits made by the offender or for

damage suffered by the company as a result of the breach, and also

constituted an offence for which the statutory penalty was five 292hundred pounds.

The provision formed part of the 1958 companies legislation in the 293State of Victoria, where it was apparently introduced following a

2companies office investigation into the affairs of a particular company.

Regarded as the first piece of legislation of its kind in the English-

speaking world, the section was predicated on the basis that,

although to a large extent declaratory of the existing law,

It is believed that a restatement of the principles of honesty and good faith that should govern directors' conduct, clearly set out in the Act, will be an effective deterrent to misconduct and will free the courts from the technicalities of the existing law in dealing with all forms of dishonesty and impropriety by directors?95

1120

It must be noted that although the terms of Section 124 related

to "officers" which, as defined, included, inter alia, directors,

secretaries and employees, the Act's Explanatory Memorandum expressed

the obligations which it sought to impose only in terms of

directors' responsibilities. Thus, although the original intention

of the drafters appears to have been to deal with directors' duties, it

does impose those duties upon a wide range of persons who are not

directors.

That the section was in fact concerned with directors is evidenced by 296By m e v. Baker/ in which the Full Court of the Supreme Court of

Victoria reviewed certain orders nisi resulting from a magistrate's

hearing of an information based directly upon the Victorian section.

In rejecting the prosecution's interpretation of the section, the

Court stated

The language used is appropriate and was designed, we think, to introduce one aspect of the concept of negligence, as known and acted upon for many years by the courts on mis­feasance summonses against directors: and this concept ofnegligence has reference to identifiable acts or omissions, not to any general characterization of the conduct of a director over a selected period^?

C. The Fourth Interim Report of the Eggleston Committee * 298

As it was on the basis of this report from the Company Law Advisory298Committee that substantial amendments relating to insider trading

1121

were made to the then existing companies acts in most Australian

states, one would expect to find in the report a detailed examination

of the need for regulating the practice. One would be disappointed.

The Committee merely noted that "current discussions" were occurring

on the question, recognized that where "directors and other officers"

made made improper use of confidential information they should be299penalized to the extent of the wrong committed, noted that the

Jenkins Committee appeared to have approved the principles laid down

in Section 124 (Section 109 of the Victorian Act), and blithely

stated, in respect of the Jenkins Committee, that "its recommendation

was in terms limited to directors, whereas subsections (2), (3) and

(4) of Section 124 of the uniform Act extend to all officers as

defined in Section 5 of the Act"?^ Thus, with no attempt to

justify the conclusion that the provisions of Section 124 extended

beyond the scope of the Jenkins Committee's recommendations, the

Eggleston Committee proceeded on the assumption that any regulatory

provisions in this area would cover "officers" as well as

directors. This appears to have been a crucial point in the

development of insider trading machinery in Australia, yet its

significance was totally lost on the Committee.

Additionally, in seeking to find a base for wide regulatory

legislation, the Committee should have looked at the United States

experience, which by this time (1970) was extending well beyond the

1122

Texas Gulph Sulphur decision. Instead, the Eggleston Committee

satisfied itself with citing a four paragraph note "summarizing the

position in the U.S.A., based on a memorandum submitted to the Jenkins301Committee in 1961". Even making allowance for the utter

impossibility of "summarizing the position in the U.S.A" in four

paragraphs, it is incomprehensible that the Committee would, in 1970,

rely upon a memorandum purporting to explain the United States

position some nine years before.

Finally, in what is its major explanatory statement in this area, the302Eggleston Committee cited Percival v. Wright (which it must be

remembered, was a case limited to directors * fiduciary duties),

indicated that the object of the new Section 124A (1) - (3) was to

alter the law in that case, and declared:

We think that an officer who makes use of a specific item of confidential information either to buy shares which he expects will rise when the information is released, or to sell shares which he expects to fall when the information becomes known, has gained an improper advantage from his position, and should be accountable in some way to the extent of that advantage.303

No reasons were given by the Committee for expanding the Percival v .

Wright directors’ liability principle to "officers" and thus

automatically encompassing directors, secretaries and numerous

undetermined levels of employees. No reasons were given for the

Committee’s view that such action is in fact gaining an "improper"

advantage. Why, apart from a director’s fiduciary duties, may not

a secretary or employee use such information to his advantage? Why

is it "improper" to do so?

Further, the Committee provided no illustrations of the practice it

so readily, and so sweepingly, condemned. Particularly in the light

of its earlier reference to "current discussions," one would not have

imagined that it would be impossible to actually describe a number of

the alleged "insider trading" incidents which presumably had occurred

or were then occurring.

In what by now had become a distressingly cavalier fashion, the

Committee also recommended, again without reasons, that the amended

Section 124 apply "where the advantage is obtained by a person other

than the officer himself"’ and (although somewhat doubtful in this

respect) that the new Section 124A should be similarly extended, as

"we see no good reason why an officer who misuses special confidential

information by telling his friends to sell should not be liable to305those who bought from those friends". The Committee thus rendered

an officer who passes "inside" information to "tippees" liable for

losses incurred by those who purchase from the "tippees", and also

guilty of an offence under Section 124. There is no discussion in the

Report of the possible liability of "tippees" themselves, and

presumably this important question was not considered by the Committee.

Thus the bases upon which important substantive amendments were

made to the Australian companies legislation, imposing wide-reaching

controls over the practice of insider trading, were very slight indeed.

They do, in this author’s view, call for a complete re-examination of

the question of liability in this crucial area before the introduction

of new federal legislation.

C. The Effect of the 1971 Amendments * 306

The amendments which were made to the companies acts of Victoria,

Queensland and South Australia, as a result of the Committee’s

recommendations, were briefly as follows.

Section 124 was amended by, first moving the word ’’improper” from

immediately preceding the word "advantage” in subsection (2) to306immediately preceding the word "use", and secondly, by adding the

phrase ”or for any other person" immediately after the word "himself"

in the same subsection.

Thus, while Section 124 created both an offence and a liability to

the company, the new Section 124A, where adopted, created liability to

persons who suffer loss as the result of the "insider's" actions,

that is, persons who pay more for securities in a transaction with the

"insider" than they would have paid if that inside information was in

fact publicly known.

1124

1125

As now incorporated in the legislation, the section is dependent

upon a number of factors existing before it becomes operative. First,

there must be a dealing in the securities of the corporation, in or

in relation to which an officer of the corporation, by himself or

another person, enters. To this author, this provision, whether

intentionally on the part of the legislature and the Eggleston

Committee or otherwise, may substantially restrict the scope of the

section. Is its application limited, by virtue of this condition,

to only those transactions in which the outsider actually deals with

the insider or another person using the "inside" information? For

example, if A, who has "inside" information, places his shares on the

stock exchange market, through a sell order with his broker, and if

B, who does not have knowledge of that information, purchases those

shares some days later through placing a purchase order with his own

broker, is there a "dealing" within the meaning of the section? It

is submitted that, while the section would obviously cover a direct

face-to-face sale between A and B, there is some doubt that it will

cover a random market transaction such as that described above. If

this submission is valid, it means that the Australian section is of

significantly narrower scope than the current United States

provisions, the effect of which is to effectively prohibit any trading

by "insiders". This important question will have to be resolved by

judicial interpretation of the provision at some future time.

Secondly, there must be a direct or indirect advantage gained for the

1126

insider or another person.

Thirdly, the information used must be ’’specific confidential

information” acquired by virtue of the officer's position "which if

generally known might reasonably be expected to affect materially the

value of the subject matter of the dealing". While the "specific" and

"confidential” conditions themselves might be expected to pose some

problems of interpretation, even greater problems are likely to arise

in respect of the information being required to be obtained by virtue

of the insider’s position; in respect of the meaning of "if generally

known” ; and especially in respect of the materiality provision.

Further, as the liability to a person suffering loss is to be

calculated on the basis of the payment by the outsider of

consideration greater than that which "would have been reasonable if

the information had been generally known at the time of the dealing”,

difficulties in assessing loss are sure to arise.

Thus, even apart from their lack of a sound philosophical base, the

insider trading provisions in the Australian state companies

legislation seem destined to raise difficulties of interpretation and

application for many years to come, or until sound federal

legislation is introduced.

1127

E. The New South Wales Provision

Because of delays occasioned in the passing of the 1971 amending 307legislation* the New South Wales Government proceeded to enact its

308own insider trading provision, thus adding to the patchwork quilt

of regulatory enactments in this area throughout the country, and thus,

incidentally, providing a further reason for the introduction of309comprehensive federal legislation,

The debate on the introduction of the new Section 75A proved, in both

the Legislative Council and the Legislative Assembly, to be less than

adequate. In foreshadowing in the Legislative Council that he would

introduce the new section in Committee, the Hon. J.B.M. Fuller,

Minister for Decentralisation and Development, indicated that the new

section would apply to a company's professional advisers, such as

geologists, and to ten per centum shareholders, merely referring in

the latter respect to Canadian and United States experience without310questioning the basis of that experience.

Further, his main argument for the need for the legislation rested

upon a survey published in the Harvard Business Review in 1961, which

posed a hypothetical question to readers on the assumption that they

were Members of the Board of Directors of a large corporation. From

this survey, specifically limited to directors, the Minister proceeded311to generalize on the question of insider trading, Again, as with

1128

the companies act amendments, no basis was given for the need to

extend insider trading provisions beyond coup any directors.

In his speech in reply, the Leader of the Opposition, the Hon. N.K.

Wran Q.C., did little more in respect of insider trading than to refer312to the Leopold affair as a "classic illustration of insider trading".

When the amendment was debated in Committee on May 4, 1971, the Minister

did not attempt to justify the provision, but merely pointed out that

it extended to "company officers, professional advisers and substantial

shareholders, and where these are companies, their directors,313managers and secretaries".

In an equally disappointing speech in reply, the Leader of the

Opposition indicated that the Opposition would have "placed a

prohibition on engineers, geologists, accountants, solicitors and

other professional advisers dealing in the shares of a company to which314they happen to be adviser" , justifying this stand only on the basis

that such persons should not be "in competition with shareholders

who have contributed the capital which made the company a viable315commercial structure in the first place".

This argument, however, totally ignores two important factors.

First, that at the same time as those advisers are dealing in a

company’s shares on the basis of certain information known only to

1129

them, other market operators are also dealing on the basis of

other information known only to them. In other words, of the large

number of factors which together determine the eventual market price

of a particular security, the possession of ’’inside" information by

certain persons will be only one factor, which in a given situation

may or may not be the primary determinant of that eventual market

price. Secondly, the argument ignores the fact that the value of the

holdings of shareholders who have contributed capital may well be

increased by advisers and others dealing in securities on the basis of

inside information.

On May 6, 1971, in moving that the Legislative Assembly, in Committee,

agree to the Legislative Council's amendment in respect of the new

Section 75A, the Attorney-General, Mr. McCaw, merely referred to

earlier debates on the companies act amendments, indicating that after

those debates, he approached Cabinet, and "the Government parties316approved of the banning of the principle of insider trading” .

Again, no reasons were given for the Government parties having come

to this sweeping conclusion.

Thus, the debate which resulted in the enactment of New South Wales’

own particular form of regulation of insider trading was as un­

informed as the report which led to the insider trading provisions in

the companies legislation of other states. Again, this fact provides

even more reason for a thorough examination of this country’s proper

1130

policy towards this practice.

The New South Wales statutory provision itself is wider in scope than

Section 124A of the Companies Acts. It applies to a person who,

"through his association with a corporation or body", carries out certain

acts. This phrase is very broadly defined, and includes, inter alia,

officers of a corporation or a related corporation within the meaning

of the companies legislation; persons who bear, to a body which is not

a corporation, a relationship analogous to that of an officer to a

corporation; persons who act, or have acted, as bankers, solicitors,

auditors or professional advisers, or in any other capacity, for a

corporation or body; ten per centum shareholders; and, where the

adviser or ten per centum shareholder is a corporation, a director,317manager or secretary of that corporation.

The scope of this provision is, when closely examined, extraordinarily

wide, particularly in respect of the current or past advisers to a

corporation or body. Thus, a consulting computer data processing

expert who advised a corporation ten years ago on the adoption of a

particular computer program would, it is submitted, on the current

wording of this section, commit an offence if he acquired information

of the type covered by the provision and then dealt in the company’s

securities. Dependent upon whether the phrase ”or in any other capacity" is

interpreted ejusdem generis with "professional adviser", a corporation’s

travel consultant or interior design consultants could commit statutory

1131

offences years after they had ceased to be associated with the

particular corporation.

This particular portion of the New South Wales clause is drawn so

widely as to make its enforcement potentially ludicrous and one wonders

why, if the Government in fact decided to ban the practice of insider

trading, it did not do so in clear terms, rather than depend upon the

tortuously framed provisions of the current legislation.

The type of information covered by the section is ’’specific

information relating to the corporation or body or to securities issued

or made available by the corporation or body” which is not generally

known, but which, if so known, "might reasonably be expected to affect318materially the market price of those securities”. Apart from

raising obvious problems of interpretation in relation to when some­

thing is or is not generally known, ’’might reasonably be Qcpected”,

materiality, and the determination of "market price”, the provision

has adopted the phrase "specific information" in preference to the

Companies Acts' "specific confidential information".

Although the reasons for the change from what was in the New South

Wales Companies Amendment Bill's Section 124A referred to as "special

confidential information" to Section 75A’s "specific information"

was questioned by the Leader of the Opposition in the Legislative

Council debate, no satisfactory answer was given by the Government.319

1132

Although it was initially suggested by Mr. Wran that the change

nwas the result of much soul searching and consideration by directors

and officers of companies who considered that an undue burden was

being placed upon them in relation to special confidential information”, ,

he later questioned whether it indicated an increase or decrease in

the sanctions imposed upon those who wished to engage in insider

trading. To this author, the change represents a widening of the

scope of the provision, from the narrow ’’special confidential" of the

Bill and the "specific confidential" of the act in other states, to

the much broader "specific" criterion. No longer is there a

requirement that the information be "confidential" before the

provision becomes operative: it will apply to use of "specific"

information which surely means effectively "all" information.

Apart from creating the offence of dealing, or divulging information

to enable other persons ("tippees") to deal, the section provides a322right of action to outsiders, enables the Corporate Affairs

Commission to bring an action on behalf of a corporation or other body323 • • 324or person aggrieved , and imposes a limitation period .

Thus, New South Wales has, without proper consideration, enacted an

extremely broad insider trading provision. In doing so, it has

created a further lack of uniformity throughout the Australian States,

and has also saddled itself with a provision which will pose immense

future difficulties of both application and interpretation. It is

320

1133

hoped that properly considered and drafted federal legislation will

regulate this area before Section 75A is allowed full flight.

F. An "Example" of the Practice * 325

One of the most widely publicised incidents of the 1969-1970 mining

boom in Australia was the reported statement of Mr. W.S.P.G. Singline,

Chairman of Directors of Tasminex N.L., which statement used the phrase

’’massive sulphides” , and indicated that Mr. Singline’s coup any ’’had325struck a nickel field which would be bigger than Poseidon’s” . In

the context of the speculative mania which then pervaded the

Australian securities market and the rumours in relation to this

company which were then prevalent on that market, this statement,

which was published in a newspaper interview on January 28, 1970,

resulted in the company’s shares increasing in price from the previous

day’s high (on the Melbourne Stock Exchange) of $18.50 to a high of 32 6$75.00 . Prices of the company’s shares stayed high until

February 2, 1970, on which date, as the result of a sobering

announcement by the company’s directors to the stock exchanges, they

fell to approximately $21.00. On March 3, 1970 a further announcement

was made to the Sydney Stock Exchange in which the Board of

Directors regretted ’’the unwarranted fluctuation of the shares on the

stock market” and advised shareholders to ’’minimise trading and

transactions at this stage of exploration”, following which

announcement the shares fell in price to approximately $7.50.327

1134

In fact, no "massive sulphides" had resulted, and the company's

geologists had written a letter to the Sydney Stock Exchange on

January 28, 1970 dissociating themselves from the then current

newspaper speculation as to the merits of the prospect, and indicating328that they regarded it as "a routine exploration prospect".

The subsequent investigation by the Government-appointed Inspector

revealed that the wife of the company's chairman and two companies

of which both such persons were shareholders had, between January 27

and January 30, 1970, sold 28,095 shares for a total value of

$1,028,071.93. Share trading by the other three directors of the

company also indicated that they had sold while the market was at330various high levels. The Inspector indicated that in these

situations the directors, as they were aware of the falsity of the

chairman’s statement and thus of the inflated value of the

securities, should not have traded. With this conclusion there can

be no dispute: the directors owed a fiduciary duty to the company

and they were guilty of breaches of that duty.

In considering share trading by other persons, however, the

Inspector moved, in this author’s opinion, on to much less firm

ground. Substantial profits were also made, through sales of the

company’s shares, by some of the directors of another company (and

that company itself) which had entered into a joint venture agreement331with Tasminex N.L., and also by the geologists engaged by

1135

Tasminex . There is no doubt that both of these categories of

persons were aware of the falsity of the market, yet continued to sell

their shares and accordingly to make substantial profits. Yet the

danger lies in automatically equating their actions with those of the

directors of Tasminex N.L. itself. While the latter obviously owed a

fiduciary duty to their coup any, what duties were owed, and to whom,

by the other traders mentioned above? Why should they not be permitted

to trade on the basis of information which they acquired, when such

trading is not in breach of any fiduciary duty? How is their position

any different from that of the sharebroker who also traded (very

profitably) in the company's securities for the discretionary accounts

of various clients, giving the following reasons for his actions;

(a) The market was very strong.(b) There were 'strong rumours about Tasminex'(c) He examined the chart concerning the trends in the market

for Tasminex shares and considered this to be favourable.

(d) Tasminex had a 'very tight capital structure' which meant that 'if there is any demand for the shares, they will run very, very quickly'.

(e) He checked with the firm's 'mining man' who said that the rumours were feasibjg 'because they were drilling ina nickel prospect'.

How is this information, which the broker concerned emphasised was not

inside information, any different in kind from that possessed by

the directors of Tasminex N.L. or its associated company? How are

the following factors, relied upon by the investment consultant to a

then large Australian group of companies, which made a total profit

exceeding $1,000,000 in a few days trading in the shares of

1136

Tasminex N.L., any different in kind from inside information?

(a) On Thursday the 22nd January, an employee of Kenneth McMahon and Associates Pty Ltd reported to Mr. Bogg that there were rumours that ’drilling was going on at Cosmo - Newberry’.

(b) On Friday the 23rd January, Mr. Bogg heard rumours in Sydney that two employees of Tasminex had been drunk in the Laverton Hotel on the previous night and 'supposedly their information was that this drill hole had obtained an intersection of nickel sulphides’. I should add that Mr. Mann told me that he had also heard this rumour.

(c) He said that 'at that time the share market was the wildest I had known it, personally, in my experience'.

(d) The chartists suggested that 'we were coming into a third wave in a major bull market’.

(e) The particular area where Tasminex was interested had been for some years the area where rumours had been very strong and had affected the market. Mr. Bogg felt that if there was to be a third wave it would,-, have to involve another discovery in that area.

These citations indicate the basic flaw in the generally adopted

approach to insider trading, viz., that it is not possible to ensure

that all investors have access to the same information in respect of

any given securities, and that there will always be certain investors

who are, for one reason or another, better informed than the persons

from whom they buy or to whom they sell in the market.

Obviously, the persons who purchased from or sold to the two persons

described immediately above, did not make their investment decisions

1137

on the basis of the same information. As each of these persons made

substantial profits from the transactions one would at first

consideration assume that the other parties to the transaction had

suffered losses. Yet the prices at which those other parties sold

to these two persons may have been far in excess of their initial

purchase prices. In other words, this argument, which is developed

further later in this Chapter, is that what is popularly conceived of

as "inside" information is in fact only one of a number of kinds of

information which are utilized by operators within a securities market

and which assist in deteimining market prices at any given time.

While it may be proper that directors, because of their fiduciary

obligations, be prohibited from utilizing it to their advantage, there

is no reason why, in the case of any other operator, and in the

absence of fraud or misrepresentation, such information should not

be utilized to that other operator’s advantage.

G. The Future?

As indicated throughout the preceding examination of the current

insider trading regulatory procedures in Australia, this author

believes that they are not based upon any sound consideration of the

need to control the practice and that, additionally, they are

technically defective in many respects.

Essentially, what is needed for the future in this particular area is

1138

a re-examination of the currently accepted regulatory philosophy,

in the light both of the overall objectives of government in the

securities markets and of the Australian experience with this

activity. Much will depend, of course, upon the report to be presented

by the Senate Select Committee on Securities and Exchange. If it

takes the opportunity to reconsider the whole rationale of regulation in

this field against the background of the information it has

collected, particularly in relation to the 1969-1970 share boom, it

will render a very useful service. If, however, it merely accepts

the conventional wisdom, as exemplified by Professor Loss in his335recent memorandum to the Attorney-General/ then it will have missed

what will be perhaps the only opportunity in this country's history

for an informed, rational examination of the problem, in the light

both of Australia's own needs and of the experience and rationales

of other jurisdictions.

1139

VII. CCNCLUSICNS AND RECOMMENDATIONS

A. Conclusions

It is clear from the preceding examination of the alleged bases of

insider trading regulations in a number of jurisdictions that very

little consideration has been given to the two basic questions of

whether such trading should in fact be regulated at all and, if it

should be so regulated, whether the provisions should extend beyond

the range of company directors to other ’’insiders” .

The United Kingdom experience reveals a lack of any real

consideration of the basic question of the need for control, and the

existence of conflicting views as to the extension of such control to

a wide range of insiders. While the Jenkins Committee’s recommendations

were limited to directors only, attempts have more recently been made

to widen the scope of proposed regulatory provisions quite

considerably. In some instances, however, the ludicrous results336which would inevitably follow these proposals have been appreciated,

and in none of these recent attempts has any convincing explanation

been given of the reasons why an extended range of persons should be

precluded from trading upon certain information which comes into

their possession.

1140

Developments in this field in the United States resemble the

Valkyries who lured unsuspecting sailors to their deaths on hidden

reefs; while they are of great superficial and immediate attraction,

they contain latent dangers which, unless appreciated, will raise

infinitely more problems for Australian and regional legislators

than they will solve. The major factors to be appreciated in respect

of the United States experience are the lack of any clear

Congressional mandate for the current regulatory situation; the relative

ineffectiveness of Section 16; the lack of original intention on the

part of the SEC that Rule 10b-5 should be used to provide a private

right of action; the residual doubts which exist as to the validity of

Kardon and other decisions establishing such a right; the SEC’s

extension of the 10b-5 remedy in 1961 in Cady Roberts $ Co.; the

Second Circuit’s approval of much of this extension in 1968 in

Texas Gulph Sulphur; the strong dissents in that case in respect of,

inter alia, "materiality” and the "in connection with" clause; and

the subsequent expansion of that case’s holdings and the problems

of interpretation it has spawned.

Additionally, the recent and current academic debate in the United

States on the basic question of whether the practice should be

regulated must also be absorbed and evaluated. While the

"entrepreneurial" argument of the main opponent of the anti-insider

trading school is not tenable, his criticisms of the lack of

Congressional reflection on the basic question, and the haphazard

1141

growth of the Rule 10b-5 remedy, and his acceptance of the

practical impossibility of effectively regulating the practice, do

warrant close examination.

The Canadian experience in this area provides yet another set of

lessons for Australian and regional legislators. The principle of

regulating the practice was merely assumed in the 1964 Royal Commission

Report, and was based upon a general ’’free and open market” rationale in

the important Kimber Report, and thus neither of these documents can be

seen as providing a reasoned argument for the adoption of the general

principle.

However, accepting arguendo the need for some form of regulation, the

recommendations of the Kimber Report assume great significance. One

must disagree with its extension of the concept of ’’insider” to 10%

substantial shareholders and to ’’executive” officers, the former

because no reasons are given for the need to impose such obligations

upon persons in this category and the latter because it represents an

arbitrary "cut-off point” amongst a company’s employees. For example,

does the use of inside information, reprehensible by persons within the

"executive” officer category, become acceptable when performed by

persons immediately below that category? The concept of such an

arbitrary distinction is unacceptable; it serves only to indicate that

the dividing line must be between directors who owe a fiduciary duty

to the coup any on the one hand, and others who do not owe such a duty

1142

on the other hand.

The Kimber Committee did make sound recommendations in respect of

the exclusion of professional advisers and tippees, the making of a

clear distinction between public and other companies, and the

granting of power to the Ontario Securities Commission to enforce

rights against insider traders.

While the Committee’s recommendation in respect of the need for a

reporting requirement was also sound, the period within which the

reporting must be effected should be reduced to twenty four hours.

Ten days after the end of the month in which the transaction took place

is too long a period of time to be at all meaningful in this context,

especially if the application of the provision is limited to company

directors.

Finally, as indicated above, the Canadian experience in this area

has been unavoidably influenced by the extensive developments which

have occurred in the United States.

The select Asian experience in this field offers cause for both hope

and alarm. While India has perservered primarily with its companies

legislation and shows no immediate signs of interest in expanding its

regulatory machinery in this field, Malaysia and Singapore have played

a rather more active role. In Malaysia, the Australia companies acts’

1143

provisions, with modifications, have governed the practice, and the

new securities industry legislation has wisely refrained from

following its Australian counterpart. In Singapore, however, while

basically the same companies act provisions have been utilized, the

conservative recommendations of the Ferris Report have been by-passed

by the adoption of what is essentially the United States SEC's Rule

10b-5, which is destined to lead to the same kind of problems which

have occurred in that country. In neither Malaysia nor Singapore does

there appear to have been any real consideration of the important

philosophical questions, but rather a too-ready willingness to embrace

the ’’advantages” of overseas experience.

Again, in Hong Kong, the basic problems seem not to have been

considered and New South Wales' untried Section 75A has been adopted,

amended and expanded.

Although both the Philippines and Japan introduced legislation along

American lines, in neither country has it operated as it has done in

the United States. Also, in neither country does it appear that either

the real need for such legislation or its proper scope has been the

subject of close scrutiny.

Finally, in Thailand, the practice has been largely ignored, with

reliance being placed merely upon provisions of the Civil and

Commercial Code to regulate the activities of directors of limited

companies.

1144

B . Recommendations

Australia and the countries within the Asian region must re-examine

the basis upon which they now approach the question of regulating

insider trading. They must, against the background of the

experience of countries such as Canada and the United States, determine

whether they wish to create a category of person, to be known as an

"insider", whose utilization of certain information which comes into

his possession will either create an offence, or give rise to a cause

of action by a third party, or both.

In approaching this basic question, the following factors must be

considered. First, that the few economic studies which have examined

the practice have been inconclusive as to its alleged detrimental

effects. Secondly, that of all the myriad factors which together

result in the market price of any particular security at any particular

time, the "inside" information possessed by certain individuals will

be only one such factor. There are a number of different theories of

determining the market prices of securities, included amongst which

are those of the present value; multiple-of-earnings; dividends and337earnings per share; and demand and supply analysis.

The first of these is based upon a calculation of future dividends

assessed against the appropriate discount rate; the second upon

normal current earnings in the light of an appropriate multiplier

1145

based on a given rate of growth; the third upon a combination of

both dividends anticipated and projected earnings per share; and the

fourth upon the comparison of buy and sell orders actually placed

with brokers, determined primarily by the responses of the three

classes of investors ("inert”, "price-conscious" and "speculators")338to a different environmental stimulus.

Market prices will be determined, effectively, by the results of a

continuing and coup lex interplay of various forces and will be

influenced considerably by factors some of which are outside the actual339market itself. For example, as well as projected earnings, price-

earnings ratios will be important, together with anticipated bonus

issues; changes in interest rates; changes in commodity prices to

which a stock may be related; the performance of a company in terms

of orders gained; technological developments which may either improve

its business prospects or force it into heavy expenditure on, for

example, new plant and machinery; and political considerations such as

elections, changes in a particular business-orientated ministry, etc.

In addition to all of these important factors, the nature of the

operation of a securities market must also be taken into account.

Essentially such a market consists of persons who buy and sell secur­

ities on the basis of information, and while, ideally, all such

persons should have access to the same degree of information, such a

situation is not practically attainable. Because a securities market

1146

is in a constant state of flux and because the information which

goes into the process of determining share prices becomes both

relevant and then irrelevant so quickly, absolute equality of access

to information is not feasible.

Further, once information is obtained, its most advantageous

utilization is a matter of analytical skill and technique, in respect

of which experienced market operators such as brokers, dealers and

investment advisers have substantial advantages over the ordinary

investor. Finally, information itself is a marketable commodity, and

the practice of furnishing information, in exchange either for other

information or different recompense, is a well-established market

practice. The effective determination of when exactly certan types

of information become "inside” information is, again, impossible of

achievement.

For these reasons, this author believes that any system of securities

regulation which attempts either to prohibit what is known as "insider

trading" altogether, or to extend its regulatory scope as widely as

has been attempted in the United States and recommended elsewhere, is

destined to fail. While remaining unconvinced that the practice is

undesirable per se and has a detrimental effect upon any securities

market, it is thought that some regulation should be effected of the

activities of company directors in this area, for the reason that it

is they who owe fiduciary duties to their respective companies'^

1147

It is this fiduciary duty which, to this author, justifies

restricting insider trading on the part of directors, not the

proposition that such trading is either "wrong" or conducive to a

lack of investor confidence in the securities markets.

To this end, it is recommended that Australia introduce in its

proposed new legislation, and that Asian countries consider for future

introduction, a system of regulation which would require all

directors of public companies to disclose to the appropriate regulatory

body or bodies (in Australia, the proposed Commonwealth Securities

Commission and the proposed Australian Stock Exchange) all dealings in

the shares of their own or of associated or subsidiary companies, from

which they derive a direct or indirect benefit. Such disclosure

should be made in writing, within 24 hours of the transaction being

effected, and all such transactions must be marked by the director's

broker as "Director's Transaction" in the manner in which, in some

jurisdictions, all short sales must be noted to that effect.

Additionally, all such sales should be publicized extensively, both

in the proposed Weekly Bulletin of the Commonwealth Securities

Commission, and in the publications of the Australian Stock Exchange.

Such a provision would, of course, be in addition both to that which

currently requires the maintenance of a register of directors'

shareholdings, and to the A.A.S.E.'s current disclosure requirements

in this area.

1148

In the event of it being established that, in any such transaction,

a director of a coup any has breached his fiduciary obligation to the

company, by, in this context, improperly utilizing information acquired

by virtue of his position in the coup any, such director should,

depending upon the seriousness or otherwise of the situation, be

suspended from office by the Commission, either indefinitely or for

a limited period, or fined or imprisoned or both. It is not felt that

the granting to the company of any right to sue a director for losses

incurred by a third party as a result of that director’s breach of his

fiduciary duty serves any useful purpose.

It is submitted that this proposal adequately reflects the proper

position of the law in respect of the obligations of company

directors and avoids the impossible situation which has arisen in

certain jurisdictions of attempting to impose widespread liability

where no fiduciary duty exists and where it has not been established that

(in the absence of either fraud or misrepresentation) any right to

recover should be artificially created.

1149

Chapter 9

ADMINISTRATIVE BODIES

I. INTRODUCTION

Any proposed federal system of securities regulation for Australia

would be incomplete unless it were to include an administering

authority designed, inter alia, to approve the issue of prospectuses;

to receive, process and disseminate continuous reporting information;

to license brokers, dealers and investment advisers and supervise

their conduct once licensed; to license stock exchanges and supervise

their operations once licensed; and to regulate the various and

complex facets of post-distribution trading such as short selling,

the use of proxies and (arguably) insider trading. Because such

administrative bodies are of greater overall significance in the

regulation of the securities markets than are stock exchanges, and

because also of the impossibility, in a study of this kind, of

dealing in detail with the operations of stock exchanges, this

chapter will concern itself with non-exchange regulatory bodies.

The prospect of federal legislation and a federal administrative

body raises important questions in seven major areas. First,

whether administrative control should in fact be effected at federal,

or state, level? Would a federal body be capable of achieving

uniformity to an extent which has to date eluded the various state

bodies? If a federal administrative body were to be established,

would there be available to it the necessary degrees of expertise

required to initially create and subsequently maintain a federal

regulatory structure? Would existing state bodies be absorbed into

a federal body and constitute its regional offices, thus providing

their expertise to that body? Is such a proposal practicable, and

would it be acceptable to either the state governments or those

persons presently employed in the state administrative bodies?

Secondly, if there is to be federal administrative control of the

securities industry in Australia, should it comprise first, total

governmental control, secondly, some form of quasi-governmental

control, or, thirdly, a loose form of governmental supervision with

major emphasis being placed upon the industry self-regulatory bodies

such as the stock exchanges? Would total governmental regulation,

involving, inter alia, the licensing of all stock exchanges and

market operators by a government department, allow the flexibility

required in an expanding capital market, or would it impose such a

restrictive regulatory pattern that market expansion would be

impeded?

Would a form of quasi-governmental control, involving a partially

independent regulatory agency not forming part of a government

department, be a more suitable regulatory mechanism? Would such a

body, administered by one or a number of qualified Commissioners

appointed for fixed terms of office and reporting annually to the

Parliament itself, be more conducive to the growth of Australia’s

1151

capital market, yet still provide the necessary degree of protection

to the nation's investors?

Should, on the other hand, the role of government in a nation's

capital market be minimised? Should government provide only an over­

all supervisory umbrella beneath which the major regulatory activity

is carried out by industry bodies such as the stock exchanges and,

in Australia, the exchanges' own administrative body, the Australian

Associated Stock Exchanges (AASE)? Does government have a constructive

role to play in the administration of what is, in reality, the core of

the laissez-faire system, or should it be content to leave its

organization and operation to the various interested industry bodies?

Thirdly, assuming a federal regulatory system and a federal regulatory

body, what powers is it constitutionally able to exercise? Mast it be

a totally administrative body, issuing licences, approving prospec­

tuses, etc., or can it be partly legislative, promulgating its own

regulations and policy opinions; and/or can it be partly judicial,

hearing appeals against the suspension or revocation of licences, or

hearing disciplinary proceedings against brokers, dealers, or invest­

ment advisers? Is such a body, under the Australian constitution,

able to exercise all, or any combination of, these three traditionally

distinguished powers?

Additionally, what constitutional head or heads of power will provide

the necessary base for the creation of a federal administrative

body? If the recently widely interpreted corporations power is

relied upon to provide the constitutional foundation for proposed

federal securities legislation, would it also provide the foundation

for a Commonwealth Securities Commission with powers to regulate all

of the necessary aspects of trading in the Australian capital market

Would it be necessary to rely partly upon other constitutional

powers, such as the post and telegraph or the taxation powers, to

provide additional constitutional legitimacy for such a body? Is it

possible or desirable to base a federal body upon such a patch-work

quilt of constitutional powers? Finally, would the various states

be likely to cede the relevant constitutional powers to the federal

government in order that a Commonwealth Securities Commission might

be established without recourse to prolonged constitutional liti­

gation?

Fourthly, and assuming that a federal regulatory body is both

desirable and constitutionally possible, with what powers should

such a body be vested? Should it have the power to issue subpoenas,

administer oaths, initiate and carry out investigations, recommend

the laying of criminal charges, impose fines, or grant injunctions?

Are all or any of these powers strictly necessary for the efficient

functioning of such a body?

Fifthly, and again assuming that it is possible to establish a

federal regulatory body in Australia, what structure should it have,

1153

and where should it be located? Should it be composed of one

Commissioner for Securities, responsible for the formulation of the

body's overall policy in accordance with statutory guidelines,

together with a number of Assistant Commissioners? Should it, on

the other hand, comprise a number of Commissioners, all of equal

authority and status? Should the proposed Commission have a number

of Divisions or Offices, each concerned with the administration of

a self-contained area of the Commission's total jurisdiction, or

should there be no strict division amongst such areas?

Is Canberra the only location for a federal securities administrative

body, or might it be located in a major financial centre? If it were

located in either Sydney or Melbourne, would its efficiency be

impeded by the type of inter-state rivalry which currently affects

the stock exchanges of these two cities? If such a body were located

in Canberra what role, if any, would be played by the current state

regulatory bodies?

Sixthly, to what extent, if at all, should the decisions of a federal

regulatory body be subject to either administrative or judicial

review? Should there be a federal administrative tribunal to which

appeal would lie from a body such as the proposed Commonwealth

Securities Commission? If so, should such appeal be on the merits,

on questions of law, on questions of fact, or on mixed questions of

fact and law?

1154

Should, on the other hand, the decision of such a body be reviewable

only judicially, by the High Court or the proposed Commonwealth

Superior Court? Do these courts, exercising the judicial power of

the Commonwealth, have the constitutional authority to review all of

the decisions of such an administrative body, or are they limited to

only those situations in which a "justiciable" issue is involved?

Seventhly, while each country examined in this study has some form

of regulatory body or department to administer its securities legis­

lation, is it feasible for there to be an Asian Securities Commission,

a body responsible for rationalizing the various regulatory systems

operating in the region? Could the subject countries ever agree on

the need for such a body, and, if so, to what extent would they be

prepared to surrender any of their regulatory powers to it?

Could such a body serve a useful role in standardizing regulatory

procedures throughout the region in respect of, for example, the

issue of new securities, or the standards required for stock

exchange registration? Is such standardization desirable?

Although the problems raised by these and other questions will be

examined and answered in detail throughout this chapter, on the basis

of both Australian and overseas experience, the general approach

adopted by this author will be as follows.

1155

First, it is suggested that only a federal administrative body is

capable of uniformly and efficiently administering a system of

securities regulation throughout Australia, and that the States have

demonstrably failed in their attempts to do so; that the national

character of most significant commercial activity requires uniform

federal rather than piece-meal state, regulation; that a federal

regulatory body based in Canberra with regional offices in the

capital cities would not lose touch with economic reality if properly

organized, as exemplified in the experience of the United States

Securities and Exchange Commission (SEC); that regional offices

should be permitted only very limited flexibility in the inter­

pretation of federal regulatory policies; that the present lack of

uniformity at state level, resulting from the absence of any central

or unifying force, could be avoided; and that absorption into a

federal regulatory agency of expert employees in existing State

agencies would provide any new federal body with at least some of

the necessary expertise which it would require.

Secondly, this study will argue that, despite the apparent success

of regulation by government department in, for example, Japan and

India, such a system would not be suitable for Australia. It will

also argue that self-regulation by the industry, by, for example,

stock exchanges and brokers' associations, is not suitable, primarily

because of the unavoidable conflict of interest situations which

arise.

1156

In this situation, one is left with what is in reality the most

attractive alternative, that of a semi-governmental regulatory agency

with one or a number of qualified Commissioners, operating indepen­

dently of government departments, but funded by government and

reporting annually to Parliament. If such Commissioners were

adequately experienced in the commercial world, and particularly in

the securities industry, there would, it is submitted, be little

likelihood of any inflexible or remote federal regulatory system

being developed.

Thirdly, a federal regulatory body, to be completely effective, would

need to utilize aspects of each of what have been described as legis­

lative, administrative and judicial powers. Because of constitutional

limitations in Australia, such a body could not exercise purely

judicial powers, but could exercise quasi-judicial powers.^

Additionally, in the regrettable absence of any State referral of2powers to the Commonwealth in this area, a federal regulatory body

may have to be based upon a number of various constitutional powers.

This possibility raises the unfortunate prospect of prolonged delays

before the constitutionality of any such body can be established.

Fourthly, a federal regulatory body should have as wide a range of

powers as is both constitutionally possible and necessary to enable

it to effectively regulate the operations of the securities markets

in Australia. These must of necessity include the majority of the

powers listed above.

1157

Fifthly, it will be recommended in this study that the proposed

Commonwealth Securities Commission be comprised of one Commissioner

and a number of Assistant Commissioners, rather than a large number 3of Commissioners; that such a body should have a number of specified

divisions each dealing with a particular facet of that body’s

operations, but that conscious efforts must continually be made to

ensure that those divisions do in fact work as part of one integrated

whole, and not merely as independent units.

Further, it will be recommended that such a body be established in

Canberra, as the inter-state rivalry in commerce between Sydney and

Melbourne, although unfortunate, is very real, and could seriously

affect the operations of a body established in either capital.

Existing state regulatory agencies should be absorbed into the pro­

posed new federal structure as regional offices.

Sixthly, there should be the maximum possible number of levels of

internal administrative review within the Commission, and decisions

of the Commission itself should be subject to further administrative4

review, on the merits, by the proposed Administrative Review Tribunal.

Whether or not this Tribunal is created, there should be judicial

review, to the extent constitutionally possible, by either the proposed

Commonwealth Superior Court, or the High Court of Australia.

Seventhly, it will be argued that the concept of an Asian Securities

Commission is a feasible one; that such a body could play a crucial

1158

role in the standardization of securities regulation in the region,

and that such standardization is itself a desirable objective.

While initially it would be expected that there would be doubts on

the part of governments as to the functions of the proposed Commission,

its usefulness in establishing standard criteria for the registration

of exchanges, brokers, dealers and investment advisers, would allow a

degree of capital movement and flexibility from country to country

which could only be of advantage to the capital market of each

country concerned.

This study will now examine the major questions arising in each of

these important areas.

1159

II. A FEDERAL OR STATE ADMINISTRATIVE BODY?

A. The Nature of the Problem

In those jurisdictions in which governmental power is shared between

a federal government and various state or provincial governments, the

proposed introduction of a new system of securities regulation raises

the immediate question of whether that system will be a federal or a

state system, and thus be administered by the federal or the state

governments, either exclusively or concurrently. In the jurisdictions

examined in this study, the question arises only in Australia, the

United States and Canada. All other jurisdictions, through either

the existence of a unitary system of government or an appropriate

constitutional provision, have managed to avoid the problem.^

In Australia, the United States and Canada, however, serious questions

as to the respective powers of, and the proper relationships between,

federal and state governments have proved unavoidable. In each of

these jurisdictions the states have legislated in the company law

and/or securities law field and, once having established their juris­

diction, have proved reluctant to allow the federal government to

enter that field.

The situation of the United States is, however, slightly different

to that of either Canada or Australia. While, historically, various

states had introduced blue sky legislation prior to the enactment of

of federal securities legislation, and had created their own

administrative bodies at that level, federal legislation, when intro

duced, specifically preserved existing state legislation^ and was

not designed to take over the field.

In both Australia and Canada, while the major regulatory machinery

has been at state and provincial level, there have been federal

initiatives in the companies field, but as yet no major successful

legislative or administrative move by the federal governments to

enter the field either at the expense of or in conjunction with the

states. In both jurisdictions, however, the pressures for such

federal moves have recently intensified, and, particularly in

Australia, the prospect of federal intervention and the creation of

a federal administrative body in the securities field, is becoming

increasingly real.

In addition to the compelling reasons for federal, rather than state7

control of the Australian securities industry, discussed above, an

examination of the establishment of the United States federal

regulatory agency (the SEC); of the reasons for a proposed similar

body in Canada; and of the current position of the state regulatory

bodies in Australia, all point clearly to the need for a federal

administrative body, rather than various state bodies, in this

country.

1161

B. The United States SEC

The debate in the United States which lead to the introduction ofg

the Securities Act of 1933 and the Securities Exchange Act of 1934

proceeded on the basis that if federal legislation were introduced,

it would necessarily be administered by a federal regulatory agency,

rather than by state bodies. The former statute was initially

administered by the Federal Trade Commission (F.T.C.), which had

power to issue stop orders, obtain injunctive relief, interpret

accounting and trade terms and make rules and regulations including,

inter alia, those relating to registration statements and pros-

pectuses. The shortcomings of the Commission were, however,

recognized, particularly in the light of its frequent overruling by

federal courts,^ and the introduction of the Securities Exchange

Act of 1934 saw the specific creation of a regulatory body for the

securities field, viz., the Securities and Exchange Commission, to

which the F.T.C’s powers in the securities area were transferred.

Both the 1933 and 1934 Acts, and the creation of a regulatory body

under the latter, were predicated on the fact of the national or

interstate character of the United States securities industry at

that time. The justificatory provision of the 1934 act, for example,

recited the ’’national public interest”, and the need to protect

interstate commerce, the national credit, the federal taxing power,11the national banking system and the Federal Reserve System;

stressed the interstate character of both the exchange and the

1162

over-the-counter markets, and the utilization of the mails and

instrumentalities of interstate commerce; and, finally, emphasised

the responsibility of the federal government to prevent national

emergencies by prohibiting manipulation and excessive speculation12in the nation’s markets.

While obviously designed to regulate the interstate and national

aspects of the securities industry, the federal legislation was not

concerned, as such, with intra-state transactions and their regu­

lation by state-administered blue-sky legislation. While a grey

area between the regulation of interstate and intra-state trans­

actions existed at the time of the introduction of the federal 13legislation, its aim was clearly not to supplant the existing

state administrative bodies with its own SEC, but rather to maintain

two parallel systems of laws and administration.

Thus the legislation which established the federal securities agency

in the United States was designed to regulate nationally what had

previously been the subject only of state regulation. As such, it

provides an exact parallel with the current situation in Australia,

where a national securities industry, involving numerous interstate

transactions, is regulated only on a piece-meal, state-by-state

basis, by state regulatory bodies of various types, exercising

discretions differently in their application of non-uniform statutory

provisions.

1163

C. Canada

As discussed above, there have for some time been calls for inter­

vention by the Canadian federal government in the securities field.

As with the United States, the rationale for these calls has been

the need to introduce uniformity and national regulation into what

is essentially a national arena, and to remove the limitations upon

uniformity which result from the existence of diverse state or

provincial jurisdictions.

Although there have been arguments against federal intervention,^^

the weight of opinion has tended to favour federal legislation and16the creation of a federal regulatory body.

The fact that no concrete moves have been made by the federal govern­

ment into this area is, however, explicable by reference to the

legislative activities of the various provinces, particularly Ontario

and Quebec. As distinct from their Australian state counterparts,

these Canadian provinces have been continuously concerned to study,

experiment with and update their provincial securities regulatory

systems. They have undertaken comprehensive and detailed studies of17various aspects of those systems and the quality of their research,

combined with their willingness, in most instances, to adopt and

implement the recommendations of expert committees, has ensured a

continuously high level of investor protection in most provinces

14

1164

which has resulted in calls for federal intervention in the field

becoming less urgent.

This result may be satisfactory to many Canadian provincial legis­

lators and to some operators within the securities industry who would

prefer to see the maintenance of provincial control of this field,

just as it would be satisfactory to those Australian state legis­

lators who are currently attempting to avoid or delay federal

intervention in this field in Australia. In Canada, however, the

result, while in this author’s opinion not as desirable as federal

control of the field, is at least more satisfactory than the

Australian position, where the various states have not undertaken

any significant research into the problems of the industry, and where

attempts to overcome the existing lack of uniformity of regulation

may in many instances be properly regarded as cosmetic devices

designed to decrease the likelihood of federal intervention.

Thus in Canada as in the United States, calls for federal regulation

of the securities industry have been properly accompanied by calls

for the creation of a federal regulatory agency. While in the

latter country the introduction of federal legislation in the early

1930’s resulted in the creation of such a body, the generally high

standard of provincial regulation in Canada has contributed to the

failure of the federal government to legislate in this field. The

Australian experience to date falls mid-way between these two

1165

positions; there are consistently strong calls for federal inter­

vention, the present federal government itself is highly motivated

in this respect, and the states have not contributed significantly

to the development of an effective and uniform regulatory system at

their level.

D. Australia

As regulation of the Australian securities industry is currently

effected at state level, the major regulatory instruments are the

various government departments or corporations sole which administer

the companies and/or securities industry legislation, and the

self-regulatory bodies, viz., the various stock exchanges.

The state government administrative bodies grew to their present

position from being initially concerned only with the regulation of

the activities of companies within their respective jurisdictions.

Created initially to regulate the incorporation of companies and

their subsequent activities under the various state companies acts,

they were given the responsibility, in the early 1960fs, of adminis­

tering what was called (and what was doubtless designed to be) a

uniform companies act.

While this was, at least in theory, a commendable attempt at unifor­

mity of regulation amongst the states, and while lip-service continues

to be paid to its ideal, two major difficulties have prevented the

1166

practical application of the legislation from meeting that ideal.

First, not only was the "unifoimM legislation introduced in the

early 1960’s not entirely uniform in its provisions, but the inter­

pretations accorded to the statutory provisions by the various state

administrative bodies varied considerably.

Secondly, both the provisions of the companies legislation and the

expertise of the administrative bodies were inadequate to cope with

the rapid and sophisticated developments which took place in the

Australian securities industry in the late 1960’s and early 1970’s.

The mineral developments of this period, the influx of foreign money

and market expertise, the operations of companies throughout the

whole of the country and not just within the boundaries of one 19state, and the introduction by some states of amendments to the

then existing companies legislation, and of extra regulatory measures

in the form of securities industry acts, all combined to finally

destroy the myth of the uniformity of companies legislation, and,

more broadly, of effective state regulation of the securities

industry.

The other state-oriented regulatory mechanisms, the stock exchanges,

have also proved unsuitable as instruments of uniform regulation.

This has resulted partly from the intense competition for business

which exists between the major exchanges (those of Sydney and

Melbourne) and which also finds expression amongst the country’s

other exchanges, and partly from the fact that, particularly in the

cases of Sydney and Melbourne, the exchanges have a state, rather

than a national, outlook. It is the state governments with which

the exchanges must deal, by whom they and their members must be

licensed, rather than the federal government, and they have accor­

dingly tended to follow the regulatory gospel advanced from time to

time by those state governments.

While the AASE has seen the federal writing on the regulatory wall

and has attempted to create a national, rather than a parochial state

image (by, for example, introducing nationwide listing requirements

applicable to all exchanges, and stressing its own national

character) it remains essentially a creature of its member exchanges,

as it is their representatives who, in the final analysis, determine

the nature of AASE policy. Additionally, as discussed below, the

exchanges are interested bodies, representing a particular sectional

interest within the securities industry, and it is naive to expect

that they will, in the inevitable conflict of interest situation, act

in the interests of either the securities industry itself or of the

investor. Because they are interested parties, exchanges alone

cannot constitute an effective overall regulatory mechanism.

The time is thus opportune for the creation of a federal securities

regulatory body in Australia. With the currently favourable climate

for federal legislation in this field and the established incapacity

of the state administrative bodies either to achieve uniformity of

regulation or to effectively regulate the national or interstate

activities of companies, a federal body is increasingly seen as the

only means of avoiding the problems which are unavoidable under a

state oriented system.

E. The Region

The problem faced by the United States, Canada and Australia in

determining whether regulation of the securities industry might best

be effected at federal or state level, and the associated problem of

the creation of either federal or state regulatory machinery, have

been avoided in the Asian jurisdictions examined in this study.

Japan, with its unitary structure of government, has entrusted

primary supervision of its securities industry to the Department of

Securities within the Ministry of Finance. The Philippines created

a Securities and Exchange Commission which, while initially under

the executive supervision of the Department of Justice, is now

supervised by the Department of Commerce and Industry. In Malaysia,

primary control over the finance industry is effected by the Bank

Negara Malaysia, which carries out reserve bank functions, and by

the Capital Issues Committee. The latter body (in conjunction with

the Registrar of Companies, who has primary responsibility for the

administration of the companies legislation, and together with the

appropriate Minister) forms the administering authority for the

recent securities industry legislation. Similarly, in Singapore,

administration of the companies legislation is vested in a Registrar

1169

of Companies, and of the securities industry legislation in the

Minister with the assistance of the Monetary Authority of Singapore,

the Securities Industry Council and the Registrar. In Hong Kong,

under recent legislation, administration of the securities ordinance

and the companies ordinance is vested in a Securities Commission,

comprised of a Commissioner for Securities and six other members

appointed by the Governor. India, which wisely made specific

provision in its federal constitution for the central regulation of

its securities industry, effects its administration through the

Department of Economic Affairs in the Central Finance Ministry and

through the Board of Company Law Administration. The major Thai

administrative machinery until recently comprised the Bank of

Thailand (the monetary authority and finance agent for the government)

and the Ministry of Economic Affairs which administers the provisions

of the Civil and Commercial Code. The new Securities Exchange of

Thailand will now also play an important regulatory role.

Thus, although the various administrative mechanisms adopted by the

countries within the region do exhibit a large degree of divergence

in structure, they all have the advantage of being the only body or

bodies which do administer the securities industry in those parti­

cular countries. In other words, they are not plagued by the

problems which arise when two or more bodies are competing for the

power to administer a particular industry, such as are currently

found in Australia. It is possible for the relevant body or bodies

in each of those countries to uniformly administer its regulatory

legislation without concern as to the possibility of conflicting

1170

statutory provisions, or conflicting administrative or judicial

interpretations of the same statutory provisions, occurring in other

areas within the boundaries of its securities industry.

It is this aspect of the regulatory bodies within the Asian region

which provides, to this author, one of the most important steps in

the internationalization of securities regulation within the region.

Each of the regulatory bodies described briefly above is able to

speak for the particular country in which it operates, as the sole

administrative body (or combination of administrative bodies) for

that country, in a way in which, for example, the New South Wales

Commissioner for Corporate Affairs could not speak for the other

state administrators of the Australian securities industry. It

would thus be possible for each of these regional bodies, represen­

ting its particular country, to appoint a representative to a

committee to investigate the formation of an Asian Securities

Commission. Such a Commission, to be eventually composed of one

commissioner from each country within the region, would have respon­

sibility for gradually standardizing (as much as possible) the

requirements of member countries in respect of, inter alia, the

issue of securities, the standards required for registration of

stock exchanges and operators within the securities markets and the

controls necessary for the effective regulation of post-distribution

trading. While it is conceded that such a process would be a

gradual one, the eventual benefits to be derived in respect of, for

example, the simultaneous issue of a prospectus in a number of

1171

countries, the inter-changeability of operators within the markets

if registered or licensed in all member countries, and the uniformity

resulting from one set of regulations governing post-distribution

trading, would be very significant. The substantial complexities

involved in the proposition, particularly in relation to the degree

of national sovereignty to be forsaken by each member country, and

the real differences in both legal background and relative stages of

economic and political development, should not be permitted to over­

shadow its potential advantages, but should merely point the way to

some of the problems which will need to be resolved as the propo­

sition is considered by potential member countries.

1172

III. THE BEST FORM OF REGULATORY MACHINERY?

A. The Possible Choices

Assuming arguendo that federal legislation and a federal regulatory

body will best serve the interests of the Australian securities

industry, what form should that legislation and that body take? The

choice appears, to this author, to be three-fold. First, the regu­

latory legislation might represent total governmental control of the

securities industry, with, inter alia, government licensing of all

brokers, dealers and investment advisers; total government control

of stock exchanges and a full set of regulations covering as many

aspects of market operations as could be devised. Such a regulatory

policy could be implemented through either a federal government

department such as that of the Attorney-General or the Treasurer, or

a semi-independent body created and funded by the government, with

qualified Commissioners appointed for fixed terms, reporting annually

directly to Parliament. Because of the degree of independence which

such Commissioners would have from direct governmental control,

however, it is suggested that the policy of total governmental control

of the securities industry would be best effected by allowing a

government department to administer the appropriate legislation and

regulations.

Secondly, an alternative approach would be to impose a large degree

of governmental regulation, but to allow the self-regulatory bodies

such as the stock exchanges to operate in a limited capacity and

1173

under the overall guidance of the government. While such a regulatory

policy might be administered either by a government department or by

a semi-independent body of the type described above, the latter seems

to this author to be the preferable alternative. Regulation by

government department, while suitable for a policy of total govern­

mental control not required to take cognizance of self-regulatory

bodies, would not be readily adaptable to a form of joint regulation,

even where the balance of power was tipped in favour of the govern­

ment, as is here suggested. It is more likely that the experienced

securities industry and legal personnel required to enable a semi-

independent body of the type described to adequately administer a

policy of contemporaneous governmental and industry regulation would

be attracted, perhaps on a short-term basis, to a semi-independent

agency rather than to service in a government department. The United

States SEC has certainly succeeded in attracting a large number of

highly experienced lawyers and businessmen on this basis, and it is

felt that the same result could be achieved by a similar body estab­

lished in this country.

Thirdly, a policy of minimal governmental intervention in the

operations of the securities industry, with merely a general super­

visory eye being kept on the activities of the industry self-

regulatory bodies, could be adopted. If, in accordance with such a

policy, the major administrative role was to be played by the industry

bodies, it would seem unnecessary to create a special federal

1174

administrative body, and such governmental supervision as was thought

necessary could be effected through an appropriate government

department.

To this author, the choice which must be made is clear. Total govern­

mental control, while arguably desirable in respect of certain well-

defined and well-established areas of political endeavour such as

civil aviation, defence and foreign affairs, is not, it is submitted,

appropriate for the initial regulation of a new and complex area such

as that presented by the securities industry of this country. This

is particularly the case where the area to be regulated is a tech­

nical one in which very little governmental expertise currently

exists, and where, as a result, the experience of the private sector

must of necessity be heavily relied upon by government. Because the

success of any federal governmental venture into this field will

depend primarily upon the calibre of the personnel who staff the

regulatory body which is established, it is essential that that body

be of a character likely to attract experienced persons. It is felt

that a semi-independent body, working free of the normal government

department inhibitions, would be more likely to attract such persons.

Additionally, the importance of the regulatory scheme which it is

proposed be introduced into Australia is such that it is necessary

that it be accorded a separate regulatory body, and that it be not

merely absorbed into, and form a small part of, a large government

department. As such , it would be forced to compete with other

sections of that department for both the relevant Minister’s time

and favourable budget treatment.

Just as full governmental regulation is not suitable for Australia,

so the third possible alternative listed above, the minimal govern­

mental supervision which represents the other end of the spectrum,

is also, it is submitted, unsuitable. While in theory it would be

desirable for an industry such as the securities industry to be able

to regulate itself, and for the stock exchanges to be fully respon­

sible for the operations of the nation’s market places, in practice,

four insurmountable difficulties prevent the theory having any

realistic application. First, the stock exchanges are capable of

regulating only portion of the total securities industry. While in

Australia and the United Kingdom the position differs from that in

jurisdictions such as the United States, which has a large over-the-

counter market and where accordingly the volume of shares traded on

the stock exchanges is proportionally less than in the two former

countries, the exchanges are still only capable of regulating those

issues of securities which seek public quotation on their boards,

and those operators within the markets who actually hold membership

of those exchanges. Their regulatory machinery does not, for example,

encompass those public issues of securities which do not seek exchange

quotation, dealers who are not exchange members, or investment

advisers.

1176

Secondly, such regulatory actions as the exchanges may take are

ineffective compared to those which are available to an independent

or semi-independent regulatory agency. For example, a broker who

is a member of an exchange may be disciplined by fine or suspension

from the exchange, after which he might continue to operate as a

non-broker dealer. If the same person were subject to the indepen­

dent regulatory agency’s control, similar penalties could be imposed,

and, in addition, his licence as a dealer could be suspended or

revoked and, if necessary, criminal proceedings could be instituted.

In the case of a defaulting company which has securities listed on

an exchange, the strongest possible sanction open to the exchange is

to delist those securities, which is, in many instances, the end

result most favourable to the manipulators who have arranged for the

company’s default. An independent regulatory body in this situation

could, if this author’s proposals are adopted, revoke the company’s

registration as a public company and prevent it dealing with the

public in any way, and institute proceedings, where necessary,

against the manipulating directors.

Thirdly, to permit only briefly-supervised self-regulation by stock

exchanges makes the unwarranted assumption that exchanges themselves

should be able to be formed and operated on their own initiative,

without necessarily obtaining government approval for such formation

or operation. The failure of the major stock exchanges either to

adequately cope with the volume of transactions or, more importantly,

to effectively protect investors in securities listed on their

1177

boards, was evidenced recently not only in Australia, but also in21Hong Kong, Malaysia, Singapore and the Philippines. Similar failures

have occurred in other jurisdictions at other times.

Fourthly, and in part related to the point made immediately above,

the industry self-regulatory bodies cannot be relied upon to accord

priority to any interests other than their own. They are essentially

interested, industry bodies, and it is naive to expect of them the

objective, detached approach to a particular regulatory problem which

one would expect of an independent regulatory agency. For example,

during the recent securities boom in Australia, it was revealed that

a number of Sydney brokers had taken short positions in the stock of

Antimony Nickel N.L. When a successful comer occurred and the details

of the short activity were revealed, questions were asked as to what

disciplinary action would be taken by the Committee of the Sydney

Stock Exchange against those brokers. The Committee decided to take

no disciplinary action. As the Chairman of the Sydney Stock Exchange

indicated, if all of the members of the exchange Committee who had

taken short positions in that stock had disqualified themselves from

voting on the disciplinary measures, there would not have been a

quorum of that Committee.

To this author, there remains only one possible choice of policy and

administrative body.

B. The Only Answer

Both because of the faults in the other two possible choices, and

because of its own advantages, the policy of securities regulation

to be introduced into Australia must be one of governmental control

with a degree of self-regulation by industry bodies, such self-

regulation to be always subject to final governmental approval.

This will allow overall federal governmental control of the industry,

with important policy decisions reserved to government and some

degree of interpretative discretion vested in the industry bodies

such as the stock exchanges. The fact that ultimate control rests

with the federal government will ensure a degree of uniformity of

interpretation which has not been found possible under the existing

state-oriented system.

Such a policy should be administered by a semi -independent regulatory

agency, to be known as the Commonwealth Securities Commission,

created and funded by the federal government. While full details22of its recommended structure and composition are set out below,

such a body should be comprised of one Commissioner and four Assistant

Commissioners; it should as far as possible be free of ministerial

control, and it should report annually directly to Parliament. It

should attempt to obtain its Commissioner and Assistant Commissioners

from persons experienced either in the securities industry or in this

area of the law, and it should attempt to recruit research and

administrative staff of the highest possible calibre.

1179

This body would be in a strong position to deal equitably with the

government, whose regulatory policy it would be enforcing; with

business interests, which it would be regulating; with industry

interests, with which it would be co-operating but which in the

final analysis it would also be regulating; and with the investing

public, which it would be attempting to both inform and protect.

The creation of a semi-independent body along these lines would not

be in accord with the practice in the United Kingdom, Japan or

India, where historical, governmental and constitutional factors

respectively have resulted in regulation by government department.

It would, however, be in accordance with the practice in the United

States, where the SEC has been amongst the most effective of the

numerous bodies created by that country’s government. Additionally,

it would approximate to other jurisdictions in which a separate

semi-independent regulatory body has been created, but is subject to

slightly more governmental control than either exists in the United

States or is proposed for Australia. This situation currently

occurs in the Philippines, with its Securities and Exchange

Commission; Hong Kong with its Securities Commission; Malaysia with

its Capital Issues Committee; Singapore with its Monetary Authority

and its Securities Industry Council and, to a lesser extent,

Thailand, with the Bank of Thailand.

1180

This regional similarity in approach towards the nature of regulatory

bodies is another factor which will assist significantly in the

eventual internationalization of the securities markets in the Asian

region.

1181

IV. CONSTITUTIONAL LIMITATIONS

A. Powers of Federal Regulatory Body

1. The Problem in Australia

If a federal regulatory body is established to administer a system

of securities regulation under the general form of constitutional

structure adopted by the United States, Canada and Australia, does

that constitutional structure impose any limitations upon the nature

of the powers which may be exercised by that body?

Does it, for example, limit that body to the exercise of only adminis­

trative powers, or may it, contemporaneously, also exercise judicial,

quasi-judicial or legislative powers? If there is a constitutional

limitation upon the powers of the administrative body, can such a

limitation be justified in the light of the need for the body to have

a wide range of powers in order to carry out effectively its assigned

tasks?

While this problem has not arisen directly in Canada, as there is

currently in that country no federal securities regulatory body and

the various provincial bodies have been created under provincial

legislation, it has arisen in the United States, where the SEC

was specifically created by the federal Securities Exchange Act of

1934. An examination of the problem as it currently exists in

Australia will be followed by a discussion of that United States

experience.

1182

In Australia, the constitutional doctrine of the separation of

powers has been adhered to, particularly in respect of the judicial

power, in a manner which on the present state of the authorities,

places difficulties in the way of the creation of a Commonwealth

Securities Commission with an adequate range of powers. The major

divisions of power with which this study is concerned are, first,

that between legislative and executive, and secondly, that between

judicial and other powers.

It is conceded that "It is not and never has been the case that the

doctrine of the separation of powers in a strict and pure form is a23practical means of governing a complex modem community" and it

is accepted that no strict separation need be made between the24legislative and executive branches of government. In Victorian

Stevedoring and General Contracting Co. Pty. Ltd, and Meakes 25v. Dignan, a 1931 decision involving a challenge to the validity * 27

of regulations made by the Governor-General under Section 3 of the

Transport Workers Act, 1928-1929, the High Court upheld a delegation

of power from the Parliament to the Governor-General. It was argued

on behalf of the defendant appellants that as the Court had previously

held^ that any attempts to vest the Commonwealth’s judicial power

in bodies other than the High Court, and other than as provided by

Section 71 of the Constitution, were ultra vires, that the same

principle should be applied to Section 61 of the Constitution in27respect of the executive power. Gavan Duffy C.J. and Starke J.

rejected the argument on the brief ground that legislative power was

1183

very different in character from judicial power, indicating that

unless this were so and in the situation where there had been a

delegation of legislative power, both Huddart Parker v. The28 29Commonwealth and Dignan v. Australian Steamships Pty. Ltd. had

30overlooked an obvious point and were wrongly decided. Rich J.31relied upon Roche v. Kronheimer as authority for the proposition

that "an authority of subordinate law-making may be invested in the 32Executive".

Dixon J. examined a number of United States precedents which called

for the strict separation of legislative, executive and judicial

powers, conceded that such a theory would not necessarily overcome

either the logical difficulties involved in defining the power of

each of the organs of government, or "the practical and political33consequences of an inflexible application of their delimitation",

and briefly discussed a number of Australian decisions which,

together, made it appear that the Commonwealth’s judicial power

could not be reposed in any non-judicial body, nor could a judicial35body exercise other than judicial power. On the understanding

that "the same or analogous considerations" applied to the vesting

of legislative power in the Parliament, His Honour questioned

whether it followed that in the exercise of the legislative power,

the Parliament was restrained from investing essentially legislative36power in another organ or body?

In the first authority Dixon J. considered, Baxter v. Ah Way,

Griffith C.J.,O’Connor and Higgins J.J., had all upheld legislation

which gave to the executive, power, by proclamation, to include

goods in the category of prohibited imports. The case did not

expressly consider the separation of powers, but Griffith C.J.

referred to Section 1 of the Constitution as ’’merely an introductory

paragraph to the provisions of the Constitution which deal with the

Legislature.”^

39Dixon J. then examined Roche v. Kronheimer closely, pointing out40that in none of the decisions on which it, in turn, was based, was

the question of the distribution of powers considered, "although in

three of them ... an argument raising it would have been relevant,

and in two of these some difficulty might have been felt in treating

the authority which had been exercised by the Executive as anything

less than legislative."^ Explaining this situation by reference to42the need to widely interpret the defence power in time of war, 43

43Dixon J. confirmed that Huddart Parker v. The Commonwealth was

decided on the basis of Roche v. Kronheimer, and reiterated his

belief that that case had intended to decide that it was open to

the Parliament to confer legislative power on the Executive:

But I think the judgment really meant that the time had passed for assigning to the constitutional distribution of powers among the separate organs of government, an operation which confined the legislative power to the Parliament so as to restrain it from reposing in the Executive an authority of an essentially legislative character. I, therefore, retain the opinion which I expressed in the

37

1185

earlier case that Roche v. Kronheimer did decide that a statute conferring upon the Executive a power to legislate upon some matter contained within one of the subjects of the legislative power of the Parliament is a law with respect to that subject, and that the distribution of legislative, executive and judicial powers in the Constitution does not operate to restrain the power of the Parliament to make such a law. 44

His Honour thus accepted the argument that the theoretical separation

of powers in the Constitution should not interfere with the practical

need of the Parliament to vest legislative power in the executive.

The fact that he reached this conclusion on the basis primarily of

Roche v. Kronheimer, a case which itself relied in this respect

completely and without judicial elaboration upon two groups of

earlier decisions,^ one of which consisted solely of defence power

cases, does not detract from the significance of the ultimate holding

that a vesting of legislative power in the executive was constitu­

tionally possible.

Evatt J. conceded that the full theory of separation of powers could46not apply under the Australian Constitution, re-affirmed his

47support of Roche v. Kronheimer, and concluded that for the purposes

of effective government, the Commonwealth must have, in the exercise

of its legislative power, the power "to vest executive or other

authorities with some power to pass regulations, statutory rules,48and by-laws which, when passed, shall have full force and effect.”

The result of the appeal in this case was thus that the delegation

of rule-making power to the Governor-General was upheld as a valid

exercise of the Commonwealth’s legislative power. 49

1186

The significance of the decision for the purposes of any proposed

securities regulatory body lies in the fact that it established that

the pure theory of the separation of powers would not be applied in

the interpretation of the Australian Constitution, at least in

respect of the legislative and executive powers enumerated in that

Constitution. Accordingly, it would not be contrary to any

separation of powers doctrine for a Commonwealth Securities

Commission, established under valid federal legislation, to promul­

gate rules and regulations for the control of the securities

industry. These rules and regulations could, inter alia, detail the

required content of prospectuses, specify the financial and other

conditions to be complied with by applicants for brokers’, dealers’

or investment advisers’ licences, govern the listing requirements

of the country’s stock exchanges, and regulate the various facets of

post-distribution trading.

If the interpretation given by the High Court in the cases discussed

above allows the exercise of legislative power by bodies outside the

Parliament itself, has the court similarly interpreted the

Commonwealth's judicial power to enable it to be exercised by non­

judicial bodies, or to allow judicial bodies to exercise other than

judicial powers? The answer is, unfortunately from the point of

view of the proposed Commonwealth Securities Commission, no. In a

long series of decisions, beginning in 1909 and culminating in 1956,

the High Court has accorded a significantly different treatment to

the judicial power. In Huddart Parker $ Co. Pty. Ltd, v. Moorehead,^

1187

Griffith C.J. indicated that Parliament had no power to entrust the

exercise of judicial power to any hands other than those specified

in Section 71 of the Constitution.^ Although His Honour subse-52quently discussed the nature of judicial power, no supporting

reasons were given (other than the actual terminology of Section 71

itself) for his opinion that only bodies envisaged by that section

could be entrusted with the Commonwealth’s judicial power. However,

his view prevailed on the court.

Barton J. did not really address himself to the problem, indicating

only that he agreed with the Chief Justice in respect of his finding

that Section 15B of the Australian Industries Preservation Act 1906

was not an exercise of the judicial power. O ’Connor J., who also

agreed that the section was not an exercise of the judicial power,

similarly failed to consider the question of whether that power could

be vested in other than Section 71 bodies. The two remaining members

of the court dissented on the basis of their refusal to follow the

then current reserved powers doctrine. Isaacs J. admittedly cited

passages from Blackstone's Commentaries which detailed the separation54of legislative, executive and judicial power, but this was against

the background of his search for the meaning of the term ’’judicial

power", and not in the context of attempting to determine whether

judicial power should be strictly separated from legislative and

executive powers. He also found that the section in question,

Section 15B, was not an exercise of judicial power. Higgins J., in

a brief passage at the conclusion of his dissenting judgment,^ also

1188

did not regard the section as an exercise of judicial power, but again,

did not comment upon the necessity for restricting that power to

Section 71 bodies.

Thus of the five members of the Court, only Griffith C.J. specifi­

cally limited the exercise of judicial power to Section 71 bodies.

In this situation, it is difficult to agree with one constitutional

scholar who has argued that the whole court "took it for granted"

that the objection to Section 15B, based upon its being an exercise

of the judicial power by an executive official, was well founded in

principle, and that "The proposition that only a federal court could57exercise federal judicial power was regarded as self-evident."

The case hardly seems adequate authority upon which to base a strict

separation of the judicial from the legislative and executive powers

of the Australian Constitution. 58 59

58In The State of New South Wales v. The Commonwealth, an appeal to

the High Court from an order of the Inter-State Commission, (which59body was provided for by the Constitution and created by the Inter-

State Commission Act, 1912) again raised the question of the

Commonwealth’s judicial power. The Commission had been comprised of

Commissioners appointed for seven year terms, given certain powers

under the head of "Judicial Powers of the Commission" and empowered,

inter alia, to hear and determine complaints, disputes or questions,

and to adjudicate upon particular listed matters. It was also

specified to be a court of record.

1189

The validity of the statutory provisions was challenged on the basis

that they conferred powers upon the Commission as a Court and that

the creation of such a Court was not authorised by the Constitution.

It was argued in reply that the Constitution^ enabled the

Commonwealth Parliament to make the Commission a court if it wished

to do so, reliance in this respect being placed upon the term "powers

of adjudication" in Section 101 and Section 73*s provision for an

appeal from the Commission to the High Court on matters of law.

Griffith C.J. rejected the argument that the Commission was a court,

refusing to attribute significance to the term "adjudicate" because

of its ready application to the conferring of quasi-judicial powers61upon government officers and administrative bodies. He also

utilized the fixed seven year term of the Commissioners to argue

that, as they were not appointed for life as provided by Section 72

of the Constitution, they could not constitute a court, and refused

to agree that they could be regarded as an exception from, or af\7supplement to, Section 72. Thus, again, Griffith’s view was strong

and clear-cut and was predicated upon a strict application of the

separation of powers doctrine. His view again appears, however, to

be posited primarily upon a literal reading of the Parts into which

the Constitution is divided, rather than upon any considered

examination of the merits of the doctrine.

6 3Isaacs J. followed essentially the separation of powers line of

attack utilized by Griffith C.J., also holding that the Commission

could not be regarded as a Court of Justice as did both Powers

and Rich J.J.,^ the latter, in particular, attributing great weight

to the actual physical division of the Constitution into various

Parts.^

The decisions of the majority judges upon the constitutional issue

were thus primarily concerned with the question as to whether the

commission was in fact a court, such an approach being presumably

based upon the assumption that only a court could exercise the

judicial power of the Commonwealth. The approach exhibited in the

strong dissenting judgments of Barton and Gavan Duffy J.J., however,

was significantly different. Rather than being concerned to deter­

mine whether the commission was in fact a Court (and thus, on the

strict doctrine of the separation of powers, unable to exercise

federal judicial power) they questioned whether Part III of the

Constitution in reality "covered the whole ground of the judicial

power of the Commonwealth".^

Barton J. regarded the Section 101 power as independent of

Chapter III, which he saw as providing for the general judiciary

system of the Commonwealth, but as having "no relation to tribunals

instituted or appointed for special purposes and confined in their

jurisdiction to the enforcement and upholding of any special and

limited class of laws." He thought that the Parliament could

invest the Commission with "curial" powers such as the hearing and

determining of controversies inter partes and the granting of

consequential relief, and he rejected the argument based upon

the period of tenure of office of the Commissioners. Gavan

Duffy J. also refused to accept the separation of powers argument

based upon the physical divisions in the Constitution:

Chapter 111 has reference to the general Judicature of the Commonwealth; Chapter IV., without intruding on the domain of the general Judicature or detracting from its authority, and without itself constituting any Court, enables Parliament to use judicial power through the instrumentality of the Inter-State Commission when it deems it necessary to do so for the prescribed purposes, and to constitute the Commission a Court, or not, at its pleasure.72

Despite the prevalence of the majority view in this case, the

dissenting judgments are of great significance, as they indicate a

refusal to accept the strict 'separation of powers' argument and

thus to limit the exercise of the judicial power to bodies encom­

passed only within Part III of the Constitution. They refused to

be bound by the mechanical division of power within the constitution

into three separate divisions and, hopefully, have kept alive the

possibility that the majority interpretation might one day be the

subject of judicial reconsideration.

In The Waterside Workers' Federation of Australia v. J.W. Alexander 7373Limited the High Court was asked to determine, inter alia,

whether the enforcement of arbitral awards by the Commonwealth Court

of Conciliation and Arbitration was an exercise of judicial power;

if it was, whether the Court was a properly constituted court to

70

1192

exercise such power; if it was not, whether it could nevertheless74exercise that power?

The High Court held that such enforcement was an exercise of the

judicial power, that such power could only be exercised by a court

meeting the requirements of Chapter III of the Constitution; and,

by majority, that the Arbitration Court failed to meet this standard75because its sole member was appointed for seven years only.

This decision confirmed the earlier holdings in New South Wales v.76The Commonwealth, and although it was challenged before the Privy

Council, its findings in respect of the restriction on the vesting

of judicial power in bodies other than those provided for in77Section 71, were subsequently upheld.

Thus by this time two clear and conflicting strands of constitutional

interpretation were developing. In the first, as exemplified in78cases prior to, and in Dignan1s case itself, it was being held

that the separation of powers doctrine did not apply to the

relationship between legislative and executive powers, that it was

possible for the executive or for an administrative body to exercise

legislative powers if they were properly delegated. On the other

hand, it was being held that the doctrine applied strictly to the

judicial power, that it alone was able to be exercised only by

particularly constituted bodies. What, then, differentiates the

judicial power from the legislative and executive powers? Rather

1193

unsatisfactory attempts were made in Dignan's case by both Dixon J. and

Evatt J. to rationalize this situation. The former, admitting that

the interpretations of the two powers by the Court might "appear to79involve an inconsistency or, at least, an asymmetry", urged that

the explanation be sought "not in a want of uniformity in the

application to the different organs of government of the consequences

of the division of powers among them, but in the ascertainment of the

nature of the power which that division prevents the Legislature from 80handing over." His Honour then proceeded to elaborate upon how the

statute giving legislative power formed the continuing basis of the

authority of the legislature, but did not relate this elaboration in

any way to the judicial power.

Evatt*s J.*s rationale was that "Questions of judicial power occupy

a place apart under the Constitution, not only because of the special

nature of judicial power but because of the elaborate provisions of 81Chapter III." To this author, the "special" nature of the judicial

power is not immediately obvious without further explanation, nor are

the provisions of Chapter III seen to be necessarily more elaborate

than those of Chapters I or II. Even if they were more elaborate,

however, this would hardly seem adequate reason for applying strict

separation of powers principles to that power while not applying them

to the legislative and executive powers.

82In The King v. Taylor and Others; Ex parte Roach, the problem of

the judicial power was again considered, in the context of the

1194

Commonwealth Court of Conciliation and Arbitration's power to punish

summarily for contempt of its judicial authority. It was argued

before the High Court, in support of an application for a writ of

prohibition against the judges of the Conciliation and Arbitration

Court and the Industrial Registrar, that the Arbitration Court had

no jurisdiction to punish, as contempt, attacks made on members of

the court exercising their arbitral rather than their judicial 83powers. The majority justices (Dixon J., Webb J., Fullagar and

Kitto JJ.) acknowledged that the offence could be punished summarily

by a superior court of record, and that it was by its very nature

concerned with judicial power rather than executive, administrative,84legislative or other governmental power. In a most important

passage, the majority, although conceding that the contempts arose

out of the exercise of the industrial or arbitral powers of the court,

held that they reflected on the Court itself, and described the Court

as follows:

The legislation establishes a court to which jurisdiction is given forming part of the judicial power of the Commonwealth and to which an authority of an entirely different character is given falling outside the judicial power of the Commonwealth and derived under an exercise of the legislative power conferred by s.51 (xxxv) of the Constitution. There is thus combined a double power in one office.85

In a subsequent passage the majority referred to "the exercise ofOf.

the judicial power of the Arbitration Court" and the separate

concurring judgment of McTieman J. referred to the jurisdiction of

a judge of the Court of Conciliation and Arbitration as "a combination87of judicial and arbitral powers."

1195

The valid existence of both judicial and non-judicial powers in the

one body was thus specifically recognized as late as 1951 by five

justices of the High Court.

The major decision on the separation of the judicial power came,88 89however, in 1956. Resolving the ambiguity which had existed in

this area since the Alexander case, it established what remains today

as the accepted interpretation of the separate nature of the

Commonwealth’s judicial power. The Boilermaker’s Case arose as a

result of challenges to the validity of orders made by the Common-

wealth Court of Conciliation and Arbitration directing compliance

with the Metal Trades Award, enjoining continued breaches of that

Award, and imposing a fine for contempt (constituted by disobedience

of the earlier order).

An order nisi for a writ of prohibition was made by McTieman J.,

requiring the judges of the Conciliation and Arbitration Court and

the Metal Trades Employers’ Association to show cause why they should

not be prohibited from proceeding with the orders mentioned above.

On the hearing of this show cause order before the Full Court of the

High Court, it was argued on behalf of the prosecutor, inter alia,

that the Constitution prohibited the vesting of the Commonwealth’s

judicial power in a body which had non-judicial functions; that if

this were not so, it would detract from the safeguards found in the

Constitution; that Chapter III of that document was an exhaustive

statement of the kind of judicial power which the legislature could

1196

invest in federal courts; and that those decisions which approved

the conferring of legislative power on the executive did not

necessarily throw light on the questions of whether non-judicial

functions could be imposed on the judiciary or judicial functions90imposed on bodies which were not primarily judicial in nature.

It was argued on behalf of the respondent judges, inter alia, that

the British rather than the American ’’mutually exclusive” practice

in respect of the division of the organs of government had been91followed in the Australian Constitution: that Dignan’s Case

rejected the doctrine of the separation of powers; that apart from

the actual division into various powers contained in the Constitution,

that doctrine had no legal consequence in the High Court and92reliance was placed, inter alia, upon Roche v. Kronheimer,

93 94Alexander’s Case and R. v. Taylor; Ex parte Roach. * 95 * 97

The majority judges, Dixon C.J., McTieman, Fullagar and Kitto JJ.,

adopted a strict constructionist approach to the problems raised by95the case, limiting the exercise of the judicial power to the

boundaries provided by Chapter III, which they saw as providing an

exhaustive statement of the way in which that power is or could be

vested. That Chapter, in the majority’s view, had the result that

”it is beyond the competence of the Parliament to invest with any

part of the judicial power any body or person except a court created

pursuant to s.71 and constituted in accordance with s.72 or a court97brought into existence by a State.” It also prohibited the use

of courts established under it "for the discharge of functions which

1197

are not in themselves part of the judicial power and are not98auxiliary or incidental thereto."

The majority’s reliance upon the strict constitutional division of99powers, re-affirmed later in the judgment, thus appeared to put

it into direct conflict with its own earlier approach to the

division of legislative and executive powers. This apparent conflict

was dealt with by the unconvincing argument that the adoption in the

Australian constitution of the British system of parliamentary

responsibility (that is, the executive responsible to the legis­

lature) , together with the concept of American federalism, recognized

the distinction between "the essential federal conception of a legal

distribution of governmental powers among the parts of the system

and what was accidental to federalism ... namely the structure or

composition of the legislative and executive arms of government and

their mutual r e l a t i o n s . W h i l e conceding that the fact of

responsible government confirmed that the American theory of the

separation of powers had not been adopted in Australia, the majority

argued that the United States congressional and Presidential system

was "a matter of the relation between the two organs of government

and the political operation of the institution" and did not affect

legal powers, and additionally, that the framers of the Australian

Constitution had included a distribution of powers between the

legislature and executive, even after rejecting the independent

executive system.

In other words, the majority were relying upon two factors to

establish the distinction between the Court’s treatment of legis­

lative and executive powers on the one hand and judicial powers on

the other. First, the "accidental” nature of the British relation­

ship between the legislative and executive organs which had been

incorporated in the Australian Constitution and which, presumably,

did not require that any strict separation of powers between the two

organs be maintained. Yet, secondly, and, one would have thought,

inconsistently, the majority noted the drawing of such a distinction

in Chapters I and II of the Constitution. If the essential feature

is the "accidental" nature of the British executive/legislative

relationship, with its lack of emphasis upon the drawing of a clear

distinction between the two, it is surely inconsistent, as part of

the same argument, to rely upon the Australian Constitution’s

structure which does, at least mechanically, clearly distinguish the

two.

Just as this first portion of the majority’s argument was uncon­

vincing, so was the second portion which attempted to distinguish

the separation of the judicial powers:

The position and constitution of the judicature could not be considered accidental to the institution of federalism: for upon the judicature rested the ultimate responsiblity for the maintenance and enfor­cement of the boundaries within which governmental power might be exercised and upon that the whole system was constructed.101

1199

To this author, the distinction made in this manner by the majority,

while arguable, is not any more compelling than would be a related

argument on behalf of either the legislative or executive powers.

For example, it might be argued that the governmental system was

constructed upon the role of the legislature, as it is the source of

a nation’s laws, and is in fact the body which determines the extent

to which judicial review of legislation will be permitted.

Additionally, the executive, particularly under the system of cabinet

government utilized in this country, retains effective control of

most aspects of the legislature’s activities, and it may in the final

analysis be the body which determines the permitted scope of judicial

review of legislative or executive action. For these reasons alone,

it seems inadequate for the majority to base its distinction upon the

argument that it was the judiciary upon which the whole system was

constructed.

While it was on this unsatisfactory basis that the majority distin-

guished Dignan’s Case, they failed to deal adequately with

Alexander’s Case, a n d disposed of R. v. Taylor; Ex parte Roach‘S

and the cases upon which it rested merely by stressing that they

were based upon an assumption, without the question having been

fully argued, that the judicial power was validly conferred on the

Arbitration Court, and by stating the need to avoid being bound by

such precedents where the matter subsequently arises to be directly

decided.

1200

Of the three dissenting justices, Williams J. refused to accept the

argument based upon the separation of powers, warned against the

dangers of applying the United States doctrine to the Australian 107Constitution, and refused to attribute any significance, other

than in a "constitution-framing" context, to the division in the108constitution between legislative, executive and judicial powers.

His Honour traced the history of the vesting of judicial power in

the Arbitration Court, confirmed that only courts can exercise the109judicial power of the Commonwealth, but argued convincingly that

there was nothing expressed or unexpressed in the Constitution which

would prevent Parliament utilizing its powers under both Section 51

and Chapter III to vest both administrative and judicial functions110in the same tribunal. He correctly found support for his argument111 112 113in Roche v. Kronheimer, Dignan’s Case, Lowenstein’s Case and

R. v. Taylor; Ex parte Roach. 115 116 117 118

115Webb J. cited the Court’s acceptance of the mixture of arbitral116and judicial functions in Alexander’s Case and in a number of

other decisions and pointed out that every member of the then

currently constituted Court was a party to one or more of those117decisions. He rejected the application of the United States

doctrine of the separation of powers to Australia, and held that

Chapter III permitted the combination of arbitral and judicial powers118in the Arbitration Court.

1201

Finally, Taylor J. took a practical approach towards the doctrine

of the separation of powers, stressing the overlapping areas between119legislative, executive and judicial functions, confirmed that no

Commonwealth judicial power can be vested in a body which is not a

court constituted in accordance with Chapter III, and argued that

while that Chapter was an exhaustive declaration of the judicial

power with which federal courts could be invested, there was nothing

to prevent Parliament from imposing legislative or executive powers

or duties on them under Section 51, provided that they were strictly120incidental to the performance of the judicial function.

To this author, the majority decision in the Boilermakers’ Case

represents an unfortunate reversal of the Court’s earlier acceptance

of the view that both judicial and non-judicial powers could validly

be vested in the one tribunal. Based upon a dubious adherence to

the strict separation of powers doctrine and what is to this author

an excessively literal emphasis upon the actual three-fold mechanical

division of powers in the Constitution itself, the majority judgment

failed to adequately distinguish its treatment of the legislative

and executive powers from its treatment of the judicial power, and

failed also in its attempt to overcome the significance of its own

earlier decisions. The dissenting judgments, on the other hand,

exhibited a more realistic assessment of the application of the theory

of the separation of powers, correctly de-emphasised the significance

of the literal construction of the Constitution, and sought to remain

consistent with the course of the Court’s earlier decisions in this

1202

area. As such, they represent an approach to the problem which it

would have been very much in this country’s interest to have adopted.

Had they formed the majority, the strict and unnecessarily legalistic

separation of functions which has resulted in the creation of the

Commonwealth Conciliation and Arbitration Commission and the Common­

wealth Industrial Court in place of the former Commonwealth Court of

Conciliation and Arbitration, and which would also force such an

artificial division upon a body formed to regulate the securities

industry, might have been avoided.

With the strong weight of the dissenting judgments in the case, their

consistency with the trend of earlier court decisions, the irrelevance

of the United States model for the interpretation of the judicial 121power, and the increasing awareness, particularly in complex areas

such as the regulation of the securities markets, of the need for

regulatory bodies with as full a range of powers as is possible, it

is hoped that an opportunity for the re-consideration of the

Boilermakers’ Case principle will arise.

The decision of the majority justices was upheld by the Privy 122Council and the position thus remains that, in Australia, only

judicial bodies established under Chapter III of the Constitution

may be invested with the Commonwealth's judicial power, and that such

bodies cannot exercise non-judicial power. There are certain pre-

Boilermakers’ Case qualifications upon the doctrine thus stated,

first in relation to the vesting of a court with "limited

1203

124 125legislative powers" or "minor non-judicial powers" where they

are reasonably incidental to the judicial function; and, secondly,

in relation to the Court’s recognition of the difficulties in

drawing concise dividing lines between judicial and administrative

functions.

Despite these qualifications, however, the problems raised by the

majority decision’s strict application of the separation of powers

doctrine remain, and are of direct relevance for the creation of any

proposed Commonwealth Securities Commission in Australia. On the

basis of Boilermakers, such a body could be only either a court or

an administrative tribunal. If the former, while it could be vested

with the Commonwealth's judicial power and thus could, for example,

enfore compliance with its orders by imposing fines punishing for

contempt, etc., it could not be vested with the wide administrative

and rule-making powers which it would need to effectively regulate

the Australian securities market, except in so far as they were

reasonably incidental to that judicial power. If the latter, it

could certainly be vested with and exercise the necessary adminis­

trative and executive powers, but it could not, for example, enforce

its own orders through the means described immediately above.

The prospect for Commonwealth legislators thus appears to be

severely limited, with the possible choice of regulatory structure

being narrowed to that of an administrative regulatory body with

powers to administer securities legislation and to promulgate rules,

regulations, etc., but with no power to enforce its orders. For

this, unfortunately, it appears that it will be necessary to resort

to a judicial tribunal, constituted in accordance with the provi­

sions of Part HI of the Constitution.

2. A Possible Solution

The stringency of the situation resulting from the Boilermakers *

Case is alleviated to a slight degree by a number of decisions which

have held that particular administrative tribunals have not been

exercising the Commonwealth's judicial power, even though they have127been acting judicially. In The Shell Company of Australia

128Limited v. The Federal Commissioner of Taxation, the constitu­ * 129 130 131

tionality of the Taxation Boards of Review, which were established

to review decisions of the Commissioner of Taxation, was considered.

The Privy Council rejected the argument that the bodies were courts

exercising the judicial power of the Commonwealth, holding, inter

alia, that the fact that the Boards' decisions were deemed to be129decisions of the Commissioner and that an appeal by the

Commissioner or the taxpayer lay to the High Court from any decision130which in the Court's view was a question of law, did not mean

that they were acting judicially; and that the Board's power to

forfeit a taxpayer's deposit if it thought an appeal frivolous or

unreasonable was a power to make an administrative order only,131resting on opinion, rather than law. Further, adopting

1205

Griffith C.J.'s definition of judicial power in Huddard Parker $132Co. Pty. Ltd, v. Moorehead, the court indicated that it was

important that the Board’s orders did not purport to be conclusive133for any purpose whatsoever.

Finally, the Privy Council listed a number of negative criteria to

be utilized in distinguishing between a court and a tribunal.

Because of their direct relevance to the structure of the proposed

Commonwealth Securities Commission, they are cited in full:

(1) A tribunal is not necessarily a Court in this strict sense because it gives a final decision; (2) nor because it hears witnesses on oath; (3) nor because two or more contending parties appear before it between whom it has to decide; (4) nor because it gives decisions which affect the rights of subjects; (5) nor because there is an appeal to a Court; (6) nor because it is a body to which a matter is referred by another body.134

135In Sutton v. Commissioner of Taxation, the High Court described

the operations of the Boards of Review as follows:

Of course the board deals with the cases before it in a judicial spirit, and decides them by ascertaining the facts and applying the law as it sees it. That is a duty belonging to quasi judicial as well as judicial bodies. Moreover it is armed with the powers given in Pt.V of the Regulations and is governed so far as they go by the directions contained in that Part. But it is not exercising judicial power. The importance of this is that the basis does not exist for implying a power over the commissioner as a litigant party to impose on him a legal oblication to formulate his case by pleadings or particulars or to give discovery by answering interrogatories or otherwise or to fulfil some other procedural requirement borrowed from the courts of justice.136

1206

While it is possible that "the courts’ insistence on the rigid

separation of judicial power probably would preclude the setting up

of administrative bodies on the United States model which exercise137mixed legislative, executive and judicial power," the criteria

detailed above would enable the proposed Commonwealth Securities

Commission to exercise many of the powers which it needs for effec­

tive operation, including the hearing of witnesses in adversary

proceedings on oath, and the making of decisions affecting the rights

of parties. The use of these quasi-judicial criteria, combined with138the right of appeal to a Commonwealth Superior Court, would

assist significantly in enabling any proposed Commonwealth body to

overcome the difficulties raised by the Boilermakers’ doctrine.

3. The United States

The United States Securities and Exchange Commission does exercise

a variety of divergent powers, some of which, on the traditional

three-fold legislative, administrative and judicial classification,

would fall within each of these categories. The fact that it is

not contitutionally prohibited from concurrently exercising such

powers is the result of the acceptance, in the United States, of

the view that "no real distinction can be drawn between adminis­

trative, judicial and quasi judicial powers - for the simple

reason that the constitutional requirements of due process in the

5th and 14th Amendments will convert administrative powers into

adjudicative powers by requiring, inter alia, the giving of a fair

hearing."” This has resulted, it is a r g u e d , i n there being

merely a two-fold classification, "legislative" and "adjudicative",

the latter encompassing all powers except those included in the

definition of the former.

The United States acceptance of this two-fold classification is

partly the result of the adoption of the Administrative Procedure

Act of 1946, which established a code of practice for all federal

administrative bodies. Its advent, together with the decline in

importance in the United States Supreme Court of the "broad142principles affecting the judicial power", have resulted in the

creation of a situation in which the Securities and Exchange

Commission is able to exercise an adequately wide range of regu- 143latory powers, without there being doubt as to the constitu­

tional validity of those powers. Because of this situation and

until similar administrative procedure legislation is enacted in

this country, the parallel between the constitutional positions of

the SEC and the proposed Australian Commonwealth body is not

exact, and the United States experience is of little relevance in

resolving the serious constitutional problems currently existing

in this field in Australia.

1208

B. Constitutional Base for Creation of Regulatory Body.

1. Australia.

If, as seems likely, the proposed Australian federal regulatory

agency takes the form of an administrative tribunal, its creation

and the powers with which it is vested must be referable to one or

more of the constitutional heads of Commonwealth power. Existing

bodies such as the Overseas Telecommunications Commission (OTC),

the Commonwealth Banking Corporation, the Australian Broadcasting144Commission (ABC) and the Taxation Boards of Review, were all

established and given specific powers by statutes based upon parti­

cular heads of constitutional power. The establishment of the OTC

and ABC, for example, was directly referable to the Commonwealth’s

power in respect of "Postal, telegraphic, telephonic and other like 145services"; the Commonwealth Banking Corporation to the banking

p o w e r a n d the Taxation Boards of Review to the taxation power.

In each of these instances, the Commonwealth power was clear, and

provided the base for the structure of the body and the vesting in

it of specific powers.

The situation in relation to the proposed Commonwealth Securities

Commission is, however, much less clear. As we have seen,"^ there

is no single head of constitutional power specifically designed to

allow the Commonwealth to regulate the securities industry. The

Indian Government, with the advantage of being able to study the

1209

experience of the United States and other jurisdictions, included149a head of constitutional power which gave the central government

specific authority over the country’s securities industry. In the

absence of such an express provision in Australia, upon what

constitutional base may the creation of a Commonwealth Securities

Commission and the vesting in it of the necessary regulatory powers,

be founded?

As indicated in Chapter 3 in relation to the validity of proposed

securities legislation, there are two very remote constitutional

possibilities. First, it remains unlikely that the position would

ever be reached in Australia where the various states would refer

power to control the securities industry to the federal government.

While such a step is, to this author, both a logical and a desirable

one, the political issues of states’ rights, combined with the fact

that four of the six states currently have Liberal Party governments

which are reluctant to cede more power to a federal Labor government,

renders it extremely doubtful that it would ever occur. The recent

move by New South Wales, Victoria, Western Australia and Queensland

to form an Inter-state Corporate Affairs Commission"^ seems to

finally preclude that possibility.

Secondly, it would be possible for the Commonwealth to obtain power

to legislate in this area through a constitutional amendment. With

Australia’s history of rejecting referendums, however, (and parti­

cularly as such a measure would undoubtedly be opposed by the

1210

Liberal State governments) it would appear unlikely that any such

move would succeed.

The federal government would, in this situation, be thrown back

into the position it now occupies in respect of the constitutional

validity of any proposed regulatory statute. As discussed in detail 151above, it appears that a number of constitutional powers may each

have to be relied upon to supply the constitutional base for parti­

cular aspects of such legislation. The corporations power, as well

as the trade and commerce, taxation, credit of the Commonwealth,

postal, banking, insurance, bankruptcy and insolvency and incidental152powers may all be of assistance in this regard.

While a Commonwealth Securities Commission could be established

under a securities statute based upon, for example, the corporations

power, and could be validly established in the absence of any success­

ful constitutional challenge to that statute, the powers which the

Commission would be required to exercise would cover such a wide

range of activities that the corporations power alone would probably

not provide a sufficiently broad constitutional base. It is doubtful,

for example, if the corporations power would enable such a body to

control the activities of companies which did not fall within the

recently expanded criterion of foreign, and trading or financial153corporations formed within the limits of the Commonwealth. To

extend the jurisdiction of such a body to encompass such companies,

reliance would have to be placed upon, for example, the taxation

1211

power, by providing differential taxation rates for those bodies

registered or not registered with the Commission, or the postal

power, by denying the use of postal, telegraphic, etc., facilities

to those companies not registered with the Commission.

Similarly, additional reliance could be placed upon the trade and

commerce power to control the interstate trading of securities and

intra-state trading which was inseparably connected with that inter­

state operation; and, in a more limited manner, upon the credit of

the Commonwealth, banking, insurance and bankruptcy and insolvency

powers to bring other aspects of the securities industry within the

Commission’s scope of operations.

The prospect thus faced by Australian legislators in attempting to

create a federal securities regulatory body is of a complex and

lengthy process of establishing the constitutional bases of the

powers which such a body will need to operate effectively. Challenges

to the validity of the body and of its various powers may be

expected, not only from some State governments but also from

companies and individuals within the securities markets whose

interests will be affected by the proposed legislation. It currently

appears, unfortunately, that such a prospect is inevitable.

2. Canada

As discussed in Chapter 3 in relation to the possible constitutional

1212

bases for the introduction of federal regulatory legislation in

Canada, difficulties exist in that country which are similar to those

currently being experienced in Australia. No simple solution to the

problem has been found in that country and one scholar, after

considering many of the possible constitutional bases for the intro­

duction of federal regulatory legislation, was forced to recommend

the creation of a dominion-provincial regulatory body based upon a

co-ordinated legislative programme at both dominion and provincial

l e v e l . W h i l e there have been numerous proposals relating to the155creation of a federal regulatory body, none have as yet been

implemented.

The Canadian experience, based as it is upon only a theoretical

consideration of the problem as a result of the failure of the

federal government to intervene in the field, thus provides too close

a parallel to the unresolved difficulties existing in the Australian

situation to be of substantial assistance in this area.

3. The United States

In the United States, however, the introduction of the federal

securities legislation of 1933 and 1934 resulted in challenges both

to its general validity and as to the validity of various powers

vested by the legislation in the Securities and Exchange Commission.

In rejecting a number of these challenges, the lower federal courts

relied upon a number of different constitutional powers in a manner

which, in this author’s view, set the precedent which will be

followed in Australia. For example, challenges to the constitu­

tionality of the 1933 Act arising from the Commission’s subpoena

power were dismissed and the legislation held to be constitutional156on the basis of the postal power; and the Commission’s power of

investigation under Section 20(a) of the 1933 Act was held to be 157constitutional; as was its power to expel or suspend from a

securities exchange.

The complex and time-consuming procedure which resulted, in the

United States, in the upholding of the constitutional validity of

the 1933 and 1934 acts and the functions of the Securities and

Exchange Commission thereunder, will unfortunately have to be

followed in Australia. Without any clear-cut constitutional base

for the proposed legislation as a whole, each of the powers vested

in the Commonwealth Securities Commission may be subject to

challenge. As indicated in the discussion of the constitutional

problems in Chapter 3ythis author doubts that adequate bases do

exist to vest the Commission with the whole range of powers

necessary to effectively administer the Australian securities

markets.

1214

V. COMPOSITION AND LOCATION OF PROPOSED ADMINISTRATIVE BODIES

A. Current Australian Position

1. Availability of Information

As indicated above, the companies and securities industry acts of

the Australian states are administered by various state instrumen­

talities. Information as to the role and function of these bodies

is, with the exception of New South Wales, difficult to obtain. It

is only in New South Wales that an adequate annual report is made

(by the Commissioner of Corporate Affairs to the Attorney-General);

in the other jurisdictions, available information is limited only

to details of the statutory tasks entrusted to the various bodies

under, for example, companies, securities and business names

legislation. In this situation, a detailed examination will be made

only of the activities of the New South Wales Corporate Affairs

Commission.

2. Composition and Function

The Commission was created on April 15, 1970, and from June 1, 1971,

became the responsible authority in New South Wales for all company

and securities regulation, with responsibility for the administration

of, inter alia, the Companies Act, the Business Names Act, the

1215

Companies (Transfer of Domicile) Act, the Securities Industry Act

and the Marketable Securities Act. The former Registrar of

Companies was, from June 1, 1971, appointed Commissioner for Corporate

Affairs and constituted a corporation sole under the Companies Act.

The Corporate Affairs Commission is composed of the Commissioner, two

Assistant Commissioners (Administration and Legal), four Divisions

and an Administrative Services Branch. Staff appointments are made

through the machinery of the State Public Service Board and the

Commission as a whole is responsible to the State Attorney-General.

The Registration and Documents Division has responsibilities in

relation to company registration and the lodgement of the many

documents required by the various statutes to be filed with the

Commission, as well as the administration of the licensing provisions

of the securities industry legislation. During the calendar year

ending December 31, 1973, it registered 12,551 companies (both

local and foreign); received 260,029 annual returns and miscel-159laneous documents, and registered 202 prospectuses. As well, it

dealt with 28,523 applications for registration of business names,

and 17,355 applications for renewals of business n a m e s . A t the

same time, the Division received 630 applications for the various

licences available under the Securities Industry Act, 1970.^^

With the large size of this Division in terms of personnel (138)

and the rapidly advancing technology becoming available to it in

1216

the form of microfilm records, etc., it would seem a wise rationa­

lization of existing assets to provide that applications for licences

under the Securities Industry Act be handled by a separate division,

or at least a separate sub-division. The processing of company and

business names registrations is essentially a mechanical one,

requiring the exercise of little discretion. The granting of licences

under the complex Securities Industry Act and Regulations is, however,

a very different story; there the exercise of discretion is

frequently called for, and skill and experience is required in

assessing, classifying and ruling upon the many types of application

received. It would be sensible to locate these operations within

the one division or sub-division in order that a body of experts in

this particularly important area might be created and maintained.

This would have the result of ensuring consistent treatment of

applications for licences, and would also help to keep the backlog

of applications down to a minimum.

The Commission’s Legal Divison, consisting of only nineteen persons,

has responsibility, inter alia, in the areas of interpretation of

legislation and regulations, the approving of trust deeds for

interests other than shares or debentures, the enforcement of the

various acts administered by the Commission, and the provision ofX62legal advice in respect of securities industry and other matters.

While it is advantageous for a securities regulatory body to have

a separate legal division, it would appear beneficial to have one

1217

or more legal officers seconded to the recommended separate division

dealing with the granting of licences under the securities industry-

legislation. This would have the two-fold benefit of relieving the

Legal Division itself of portion of its area of responsibility and

also allowing the proposed Licensing Division to maintain its own

self-sufficient legal expertise in this increasingly complex, yet

crucial, area.

The Corporate Finance and Accounting Division, also numerically16 3small (21 persons) has primary responsibility for the accounts

and audit provisions of the companies legislation but deals also with

draft prospectuses, Section 82 statements and numerous requests for

dispensation from the accounts provisions.

The separation of this accountant-oriented division from the

Commission’s legal staff was recently criticised by the Assistant

Commissioner (Legal) on the basis of, inter alia, his experience of

the lawyer-oriented United States Securities and Exchange 165Commission. Although suggesting that "better results might have

been obtained if some of the work now undertaken exclusively by

accountants in the Corporate Finance and Investigation Divisions was166done jointly by a team consisting of accountant and lawyer,” he

did concede that there may be problems in officers of one discipline

supervising the work of others of a different discipline, that the

cost of consulting lawyers at all stages of the work of these

Divisions would be substantial and that in any event enough suitable

1218

16 7lawyers could probably not be found. Yet the system criticised

by the Assistant Commissioner in its operation in the New South Wales

Corporate Affairs Commission is essentially that which is utilized by

the Securities and Exchange Commission itself, with its separate

office of the General Counsel and Office of the Chief Accountant.

The SEC has continued to maintain these two divisions as separate

entities, (a great deal of the work of each being unrelated to that

of the other) on the basis that the skills and experience of the

personnel of each are available to the other when required.

It seems to this author that, as one is dealing with essentially

different disciplines concerned with the interpretation and adminis­

tration of different aspects of the regulatory legislation, these

disciplines should be allowed to develop their own expertise and

should utilize the skills of the other profession only when they

find it necessary or advantageous to do so. Little would be gained

by imposing an unnecessary degree of control by lawyers upon accoun­

tants concerned with what is, in the great majority of its many

facets, basically an accounting task.

The Investigation and Prosecution Division of the Commission has a

substantial staff (63) and is responsible, inter alia, for the168carrying out of investigations and special investigations and

for initiating prosecutions for breaches of statutory provisions.

On the figures made available by the Commission, however, there

seems to be a grossly disproportionate amount of time invested in

what might be regarded as the less serious offences, while many of

the most serious company scandals go either uninvestigated, not

publicly reported upon, or unprosecuted. While it is conceded that

such serious matters are often extremely complicated and require

the investment of large investigatory resources and much time, it

would seem to be slightly disproportionate that although 3936

matters were prosecuted summarily during the year, 2544 of those169completed related to failure to lodge an annual return. During

the same time period only ten proceedings alleging indictable

offences involving ninety charges were instituted against seventeen

persons. Of the indictable matters in which a result was obtained

during the calendar year, the activities of only seven companies

and one partnership were involved.17^

Part of the reason for the difficulty in respect of the more serious

matters has been attributed to the reluctance of the State’s

Attorney-General to table reports of company investigations, and

part may be attributable to the fact that the Commission’s investi-

gatory staff have jurisdiction only within the borders of the

State, unless they go through the rather complicated procedure of

being appointed an inspector in another state. Some of the diffi­

culties resulting from the latter state of affairs are discussed

below.172

This Division also undertakes the important task of maintaining

constant surveillance over presumably randomly selected stocks

upon the Sydney Stock Exchange, in an effort to locate unusual stock

movements which indicate undesirable market activity necessitating173further investigation by Commission staff. This particular

function of the Commission is of great importance, as unless such

movements are monitored, much of the market manipulation which does

occur will go undetected. One would have hoped that a similar

monitoring function would also be carried out effectively by the

stock exchanges themselves.

The Commission’s only Branch, as distinct from Division, is the

Administrative Services Branch, which is responsible for staff

instruction and rotation and for the encouragement given to staff

members of the Commission to pursue tertiary and other education 174courses.

Finally, the New South Wales Attorney-General, in February 1972,

formed a Corporate Affairs Advisory Committee in order that a

closer relationship might be established between the Commissioner

for Corporate Affairs and the principal organizations concerned with

companies and securities legislation. This body, which meets

monthly, is comprised of representatives of the following organi­

zations: The Australian Society of Accountants, The Institute of

Chartered Accountants in Australia, The Institute of Chartered

Secretaries and Administrators, The Institute of Directors in

Australia, The Law Society of New South Wales, The New South Wales

Bar Association, The Sydney Stock Exchange Limited, The Department

1221

of Accountancy of the University of Sydney and the Faculty of Law

of the University of New South Wales. The Attorney-General indi­

cated, in a Press Release on February 17, 1972, that the functions

of the Committee would be:

(a) To establish a working association between the Commission and the principal organizations concerned with the operation of corporation and securities laws.

(b) To act as a medium for the exchange of views on problems relating to the interpretation, practice and procedure arising under all areas of the legislation administered by the Commissioner.

(c) To provide advice on various matters referred to it by the Commission including those arising out of the dispensation provisions introduced by the Companies (Amendment) Act, 1971.

(d) To assist generally in the dissemination of infor­mation concerning the legislation administered by the Commission.

(e) To act as a medium for the ventilation of grievances by members of the organisations represented on the Committee and the submission of suggestions for improvements in the services rendered by the Commis'sion to the public by means of which the official members of the Committee might gain some new insights into the operation of the corporate system flowing from the practical experience of the outside members of the Committee.

This Committee has enabled a valuable exchange of views between the

Commission's staff and the representatives of diverse interested

bodies to take place. The formation of the Committee has even been

applauded by a proponent of federal, as distinct from State,

regulation, the Chairman of the Senate Select Committee on Securities 175and Exchange.

1222

While it is arguable that the creation of the Advisory Committee

was motivated by the desire of the state government to prevent

federal intervention in this field (by establishing a more compre­

hensive state regulatory mechanism) the Committee has served a use­

ful purpose. It has enabled a valuable process of communication to

be established between the officers of the Commission and represen­

tatives of various interested industry bodies on such important

matters as the policies to be applied by the Commission in adminis­

tering the licensing provisions of the securities industry

legislation, the problems associated with the occurrence of mis­

leading statements in prospectuses, and the issue, by auditors, of176qualified audit reports.

3. Location

As will be obvious from the above description of the Corporate

Affairs Commission, its jurisdiction is-essentially limited to those

facets of the Australian securities industry located within, or those

transactions which take place within, the State of New South Wales.

As similar restrictions apply to equivalent bodies in other Australian

states, the problems which arise in thus attempting to regulate a

national industry require little imagination to perceive.

While these problems occur in many areas of regulatory administration,

they are particularly evident, for example, in the carrying out of

investigations by an inspector appointed in one state, into the

1223

activities of a company which also carries on operations in a number

of other states. Despite the existence of an "informal network

arrangement" among inspectors employed by the administrative bodies

in the various states, it is necessary for an inspector from one

state to be appointed a special inspector in another state before he

may be granted formal access to the records of a company incorporated177in that second state. Such an appointment must be requested

through the Attorney-General of the first state, to his counterpart

in the second state, who, on the advice of the head of his companies178administrative body, will accept or reject the request. Although

as a matter of convention such requests are granted by one Attorney-

General to another, the time delays involved may be substantial and,

when accompanied by the other statutory restrictions upon the powers 179of inspectors, may be expected to work against the expeditious

detection or prevention of company malpractices.

The validity of the criticism expressed above in relation to the

interstate investigatory process has been denied by the New South180Wales Commissioner for Corporate Affairs, who argued, inter alia,

that the New South Wales procedures compared favourably with those181followed in both the United States and the United Kingdom.

While it is clear that any comparison between the results of the

procedures utilized in those jurisdictions would be influenced by

a large number of extraneous factors, such as the number of inves­

tigatory personnel available, the complexity of the offences

1224

involved, and the sophistication of the statutory provisions under

which the investigators operated, it appears to this author that

neither time nor the weight of argument is on the side of the New

South Wales Commissioner for Corporate Affairs.

His argument is answered in part by the references made to the

experience of the United States and the United Kingdom, as in both

of those jurisdictions investigatory procedures are effected uni­

formly, in the former through the agency of the SEC administering

federal legislation, and in the latter because the problem of

conflicting federal and state jurisdictions simply does not exist.

It cannot be seriously contended in this situation that a procedure

whereby approval must be obtained for an inspector from one state

to investigate the affairs of a company in another state can compare

favourably with procedures adopted in jurisdictions not encumbered

by such artificial boundaries. Despite the ’last ditch stand’

approach adopted by the Commissioner and others, the significant

benefits of the inevitable introduction of federal legislation in

this area are becoming increasingly apparent.

It is for this reason all the more alarming that the governments of

New South Wales, Queensland, Victoria and Western Australia recently

formed an Interstate Corporate Affairs Commission designed ostensibly

to co-ordinate their company laws and to show "the ability of the

states to work together in a spirit of compromise, in the cause of182co-operative federalism." The formation of this body by the four

1225

states which are currently governed by non-labour parties, can

realistically only be seen as an attempt to exhibit a show of

uniformity to detract from the argument, based upon the lack of

state uniformity, which will inevitably be used to justify federal

securities legislation. As it is not even proposed that the existing

state regulatory bodies be fully emerged, the move cannot be expected

to be any more successful in achieving uniformity than the existing

state bodies have been to date.

B. The United States Experience

1. Composition

183

Because of its undoubted success in the general administration of the

federal securities laws in the United States, the Securities and

Exchange Commission (SEC) has been the model usually referred to

by persons advocating the creation of a federal regulatory body in

Australia. Often such references to the SEC are made without

adequate background knowledge of its powers and functions or its

weaknesses; it is assumed to be a form of omnipotent regulatory

mechanism, the creation of which, in this country, will immediately

resolve the problems facing our securities industry.

The reality of the situation is, however, that while the SEC has

performed extremely well in the United States context, it is not

readily adaptable in all its aspects to the Australian situation;

its features must be individually analysed and considered, and only

those suitable to Australian conditions adopted into any new federal

regulatory body created in this country. Additionally, cognizance

must also be taken of criticisms levelled at the operations of the

SEC; these must be evaluated and, again, their relevance to the

Australian situation assessed.

In respect of its composition, the SEC provides both positive

and negative lessons for Australia. The Securities Exchange Act of

1934 established a Securities and Exchange Commission, to be

composed of five commissioners, to be appointed by the President

by and with the advice and consent of the Senate. These Commis­

sioners, not more than three of whom are permitted to be from the

same political party, are each appointed for a term of five years,

and are precluded during that time from engaging in any other

business, and specifically from participating in any stock market

operations or transactions which are subject to regulation by the

Commission under the Act.

The Commission is responsible for the administration of six statutes

and has advisory powers under a seventh. It is directly responsible

for the Securities Act of 1933, the Securities Exchange Act of 1934,

the Public Utility Holding Company Act of 1935, the Trust Indenture

Act of 1939 and the Investment Company Act and the Investment

Advisers Act, both of 1940. Its advisory function relates to

corporate reorganization under Chapter X of the Bankruptcy Act.

1227

The Commission’s staff consists of three divisions and a number of

offices and there are nine regional offices and seven branch offices

throughout the United States. The Division of Corporate Finance is

responsible for handling filings under the Securities Act, the Trust

Indendure Act and the Investment Company Act, registration state­

ments and issuers' periodic reports under the Exchange Act, and proxy

statements and insiders' ownership reports under that act as well as

the Holding Company and Investment Company Acts.

The Division of Trading and Markets administers the balance of the

Securities Exchange Act of 1934, together with the Investment

Advisers Act of 1940, and the third Division, that of Corporation

Regulation, is responsible for the administration of the Commission's

obligations under the Holding Company Act and the Investment Company

Act, as well as Chapter X of the Bankruptcy Act.

The Office of the General Counsel represents the Commission in

judicial proceedings, advises other Offices and Divisions of the

Commission on legal matters and on occasions intervenes in procee­

dings between private parties under those statutes administered by

the Commission. The Office of the Chief Accountant is responsible,

inter alia, for establishing and maintaining high and uniform

accounting standards in respect of financial statements filed with

the Commission and for specifying minimum audit requirements for

certain brokers and dealers.

The Commission's other major Office, that of Policy Research, has

general analysing, recommending and reporting functions in respect

of the securities markets, while its smaller Offices are those of

Opinions and Review, Data Processing, the Controller, Personnel,

and Records and Service.

The Commission’s structure of three major divisions is thus not of

direct relevance to Australia, as it is based upon a need to dis­

tribute amongst divisions the administration of a large number of

statutes, some of which have no parallels in Australian legislation.

While the Commission has adopted this particular policy, however,

it is important to note that the major filings required under the

1933 and 1934 acts are all controlled by one Division, that of

Corporate Finance, and thus it is possible for that one Division

to centrally administer this particular aspect of the regulatory

procedure.

Additionally, the Commission has, wisely in this author's view,

maintained a clear distinction between its legal and accounting

arms. Its Office of the General Counsel and Office of the Chief

Accountant are each concerned with important, but essentially sepa­

rate, aspects of the overall regulatory scheme. As such they are

able more clearly and more efficiently to perform their respective

functions than would be the case under the type of integrated184system discussed earlier in this chapter.

While the Commission’s various divisions have for the most part

functioned effectively against the United States statutory back­

ground, its collegial structure has not escaped criticism. The185President's Advisory Council on Executive Organization in its

comprehensive 1971 r e p o r t ,argued that that collegial struc- 187ture had impeded the Commission's ability "adequately to

respond to the growing needs of the securities industry and the 188investor ..." , and that it conflicted with comprehensive policy-

189making and contributed to delays.

Although not providing specific illustrations of the manner in which

collegial decision-making did in fact contribute to delays, the Ash

Report recommended that the Commission be transformed into a190Securities and Exchange Agency, headed by a single administrator,

whose responsibilities would include all executive functions such as

internal management, policy making within guidelines established by

Congress and the President, disposal of summary actions not

requiring notice and hearing, the introduction of rules and regu­

lations, the granting of exemptions and the analysis of securities

problems, the making of recommendations to Congress on proposed

legislation and the bringing of actions to enforce the regulatory191provisions administered by the agency.

It is necessary to take issue with some of the alleged benefits

which the Ash Report proposed would flow from the appointment of a

single administrator. First, it was argued that a single adminis­

trator would be likely to attract "highly qualified individuals

having the training and experience to deal with the complexities192now facing the agency". It is, to this author, doubtful that a

higher calibre administrator would be attracted to the Commission

simply because the position involved that of one single adminis­

trator rather than five. Even if this were true, it would remain

to be established that one excellent single administrator would be

more beneficial for the Commission and for the securities industry

generally than would the collective experience of five adminis­

trators, particularly in the light of the excellent calibre of

Commissioner which the Commission has historically managed to 193attract.

Secondly, the Ash Report argued that because a single administrator

would be more "visible" than a collegial body, he could be expected194to be more responsible than such a body in his decision making.

Again, no evidence is produced to establish that this is, or would

be, the case, and it is difficult to see why it should be so.

Thirdly, it was argued that "as a result of the administrator’s

increased direction and authority, the agency would be able to195attract and retain operating personnel of the highest caliber."

It was, however, not indicated what his "increased direction"

actually comprised and it was not explained why his (arguably)

increased authority would attract the highest calibre personnel.

In fact, it was acknowledged that the Commission has throughout

1231

its history attracted the highest calibre personnel, because,

initially, of the challenge involved in establishing a new regula­

tory agency and, subsequently, the excellent reputation which the

Commission has maintained; because of the high salaries which it

has been able to pay; and because it has facilitated and encouraged

the practice, especially amongst lawyers, of service in the

Commission for a number of years, before, or as a change from, pri­

vate practice in the securities field.

Despite the frailties in the arguments advanced by the Ash Report

in support of its recommended appointment of a single administrator

in place of the collegial structure (which recommendation has not,

at the date of writing, been acted upon by the United States

Government) this author is attracted towards the initial appointment

of only a single administrator for the proposed Commonwealth Securi­

ties Commission. While the collective wisdom of a number of

Commissioners may well be of advantage, particularly in adminis­

trative proceedings, at a later stage of the Commission’s develop­

ment, its initial impetus and character would best be created by a

single Commissioner, invested with the necessary powers and

unrestricted by the need to reach consensus on important and other

decisions with a number of other Commissioners. This initial free­

dom of action would facilitate the establishing of the Commission

itself, the laying down of policy guidelines and the recruitment of

staff. It would also be necessary for such a Commissioner to obtain

first-hand experience of the functioning of bodies such as the

SEC and it is not thought that this could be adequately carried

out by all of the members of the collegial body. For these

reasons, it is recommended that the proposed Commonwealth Securities

Commission comprise not more than one Commissioner, at least in its

formative stages.

2. Location

While the Commission’s headquarters are located in Washington

D.C., it has regional offices in New York, Boston, Atlanta, Chicago,

Fort Worth, Denver, San Francisco and Seattle, and branch offices

in Miami, Cleveland, Detroit, St. Louis, Houston, Salt Lake City

and Los Angeles. These offices have authority to carry out inves­

tigatory and enforcement work and to report thereon to the Division

of Trading and Markets and the Office of the General Counsel in

Washington. They also have authority to receive certain documents

for filing and to give interpretative advice to members of the

public.196

It is proposed that this basic format should be followed in

Australia, with the bodies now forming the various state adminis­

trative agencies providing the personnel and other facilities for

federal regional offices. In order to avoid the variation in state

interpretation of the one supposedly "uniform" companies statute

which now exists, it is proposed that such regional offices be

vested with little discretionary power and that all policy decisions

be formulated at the Commission's head office in Canberra. This

proposal does, of course, assume that valid constitutional power

exists for the federal government to effectively legislate in this

area.

All filings in respect of the issue of prospectuses and the use of

proxy statements, applications for licences as brokers, dealers

and investment advisers, and continuous reporting documents could

be effected at regional office level, in accordance with the one

policy formulated at the headquarters of the Commission itself.

All matters relating to the proposed National Stock Exchange should

be dealt with at the Commission, as with the creation of that

national body, control of the exchange will be best effected at

federal rather than at state level. Even if that national stock

exchange body were not created, it is recommended that control of

the various exchanges be effected at federal level, as state

control of the exchanges has, at least to date in Australia, lead

only to inconsistencies in administration and to some rather197parochial statutory provisions.

All matters involving appeals against decisions of the regional

bodies in matters such as the grant or renewal of licences etc.,

would be dealt with in Canberra, and the necessary degree of

uniformity thus established and maintained.

1234

C. Other Jurisdictions

1. Canadian Provincial Regulatory Bodies

(i) Composition

0£ the existing provincial securities regulatory bodies in Canada,

by far the most important are those of Ontario and Quebec. The

former was able early to establish a pre-eminence in the Canadian

regulation of securities trading (partly through the advanced

nature of Ontario’s securities legislation) which has remained

unchallenged to date. The Ontario Commission is composed of

a Chairman and a maximum of seven Commissioners (one of whom

serves as a Vice-Chairman) together with a Director, who is

the chief administrative officer, and Deputy Directors of198Filing, Registration and Administration. The Chairman and

Vice-Chairman are required to serve full-time, but the other

Commissioners may operate on a part-time basis provided that they

are able to fulfil their obligations as Commissioners.

The importance of the structure of the Ontario Securities Comm­

ission for Australian legislators lies in the fact that the

Chairman has been accorded a dominant role as the chief

executive officer, and that the Commission is not comprised

of a number of Commissioners who are of equal standing and

authority, all of whom must be consulted before any policy199decisions may be reached. As such, it is in accordance

with this author’s recommendations for the structure of the

1235

proposed Australian Commonwealth Securities Commission.

The Quebec Securities Commission, the second regulatory body in

Canada in terms of both expertise and commercial significance,

is comprised of a full-time Chairman and two full-time Commiss^

ioners.^^ While the powers of the Chairman are not as clearly

differentiated from those of the other Commissioners as they are

in Ontario, the Chairman is provided with a casting vote where

the quorum of two on any matter is evenly divided.

Thus, in both of these important jurisdictions (the former

admittedly more than the latter) there is an emphasis placed

upon the role of the Chairman, which emphasis should be

incorporated in future Australian securities legislation in

this area.

(ii) Location

The Canadian experience offers little of value to Australia in

this respect, as its provincial bodies parallel the current

state regulatory bodies in this country.

Dickson did, however, recommend in his study that his proposed

Dominion-Provincial Securities Commission have regional offices

in each provincial capital and that it absorb existing pro- 201vincial staffs. Again, this recommendation is in accordance

1236

with this author's proposals for the Australian Securities

Commission.

2. Regulation by Government Department: the United Kingdom,Japan, India and Thailand

In each of these countries, regulation of the securities markets

is effected through a body other than a semi-governmental reg­

ulatory agency of the type proposed for Australia. Because of

the conclusions reached earlier in this study as to the desirable

nature of a securities regulatory body^^ their experience is

not directly relevant to this study's proposals for the

introduction of a regulatory agency into Australia.

3. Asian Administrative Bodies * 203

(i) The Philippines

The Philippines Securities and Exchange Commission was established203by the Securities Act of 1938 and was based primarily upon

the United States model. It differs from its model in two

important respects, however. First, it is not as independent

as the United States body, being formerly under the executive

supervision of the Department of Justice, and now under the

executive supervision of the Department of Commerce and Industry.

Secondly, and more importantly, it foreshadowed the recommendation

of the Ash R e p o r t , b y appointing only one Commissioner and not

five, and thus managed successfully to avoid the problems which

have resulted in the United States from the collegial structure

of that country’s regulatory agency.

Again, the Philippines’ practical experience, since 1938, is in

line with this author’s recommendations for Australia.

(ii) Hong Kong

The 1971 Investor Protection Report recommended the appointment

of a Commissioner for Securities to perform the functions of

the Colony’s corporate and securities licensing authority,

and indicated that there would be advantages in that person205being also the Registrar of Companies. In accordance with

the Report’s recommendation, a Mr. James Selwyn was appointed

Commissioner for Securities in early 1973.^^

207The Colony's new Securities Ordinance 1974 continued the office208of Commissioner for Securities, creating also a Securities

Commission comprised of the Commissioner, the Registrar of209Companies and five other persons to be appointed by the Governor.

Hong Kong has thus adopted and maintained the broad form of

regulatory agency structure recommended by this author for

Australia, viz., a body which is under the direction of one

Commissioner who, although he is accompanied by other Commissioners,

1238

has the primary responsibility for the functioning of that regulatory

agency.

(iii) Malaysia and Singapore * 210 211 212

Malaysia and Singapore have, in their regulatory mechanisms, followed

a course of action which is mid-way between the governmental

regulation of Japan, India, the Philippines and Thailand on the one

hand, and the securities commissions of the Philippines and Hong Kong

on the other.

210Malaysia’s Securities Industry Act of 1973 preserves the role and

function of the Registrar of Companies and, rather than create a

separate securities commission, provides for both the Minister and

the Registrar to consult from time to time with a panel of experts211known as the Capital Issues Committee.

Singapore has enacted a similar provision, with the Minister and

Registrar being able to consult the Monetary Authority of Singapore

on appropriate matters, as well as the recently formed Securities

Industry Council, designed to be a consultative and advisory rather212than a regulatory body.

Thus in neither of these two jurisdictions has a regulatory agency

of the type recommended for Australia been established; their

experience is thus of greater relevance to the proposed formation

of an Asian regional securities body than it is to the proposed

1239

formation of such a body in Australia.

D. Conclusions

1. Australia

213For the reasons expressed above this author recommends the

establishment of a Commonwealth Securities Commission in

Australia consisting, in part, of one Commissioner for

Securities, rather than a collegial structure such as is

found in the United States SEC. While a number of Assistant

Commissioners should also be appointed, it is crucial that the

early decision and policy making process be centred in the

hands of one individual rather than a committee of Commissioners.

The creation of a commission or regulatory body administered

primarily by a single, rather than a number of Commissioners or

Administrators, would be in accordance with the recommendations

of the Ash Report, certain Canadian provincial experience, and

the practice followed in both the Philippines and Hong Kong.

It is suggested that in addition to the Commissioner for Securities,

four Assistant Commissioners be appointed, each having responsib­

ility for the administration of one of the Divisions of the

Securities Commission. While these assistant Commissioners

would report to the Commissioner and would, with him, constitute

the final appellate organ within the Commission, final responsibility

for overall policy-making should rest with the Commissioner

himself, within the guidelines established by the appropriate

legislation.

The Commission should be comprised of four major Divisions and

two offices, constituted as follows. There should be a

Distribution Division, with responsibility for the control of

the issue of securities to the public. This Division would

approve or reject prospectuses and preliminary prospectuses,

approve or disapprove of proposed directors of public companies

and approve or disapprove advertising and other literature

which issuing companies wished to distribute. The advantage

of establishing a separate division with responsibility in

this area alone is that a degree of expertise could be built

up which would ensure, over a period of time, that maximum

investor protection was available in relation to the public

issue of securities. This Division would have to liaise with

the Stock Exchange Division in determining the listing

requirements to be applied by the proposed National Stock

Exchange.

Secondly, there should be a Secondary Market Division with

responsibility for overseeing the operations of the secondary

market. Its function would include the random stock surveillance

now carried out by the New South Wales Corporate Affairs

Commission, the regulation of aspects of post-distribution

trading such as short selling, proxy regulation, insider trading

etc. This Division would also receive and process the continuous

disclosure material required to be filed with the Commission by

all public companies and would, as necessary, disseminate that

material.

Thirdly, a Stock Exchange Division would need to be created,

with responsibility solely for regulating the activities of

the National Stock Exchange, if this author's recommendations

are accepted, or if not, of Australia's current exchanges.

This Division would formulate membership requirements for

the exchange as well as listing requirements, and ethical

standards for exchange members. It would also be responsible

for the maintenance of a fair market on the exchange, and would,

in this respect, have the power to suspend securities from

trading, and to suspend or revoke the membership of individual

brokers.

Fourthly, the final Division should be the Licensing Division,

with responsibility for the granting of licences to brokers,

dealers and investment advisers and the suspension or revocation

of those licences. This Division would be concerned solely with

those functions, as the increasing frequency of the applications

for such licences, combined with their increasing complexity,

will require a level of both administrative efficiency and skill

which would not be obtainable if the work were to be handled

by a number of divisions.

Finally, the Commonwealth Securities Commission should also

comprise two Offices, the Legal Office and the Accounting

Office. The former would be responsible for the provision

of legal advice to the Commission, for instituting prosecutions

where necessary, and for appearing on the Commission's behalf

in litigious proceedings. Additionally, it would have the

function of preparing and distributing policy statements on

behalf of the Commission. It would also carry out any necessary

investigatory work in relation to company malpractices, etc.

The Accounting Office would be responsible for formulating the

accounting standards necessary for all new issue and reporting

documents and for preparing industry guidelines in relation to

statutory accounting requirements.

This proposed structure of the Commonwealth Securities Commission

would ensure that all important aspects of securities, as

distinct from companies, regulation were handled by self-

contained divisions which were able, by concentrating their

attentions upon a particular area of responsibility, to

develop expertise within that area. As the role of a body such

as the proposed Commission will be unavoidably difficult, every

advantage must be taken of opportunities to provide it with

1243

the most workable administrative structure.

The Securities Commission should be located in Canberra, and

should have regional offices in each of the state and territory

capital cities. The structure of the United States SEC,

with its regional and branch offices, provides a suitable

example for Australian legislators to consider. These regional

offices should function as bodies designed to effectively

implement the policies of securities regulation formulated

either in federal legislation or by the headquarters of the

Commission itself, and should be vested with only limited

discretionary powers in the interpretation of those policies.

The placing of strict limitations upon the extent of discretionary

powers available to the regional bodies will assist in the

prevention of the interpretative and administrative differences

which have developed amongst the various state regulatory bodies

in their efforts to uniformly administer the "uniform” companies

legislation.

The problem of staffing such federal regional offices with

adequate personnel possessing the necessary expertise in this

area could not be accomplished without recruiting trained staff

from the existing state regulatory bodies. If valid federal

legislation regulating securities trading were enacted, however,

and this regulatory area were thus removed from the jurisdiction

of the states, there would be compelling reasons for such

experienced personnel to continue their work under federal,

rather than state, direction. It is hoped that with the

inevitable introduction of federal legislation in this area,

many such persons will make their expertise available to the

federal government in an attempt to create a viable, uniform

regulatory structure which will be of enduring benefit to

Australian investors and to the Australian securities markets

generally.

2. The Region

It is proposed that, as an early measure designed to effect a

degree of uniformity in securities regulation amongst countries

in the Asian region, an Asian Securities Commission be formed.

Such a body should have as its primary objective the gradual

standardization of regulatory mechanisms and procedures in the

various Asian countries in order that, for example, an issue

of securities in one country would automatically be quoted on

the stock exchanges of other countries, or that a broker

licensed in one country would be entitled to deal in securities

in any other member country. Additionally, the Commission should

have as one of its objectives the provision of expertise and

other assistance by those countries whose regulatory systems

are well-established and reasonably sophisticated (such as Japan

and Australia) to those countries which are only now developing

the need for more comprehensive regulatory procedures (such

as Indonesia and Thailand).

The Asian Securities Commission should consist of a Securities

Commissioner, appointed by the member countries, together with

a small number of assistant commissioners, each to be responsible

for the operations of a particular section of the Commission’s

activities. The major areas of the Commission's concern could

well be those recommended for the proposed Australian body,

viz., (1) the distribution of securities; (2) control of

post-distribution trading in securities; (3) registration of

stock exchanges; and (4) registration of operators within the

securities markets. In this case, four assistant commissioners

would be necessary. In order that the overall objectives and

policies of the Commission might be formulated in a manner

acceptable to member countries, it is suggested that a

governing body in the form of an Assembly or Council, be formed,

and that they meet regularly, for example every six months, to

formulate or review Commission policies. Each member government

would appoint a representative to that Council or Assembly, who

might be the Commissioner for Securities, Minister of Finance,

etc., for that particular country.

The variation which currently exists in the type of regulatory

body utilized in various Asian countries, from full governmental

regulation to semi-independent securities commissions, would

not preclude each country from appointing a representative

to such a governing body.

It is proposed that such a body be located in Hong Kong. This

location appears most favourable to this author because of the

Colony's position as a leading Asian business and financial

centre, because of its recent moves to ensure the adequate

regulation of its own securities markets, because of its

central geographic location, and because of its relative

political stability. The headquarters of the proposed Comm­

ission, located in Hong Kong, could issue policy directives,

suggestions, etc., which would be implemented through the

various forms of regulatory mechanism, government or other­

wise, existing in each member country. There would thus be

no need for the creation of regional bodies of the Commission

in each of these countries.

While it is conceded that the proposal to create such a body

is one which will require detailed consideration, particularly

in respect of the difficult question of the sovereignty of

individual countries in such matters, the potential benefits

which it offers are immense. Standardization of securities

distribution procedures and broker-dealer licensing require­

ments, for example, would give a degree of flexibility to

capital market operations in Asia which does not exist anywhere

1247

on the international financial scene. There seems to be no

reason why Asia should not take the initiative in this

significant field.

on the international financial scene. There seems to be no

reason why Asia should not take the initiative in this

significant field.

1247

VI. POWERS OF PROPOSED REGULATORY BODIES

A. The Situation in Australia

1. The New South Wales Example * 214

The New South Wales Corporate Affairs Commission, the body214which, for reasons detailed above, is utilized in this

study as an example of Australian state regulatory agencies,

is given different powers under the various statutes which it

administers. For the purposes of this study, the most

important of those statutes are the Companies Act and the

Securities Industry Act.

Under the former, the Commissioner for Corporate Affairs is

given powers in respect of, inter alia, the registration of

companies; the inspection of books of account, minute books and

other records; the carrying out of investigations and special

investigations into the affairs of companies; and the laying

of informations against companies and individuals in those

situations in which offences are believed to have been committed.

The Commissioner’s powers under this legislation are similar,

at least in terms of their statutory basis, to those granted to

securities administrators in other Australian States.

While these statutory powers give the Commissioner an arsenal

of weapons with which to combat company malpractices and

protect the interests of investors, their effectiveness is

severely limited because of the fact that the powers operate

only within narrow State boundaries. They cannot, without

additional and often complex and time consuming steps being

taken, affect the operations of companies or individuals

outside the borders of New South Wales. Similar problems

are, of course, faced by securities administrators in other

States.

Under the Securities Industry Act of New South Wales the

Commissioner is given powers in respect of, inter alia, the

inspection of books and records of licencees (and others

whose books relate to that licencee's business), the

investigation of certain stipulated matters; and the appoint-215ment of inspectors to investigate particular matters. In

addition, of course, the Commissioner is given power under

this legislation in respect of the granting and renewal of

licences to operate as dealers, investment advisers and

representatives (and the imposition of conditions or

restrictions in relation thereto) and the granting of

approval to stock exchanges. While provision is made for216the reciprocity of some of the Commissioner’s powers,

the value of this provision is limited because of the fact

that not all of the Australian States and Territories have

introduced legislation vesting in their regulatory agencies

powers similar to those vested in the New South Wales

Commissioner.

Thus the powers exercised by the New South Wales Commissioner

for Corporate Affairs are essentially administrative or

regulatory powers; they do not extend to what may be classified

as judicial or quasi-judicial powers. In respect of the latter

powers, application must be made by the Commissioner to the

appropriate court for, for example, the grant of an injunction

to restrain the activities of particular companies or individuals.

The limitations which operate upon the powers of this state

regulatory agency in this area are, unfortunately, even more

evident in the federal sphere.

2. The Federal Problem * 217

As indicated above in the examination of the constitutional

limitations upon the powers of the proposed Commonwealth217Securities Commission, any such administrative body is

precluded by the currently accepted principles of constitutional

interpretation in this area from exercising the judicial power

of the Commonwealth. Such a prohibition would, prima facie,

preclude an administrative body from enforcing compliance

with its orders by imposing fines, or attempting to punish

for contempt.

While the concept of quasi-judicial power, as interpreted

primarily in decisions relating to the Commonwealth's218Taxation Boards of Review, may provide some relief

from this unfortunate situation, the existing adherence to

the strict separation of the judicial power will continue,

(until its overruling) to restrict the range of powers

available to the proposed Commonwealth Securities Commission.

Although a resolution of this problem can only be found in

a different approach to the interpretation of this aspect

of the Australian Constitution, it is instructive to examine

the range of regulatory powers which are possessed by

similar regulatory bodies in other jurisdictions. Primary

attention is accorded in this respect to the United States'

SEC, with a brief discussion of the powers utilized in

Canada, the United Kingdom and the subject Asian countries.

B. The United States

219As indicated above, the United States is in the fortunate

position of both having adopted an Administrative Procedure Act

and of having accepted a more rational interpretation of its

Constitution's judicial power. This has resulted in the

Securities and Exchange Commission, in effect, functioning

as a quasi-judicial body, and as such, possessing a commendably

wide range of powers with which to effectively regulate the

Untied States securities markets.

1. Administrative Powers * 220 221 222 223

Administrative proceedings conducted by the Commission are

subject to the Commission's own Rules of Practice and to Title 5

of the United States Code, formerly the Administrative Procedure220Act. These are designed to provide the normal "due

process" requirements to all parties appearing before the

Commission, and relate, inter alia, to the giving of adequate

notice of proceedings and particulars of charges, the right

to be represented by counsel and the right to present evidence

and cross-examine witnesses.

221The Commission is in fact a quasi-judicial body. Its

administrative hearings, which are commonly concerned with

disciplinary proceedings against broker-dealers, or stop-order222proceedings under the Securities Act of 1933 , are conducted

223initially by one of its Hearing Examiners. He has power to

admit or reject evidence, to regulate the conduct of the

hearing, to issue subpoenae (both ad testificandum and duces

tecum) and to rule on applications and motions made in the

course of a hearing.

At the conclusion of a hearing, the parties may urge the

Examiner to adopt specific findings of fact and conclusions

of law. The Examiner then makes an initial decision in­

corporating an order, copies of which are served on the

parties concerned. In the absence of the filing of a petition

for review by a party, or the Commission on its own initiative

ordering review, this initial decision becomes final and the226order made by the Examiner becomes effective. According to

Loss, the initial decision is usually waived by the parties

in proceedings under the Holding Company and Investment Company

Acts, in favour of a more flexible procedure involving neg­

otiations with Commision staff and the preparation of evidence

and submissions for argument before the Commission.

Where, however, an initial decision is made and review is

ordered, the parties may file submissions and present oral

argument to the Commission, which then makes its own decisions.

Appeal lies from decisions of the Commission to the appropriate228United States Court of Appeals. Under the Securities Exchange

Act of 1934 appeal lies only at the initiative of parties who229are aggrieved by a Commission order, but under the other

acts administered by the Commission it lies at the initiative of

224

1254

any "person aggrieved" by such an order. Title 5 of the United 230States Code, provides that "Agency action made reviewable by

statute and final agency action for which there is no other

adequate remedy in a court are subject to judicial review. A

preliminary, procedural, or intermediate agency action or

ruling not directly reviewable is subject to review on the review

of the final agency action." The exact scope of this provision231has, however, not finally been resolved.

Although the procedure (which the Commission adopted early in

its history) of issuing written staff opinions has been

modified in that they have been generally replaced by "no 232action" letters, its procedure of issuing policy or inter­

pretative releases from time to time has been maintained and233is, apparently, to be continued.

The SEC also has important additional functions, as amicus 234curiae, and in relation to rule-making and the conduct of

investigations.

Each of the statutes administered by the Commission enables it to

make rules and regulations necessary for effecting its statutory

functions. Such rules must be published in the Federal Register

and no person may be adversely affected by a rule or regulation

required to be so published unless either it is so published,235or he has "actual and timely notice of its terms."

The Attorney-General’s Committee on Administrative Procedure 2 36in 1941^ divided the Commission’s regulations into three

categories:

(1) substantive implementing rules which are legislative and

not merely interpretative in character, for example, Regulation

A under the Securities Act or the regulatory rules which

implemented the Exchange Act provisions on short-selling and237solicitation of proxies;

(2) implementing rules detailing the forms of statements and

reports and required filing procedures;

(3) interpretative or definitional rules which authorise the238Commission to define ’’accounting, technical and trade terms".

Again, the United States experience is valuable for Australian

legislators, who must provide for wide administrative sanctions

in any federal regulatory body which is established. They must

also vest it with wide rule-making power, as no legislative

enactment, no matter how widely drawn, can hope to cover all

of the variations in factual situations which will inevitably

occur in the regulation of this complex industry.

2. Investigatory, Injunctive and Other Powers

The Securities and Exchange Commission has wide investigatory

powers under the Acts which it administers. Its investigations,

which may be instituted as a result of complaints from the public,

information received from other agencies, its own scrutiny of

documents filed with the Commission itself or its own surveillance

of the securities markets, are rather more like the American

grand jury procedure, than t r i a l s . T h e y may be conducted

before the Commission, one or more of its members, or any officer

designated by the Commission for the purpose of taking testimony241and receiving other evidence. Discovery and inspection

procedures are utilized, although the extent of the Government’s

power of privilege against discovery by private parties remains 242unresolved. Witnesses are entitled to be accompanied by

243counsel, although counsel’s role is not a completely un-t , 244limited one.

Once an investigation is completed, a number of courses of

action are open to the Commission.First, it may wish

to investigate other matters arising out of that initial

investigation. Secondly, it may itself commence

administrative or injunctive proceedings. Thirdly, it may

recommend criminal prosecutions. Fourthly, it may merely

publish a report of its investigation. Fifthly, it may

refer the subject of the investigation to a stock exchange

or the N.A.S.D. for disciplinary action. Finally, the

Commission may either utilise a combination of the above

courses of action, or it may take no action at all in the

239

matter.

The Commission has the power to issue subpoenae, under Section

21(b) of the Securities Exchange Act of 1934, and its equivalent

provisions in the other statutes administered by the Commission.

This power is supplemented by the power in the appropriate

district court to enforce the subpoenae and to punish for

contempt in the event of failure to comply with that Court's248order. According to Loss, the authority to issue subpoenae

has been delegated to the directors of the three operating

divisions.

The SEC statutes provide protection against self-incrimination

in basically the same terms as Section 21(d) of the Securities

Exchange Act of 1934. While this provision is of reasonable

clarity and certainty in relation to federal proceedings alone,

difficulties arise in relation to questions of immunity from

federal prosecution of those persons who compulsorily testify

under state process and vice versa. Two Supreme Court cases

decided in 1964 seem to have raised almost as many problems

as they have resolved.

The Securities and Exchange Commission is also empowered to

seek injunctions in certain circumstances. Its power is

conferred under each of its statutes, in terms substantially

in accordance with those of Section 21(e) of the Securities

It has been argued that theand Exchange Act of 1934.^^

scope of the Commission's injunction power has been construed

too widely and that, on the present composition of the252Supreme Court, it may be even further expanded. Certainly

253 254the recent cases of Globus International Ltd. and Holman

would seem to support this proposition.

3. Value of United States Experience

As in so many other areas of securities regulation, the

administrative practices and procedures adopted in the

United States provide valuable precedents for Australian

(and other) legislators concerned to introduce the most

efficient systems of securities control into their own

countries.

The United States SEC has been vested with an extremely

comprehensive range of regulatory powers, from its administrative

hearing procedures to its investigatory and subpoena powers.

While some of these characteristics of the SEC are peculiar

to the United States situation (such as the due process require­

ment in the administrative hearings) they do give an indication

of the range of powers which should be available to a body such

as the proposed Commonwealth Securities Commission.

The most important single feature to be revealed by an examination

of the powers of the SEC is, however, the fact that almost

all of its current powers would, under the present state of

Australian constitutional interpretation, be capable of being

vested in an Australian federal administrative regulatory agency.

For example, the form of administrative hearing conducted by

the Commission in its disciplinary proceedings against broker-

dealers, etc., would not be inconsistent with the form of the

hearings now conducted by the Taxation Boards of Review in

Australia. The latter are also predicated upon the adversary

system, and also involve the making of rulings on applications

and motions submitted during the course of the hearing.

Additionally, powers similar to the SEC's rule-making powers

could, with the present acceptance in Australia of the belief

that it is not necessary to strictly separate legislative and

executive powers, be vested in a federal regulatory agency.

These would provide flexibility in the promulgation of regul­

ations needed to cope adequately with rapidly changing market

conditions and practices.

The SEC's investigatory powers are paralleled, at least to

some extent, by existing State provisions throughout Australia,

and there would not seem to be any reason why similar powers

could not be vested in a federal body. The same principle is,

of course, applicable to the SEC’s power to seek injunctions;

this power is currently available to State regulatory bodies in

1260

Australia and would be available, through the appropriate court

machinery, to a federal regulatory body.

Finally, however, the SEC’s power to issue subpoenae, even

though the associated enforcement and contempt procedures must

be taken by a court, would go beyond the quasi-judicial powers

available to an Australian body. The issue of subpoenae

would, it is submitted, fall within the ambit of the currently

accepted Australian interpretation of the judicial power of

the Commonwealth, and, as such, would not be available to a

non-judicial tribunal. This would, however, not appear to

preclude the administrative body having and exercising the

power to require the production of information, so long as

it was not sought to enforce such power by the issue of

subpoenae on the part of the administrative body itself.

The advantage of the United States experience in this particular

area is thus that it confirms that the powers available to an

Australian federal regulatory agency would not fall far short

of the SEC’s powers in either scope of operation or

comprehensiveness of remedy.

C . Canada

The Canadian provincial securities commissions represent the

governmental aspect of the Canadian securities regulatory 255machinery, each of the ten provinces and the Yukon Territory

1261

having a Securities Commission or Commissioner, whether256designated by that title or otherwise. The statutory

basis, powers, functions and overall efficiency of these

various provincial bodies do vary greatly, although it is

generally conceded that those of Ontario and Quebec have

the highest reputations. The Commissions are invested258with investigatory powers although the uses which may

be made of the results of such investigations are not259explicitly detailed. They also have decision-making power

in relation to, first, the granting of registration to

traders; secondly, the acceptance of prospectuses for

filing; and thirdly, the granting or denying of the use of

the exemption provisions. At different stages of this260decision-making process the right to a hearing is available.

As with the investigatory powers, however, the procedure in

relation to decision-making does vary considerably from261province to province. The Commissions also make regulations,

and in some instances publish regular bulletins reporting262decisions and outlining policy statements.

Although most jurisdictions do provide for appeal from decisions

of the commission to the courts, the procedure is once again

not uniform.

In spite of the fact that both legislation and administrative

procedure do vary from province to province, there is close

and continuous communication among the various securities

commissions (effected partly by telex connection) which does

enable the different bodies to maintain rapid and frequent

contact.

The powers vested in the Canadian provincial administrative

bodies are thus similar in many respects to those exercised

by the various Australian State bodies. As yet, however, the

Australian bodies do not publish regular notices or bulletins

of their decisions or policy statements. While there has

been a move in this direction in New South Wales, with the

publication, by the Commissioner for Corporate Affairs, of Inform­

ation Bulletins prepared after discussions with the Corporate

Affairs Advisory Committee, the practice has yet to be either

fully utilized in New South Wales or adopted to any significant

degree in other states.

While the Canadian experience of securities regulatory bodies

is of some relevance to Australia, and while one would not like

to think that an Australian regulatory body would be established

without a detailed consideration of that experience, an

important caveat does exist. That is, the Canadian bodies are

provincial, not federal, and as such suffer from the same

lack of uniformity as plagues their Australian counterparts

today. The resultant difficulties in effecting a national issue

of securities in Canada are in fact in many instances even

greater than those in Australia, where six, rather that ten,

jurisdictions are involved. In this situation, the creation of

a federal regulatory body is urgently required in both

countries.

D. The United Kingdom

There are three major forms of regulatory agency in the

United Kingdom, the Stock Exchanges, the Board of Trade264and the Panel on Take-Overs and Mergers. As indicated

earlier, a detailed discussion of the regulatory role of the

exchanges is beyond the scope of this study, and emphasis

will be accorded to the other regulatory mechanisms. The

first of these, the Board of Trade, which administers the

United Kingdom companies legislation through the Registrar

of Companies, represents the full governmental control

aspect of the country’s regulatory machinery. As such,

it is vested with the powers normally associated with the

administration of companies legislation, those powers which

in fact provided the model for many of the powers vested

in the various Australian state regulatory agencies by their

respective companies acts. These powers include, inter alia,

those of inspection and investigation, registration, licensing

and rule making. Because they are the base or model upon

which many of the existing Australian state powers are

based, they are of little illustrative use to Australian

federal legislators concerned to provide a new and comprehensive

range of powers to a federal regulatory body.

The Panel on Take-overs and Mergers, however, represents an

interesting attempt at voluntary regulation which is worthy

of consideration.

The Panel is comprised of eleven members, including appointees

of the Bank of England and the various bodies which make up

the City Working Party. When a take-over or merger is

brought to the Panel’s notice, the Executive (that is, the

Director-General or his deputy) will give a ruling to the

parties based upon the provisions of the City Code. These

rulings are confidential and may be either accepted by the

parties, or rejected by either party. If the latter, the

aggrieved party may appeal to the full Panel. This can be

convened "in a matter of hours" and as a matter of

practice most of the eleven members do sit on each such

occasion. On questions of interpretation, the decisions of

the full Panel are final.

In disciplinary proceedings for breach of the City Code,

an alleged offender is invited to appear before the full

Panel. If after a proper, though informal, hearing, it

finds the alleged offence established, it may censure or

reprimand the offender, or in the case of more serious

breaches take ’’further action designed to deprive the

offender temporarily or permanently of his ability to

enjoy the facilities of the securities m a r k e t s . a p p e a l

lies from such disciplinary decisions to the Appeal Committee

of the Panel, which consists of a permanent chairman and

three other members; decisions of the Appeal Committee

are final.

The Panel is not at any stage concerned with the commercialj

merits of any particular take-over or merger, but rather

restricts its deliberations to questions of compliance or

non-coupliance with the provisions of the City Code. The

Panel does publish Practice Notes, (Memoranda of Inter­pretation and Practice) which are of assistance in interpreting

267various aspects of the Code.

The Panel is, however, not a proper securities regulatory body:

it is concerned with only one aspect of the industry and, even

within that limited sphere of operation, it has been criticised268for not functioning very effectively.

Further, there has been support for the view that there should

be a British Companies Commission, tailored to British needs

without being an imitation of the Securities and Exchange

Commission: 269

It is envisaged that the Commission should combine the present agencies of self-regulation, viz. the Stock Exchange authorities and the City Panel on Take-overs and Mergers, with the present Companies Department of the Board of Trade in a single, non-political, non- bureaucratic independent body. This body should be empowered to administer statutory sanctions if voluntary self-discipline does not achieve its purpose. Such a Commission could also exercise other beneficial functions. It would make possible the separation of fundamental legal principles of company law, which should be contained in a stream­lined modem Companies Code, from administrative detail, which should be relegated to delegated legislation. At the present time British companies legislation combines rules of law and minor admin­istrative matters in the two Companies Acts which have become cumbersome and highly technical pieces of legislation. The complexity of the present legislation obscures its inherent quality which is very high.

However, at present the British Board of Trade does not support the idea of constituting a British Companies Commission and, unless there is a change of heart in the Department, an early creation of such Commission cannot be expected.

The Jenkins Committee in 1962, after hearing evidence from

such distinguished American securities experts as Professor

Loss and Mr. Manuel Cohen, declined to accept the view that

the United States SEC regulatory model would work well270in the United Kingdon.

The Economist, in calling for the introduction of a British

equivalent of the Securities and Exchange Commission, made

a valid distinction between the aims of the two bodies:

Because of conditions in the market when it was set up, the SEC has seen its mission as bringing order into chaos, and of actually policing the markets and the companies quoted on them. There is no similar chaos in Britain, so any British equivalent of the SEC needs to set itself to those few specific jobs that are not being done, or are not done very effectively, under present arrangements. The pursuit of fraud is one; the supervision of unit trusts half done by the Board of Trade at the moment, is another.271

To this author, it is clear that the present regulatory machinery

in the United Kingdom will not be adequate for the maintenance

of effective control over the securities markets of that

country in the future and that the "SEC type" machinery

threatened in the late 1960’s will eventually be introduced.

The more recent developments in United Kingdom company law, as

discussed in Chapter 2 of this study, confirm that the current

regulatory machinery is proving inadequate to its task.

The United Kingdom thus provides no valuable experience in

this area for Australian legislators concerned to establish

a federal regulatory body in this country. Its unitary

legislation and the physically small nature of its securities

market make it so vastly different from Australia in these

respects that this aspect of its experience is not directly

adaptable to the Australian situation.

E. The Asian Region

1. Japan

The administrative regulation of Japan’s securities industry is

1268

primarily effected by the Securities Bureau of the Ministry

of Finance. This constitutes the major controlling influence,

as although certain regulatory areas are left to the self-

regulatory body, the Japan Federation of Securities Firms

Association, its activities are themselves controlled by

the Ministry of Finance.

The Securities Bureau consists of a number of divisions,

those of Co-ordination, Capital, Capital Market, Corporation

Finance, Securities Company, Investment Trust and Securities

Inspection, together with two Deputy Director Generals and

a Counsellor who oversees the work of the Securities Counselling 272Commission.

While the Securities Bureau itself is located in Tokyo, its

control is effected at regional level by Finance Bureaus and

their branches, known as Finance Departments. These Bureaus

and Departments are responsible for the whole range of

activities of the Ministry of Finance (except taxation),

including, in the securities field, supervising securities

companies, conducting inspections and compiling corporate. .. . • 273statistics.

Additionally, exchange supervisors oversee transactions in

those cities which have stock exchanges, viz, Tokyo, Osaka,

Nagoya, Kyoto, Hiroshima, Fukuoka, Niigata and Sapporo.

This basic administrative structure is vested by both the

Securities Act and the Commercial Code with a wide range of

powers for the regulation of the Japanese securities industry.

Included amongst these are the powers of inspection, the

granting of licences and the making of rules, etc. While these

powers are standard to most securities regulatory bodies, the

Japanese Securities Bureau differs from most other such bodies

in that it has rarely (and in some situations never) utilised

many of the powers vested in it.

For example, the Article 187 power to sue for injunctions has

never been invoked by the Bureau, and there is a conscious

emphasis upon the settlement of disputes by either informal

or formal discussions, rather than through the use of the274Courts to enforce the Bureau's statutory powers. Indeed,

the Securities Exchange Law even provides that disputes

arising in buying and selling transactions by securities

companies or in transactions by members, may be settled by275requesting the Minister of Finance to mediate.

The emphasis in Japanese securities regulation is thus upon

the amicable resolution of problems which arise in the

industry, rather than upon recourse to the courts in reliance

upon the powers vested in the Securities Bureau. This

policy does, of course, represent a fundamental difference

in approach to that adopted by, for example, the United

States and Australia, and as such, would seem to this author

to be not directly applicable to those other jurisdictions.

It has, however, proved extremely successful within the

context of the political and social conditions which govern

the conduct of Japanese commerce.

2. The Philippines

Chapter II of the Securities Act of the Philippines established

a Securities and Exchange Commission designed to exercise

overall supervision of the securities markets and, as we276have seen, in a variation from the United States' pattern,

this body was placed under the direction of one Commissioner

rather than five. Initially under the executive supervision

of the Department of Justice, such supervision is now

exercised by the Department of Commerce and Industry.

The Commission has specific functions under the Securities Act

in relation to registration statements and prospectuses, the

continued supervision of the performance of particular securities

once issued, the registration of brokers, dealers and salesmen,

the registration of securities exchanges and the regulation of

securities transactions, including supervision of the over-

the-counter market.

Based as it is upon the United States securities legislation,

the Philippines Securities Act invests wide powers in the

Securities and Exchange Commission. It has, for example, power

to make investigations concerning violations, and to publish277information concerning such violations; and for the purpose

of such investigations to "administer oaths and affirmations,

subpoena witnesses, compel attendance, take evidence, and

require the production of any book, paper, correspondence,

memorandum, or other record which the Commission deems278relevant or material to the inquiry." The Commission is

also empowered to seek the grant of injunctions in the court

of First Instance of Manila to prevent acts or practices which

would constitute a violation of the act or its rules or reg­

ulations to conduct hearings"^ and to make such rules

and regulations as are necessary for it to carry out its281functions under the Act.

The Philippines Commission’s experience is thus very similar

to that of the United States, and its enabling statute provides

it with what are amongst the widest powers enjoyed by a

securities regulatory body in the Asian region. In any

future standardisation of regulatory procedures and bodies

in the region, the experience of the Philippines will provide

possibly the clearest example of a regulatory body successfully

utilizing a very comprehensive range of powers.

3. Thailand

Primary control over the Thai securities markets is exercised

1272

by the Ministry of Finance. This control is effected partly through

the administration of the Civil and Commercial Code (which provides,

for example, for the right to appoint inspectors to examine the282affairs of a company) and partly under new regulations

governing aspects of the securities markets.

283Although it was envisaged by the Robbins Report that the major

impetus for the study and future organisation of the securities

markets would be provided by the Working Group, that Group has in

fact now been disbanded and its work is being carried out by the

Bank of Thailand, itself under the control of the Ministry of

Finance.

While the situation in Thailand is still extremely fluid, the

recent creation of the Securities Exchange of Thailand will mean

that the respective boundaries of governmental control and industry

self-regulation have to be clearly defined. The preliminary

indications are that real control will lie in the former, rather

than the latter, area.

4. India

As with the Japanese Ministry of Finance, so the Stock Exchange

Division of the Department of Economic Affairs in the Indian

Central Finance Ministry administers uniform central control

over the securities industry in India. It has specific

responsibilities in relation to, inter alia, the granting

of recognition to stock exchanges, the continued supervision

of their activities and those of their members, the issuing

of licences to dealers in securities in those areas where

there are no stock exchanges and, through the recognised

exchanges, the maintenance of uniform listing standards.

The exchanges themselves are also responsible for the

administration of aspects of the regulation of the securities

markets, but their role in this regard is more directly under

government supervision than it is in Japan, the Securities284Contracts (Regulation) Act providing for actual representation

of the central government on each exchange. This is, of course,

a positive, worthwhile provision, and one which contributes

significantly to the maintenance of high ethical standards on

the part of the exchanges.

The Division is given extremely wide powers in respect of the

granting and withdrawal of recognition to stock exchanges;

calling for periodical returns from recognised stock exchanges

and the making of inquiries into their affairs and those of

their members; the making of rules for the exchanges; the

superseding of their governing bodies; and suspension of

their business.

These broad powers, particularly when combined with the rule-

making power vested in the Central Government, give the

Stock Exchange Division a commendable degree of control

over this particular aspect of the Indian securities

industry.

Additionally, control by the Central Government of companies

operating within India is effected by the Government controlled

Board of Company Law Administration (the Company Law Board).

Comprised of not more than five members appointed by the 28 7

Government, it has the responsibility of administering

various statutes including, most importantly, the Companies

Act itself. Apart from the normal Companies Act functions

in relation to the incorporation, management, winding-up etc.,288of companies, the Board has wide powers of investigation,

and, in what are unusual provisions, the power to make

application to the High Court for an inquiry to be made by

the Court as to whether a managerial person is a fit and

proper person "to hold the office of director or any other

office connected with the conduct and management of any ,,289company."

While such an application may only be made where the Central

Government is of opinion that the particular individual falls

within one or more of the specifically defined categories of

behaviour listed in the statute, and while the individual

is required to be joined as a respondent to the application,

286

this provision does enable the government to exercise a welcome

degree of control over operators within the Indian securities

markets. It will be recalled that this author has suggested the

adoption of a similar procedure in Australia in order to

effectively combat the skilled but unscrupulous market operators

who have caused such extensive losses to Australian investors 290m recent years.

In this respect particularly, the Indian statutory provisions

are of great value to Australia and to the other countries

within the Asian region.

5. Hong Kong

Until recently, the powers vested in the Registrar of Companies

in Hong Kong by the rather dated Companies Ordinance constituted

the major source of investor protection within the colony. With

the possible exception of the Hong Kong Stock Exchange, no

great reliance could be placed upon the self-regulatory

agencies as effective instruments of investor protection.

Even the powers available to the Registrar were severely

limited, emphasising the traditional functions of registration,

inspection and investigation.

With the added impetus for greater investor protection provided

by the reports of the Companies Law Revision Committee, however,

the enactment of the Securities Ordinance 1974 vested quite

sweeping powers in the newly established Securities Commission

and in the Commissioner for Securities.

In respect of stock exchanges, the Ordinance gives to "authorised

officers" the power, without warrant, to enter and search

any premises in which they reasonably suspect that an offence293against Sections 20 and 22 of the Ordinance is being or has

been committed. Despite the fact that Hong Kong has had

particular problems with the proliferation of stock exchanges,

this power does seem a very wide one, and its utilisation will

be watched with great interest throughout the region.

Additionally, the Commissioner has power to apply to a magistrate

to order the closure of premises in which such a stock market

is alleged to have been operated; to approve a registered

company as a stock exchange; to revoke that approval or

suspend dealings on that exchange on the basis of misconduct296and other grounds; and to order the closure of stock

exchanges in certain specified circumstances.^'7

These wide powers in respect of the control of stock exchanges

are supplemented by almost equally wide powers relating to298disciplinary proceedings and the registration of dealers, 299

299investment advisers and representatives, and by rather

291

more standard powers relating to the maintenance of records,*^

accounts and audit,*^ inspections and investigations*^ and303the prosecution of offences.

The overall effect of the 1974 Ordinance has thus been to

widen significantly the powers available to the securities

regulatory authority in Hong Kong and to substantially

improve the degree of investor protection available in the

Colony. The Government's initiative in this area, although

overdue, will provide a valuable precedent for other countries

in the region and will, in this author's view, contribute

to the desirability of selecting Hong Kong as the base of

the future Asian Securities Commission.

6. Malaysia and Singapore

As with the United Kingdom, Australia and India, companies

regulatory bodies in Malaysia and Singapore are vested with

powers in respect of, inter alia, registration, inspection,

investigation and prosecution. As the companies legislation

of these two countries is based primarily upon the "uniform"

Australian state legislation, the powers ascribed to their

regulatory bodies bear a very close resemblance to those

vested in Australian State bodies.

Of rather more importance are the powers vested in the respective

1278

regulatory bodies by the securities industry legislation

recently enacted in each of these two countries. These are

powers in relation to, inter alia, the granting of approval

to a stock exchange; the granting or renewal of licences and

the imposition of conditions or restrictions on same; the

power to enquire into share transactions; and to appoint

independent auditors in respect of the financial affairs of

dealers. These provisions are based primarily upon the

New South Wales Securities Industry Act, 1970 (as amended)

and, although the provisions of that securities legislation

generally leave much to be desired, the derivation of the

Asian statutes from the Australian model does provide an

element of cohesion in the region that may well be of signif­

icance in the future.

F. Conclusions

1. Australia

The existing state regulation of the Australian securities

industry has, as has been argued throughout this study in

relation to particular areas of regulation, been generally

unsatisfactory in that it has failed to provide uniformity

amongst the states and has also failed to effectively control

the operations of the many companies which function on an

interstate and not a purely intra-state basis.

The standard companies acts’ powers of registration, inspection

and investigation have been the subject of differing inter­

pretations and applications, as have the provisions of the

securities industry acts, in those States in which the latter

have been enacted. The recent formation of the Interstate

Corporate Affairs Commission by Victoria, New South Wales,

Queensland and Western Australia will serve only to accentuate

and prolong these difficulties, as it is clear that the non-labor

states, and certainly the federal territories, will not accept

membership of that body.

In this situation, the creation of a federal body capable of

exercising one set of regulatory standards uniformly throughout

the country is an absolute necessity. Assuming acceptance of

this proposition, it is submitted that such a body should be a

securities regulatory body rather than a companies regulatory

body (and thus concerned with the operation of public

companies, rather than with the incorporation and management

of private companies) and that its powers should include the

following.

First, it must have the power to grant, upon specified terms

and conditions, licences to brokers, dealers and investment

advisers. It must be able to itself suspend or revoke such

licences if specified breaches of federal legislation or

regulations occur, without having, as in New South Wales

at present, to go through the cumbersome procedure of applying

to a court for such revocation or suspension.

Secondly, the proposed Commonwealth Commission must have the

power to grant registration to stock exchanges, either to304the National Stock Exchange as recommended in this study,

or to those of the existing exchanges which are able to comply

with the necessary conditions for registration. Again, such a

power must be accompanied by the power to revoke or suspend

registration under appropriate circumstances.

Thirdly, the Commission must have power to fully investigate

the affairs of all brokers, dealers and investment advisers,

as well as stock exchanges, including the right to inspect

all books and records of those bodies and individuals. Failure

to comply with Commission requests for the production of

documents or the furnishing of information should permit

the Commission to impose the sanction of suspension or

revocation of registration.

Fourthly, the Commission should be given the power to apply to

the appropriate courts for injunctions against threatened or

continuing breaches of federal statutory provisions or

regulations. This power is necessary, it is submitted, in

order both to comply with the restrictions imposed upon the

exercise of the Commonwealth's judicial power by non-judicial

bodies and to enable the Commission to act expeditiously

to counter actions likely to result in losses to investors

in the nation's securities market.

Fifthly, the Commission should be vested with the power to

initiate prosecutions in those matters in which it is of the

opinion that breaches of the statute or regulations have

occurred. While this power parallels that presently

exercised by the various state regulatory bodies, thesCommon­

wealth Securities Commission's power would be exercisable

throughout the country and would, for example, encompass an

offence committed in Western Australia by a broker carrying

on business in Sydney, a situation which would not be

covered under the present state legislation of New South

Wales.

Sixthly, the Commission must have wide rule-making power in

order to effectively and expeditiously deal with currently

changing market practices. Such a power is not inconsistent

with current Australian constitutional interpretation and

would provide the Commission with a degree of flexibility of

operation without which its efficiency would be seriously

impeded.

Seventhly, the Commission must be vested with the power to

conduct administrative hearings upon a wide range of subject

matters including, inter alia, the granting, suspension and

revocation of licences; other disciplinary proceedings;

decisions calling for the production of books, records,

etc. and decisions relating to the issue of prospectuses and

other distribution material to the investing public. Such

hearings may be conducted upon an adversarial or inquisitorial

basis (and constitute quasi-judicial proceedings) without repre­

senting an exercise of the judicial power of the Commonwealth.

It is clear that the exercise of powers by an Australian

administrative tribunal such as the proposed Commonwealth

Securities Commission would be subject to the application of the

rules of natural justice. While it is suggested that the

requirements that such rules be observed be included specifically

in the appropriate statutory provisions and be incorporated into

the procedures adopted by such a body, the requirements would,305it is submitted, apply irrespective of such specific inclusion,

provided that no contrary intention could be discerned from those

statutory provisions. It has been argued, for example, that such

rules would apply specifically to an important aspect of the

securities industry, viz., the revocation of licences, and

possibly also to the grant of such licences.

The practical effect of the application of such rules would

be that parties to any administrative proceedings would be

entitled to notice of such hearing; to be represented; to

cross-examine witnesses; to be furnished with a reasoned

decision as to the result of the proceedings; (probably)

to know that the administrative body is not basing its

decision upon material not available to both parties; and

to be assured that the tribunal in question is not itself307in any way "interested" in the proceedings. The application

of such rules thus provides similar protection to parties

appearing before administrative bodies in Australia as is

afforded by the "due process" provisions of the United

States Constitution.

These, then, are the powers with which such a body should,

and constitutionally can, be vested. They are all, it is

submitted, essential to the effective functioning of a national

regulatory body for the Australian securities industry. Add­

itionally, they will provide a suitable base for future

negotiations for Australia to form part of an Asian

Securities Commission, as their wide nature is already

reflected in the provisions adopted by a number of other

countries throughout the region.

2. The Asian Region

The proposal contained in this study for the future creation

of an Asian Securities Commission is based upon the advantages

of having, in a region which it is expected will become

increasingly close in a financial sense as a result both

of the continued growth of the Asia-dollar market, and of the

expansion of trade and political intercourse amongst countries

in the region, one body capable of standardising the reg­

ulation of securities market activities throughout that

region.

The role of such a body would be two-fold. First, it would

attempt to achieve uniformity of regulation, so far as that

was possible and without infringing unduly upon the national

sovereignty of member countries, in fields such as the issue

of securities, the licensing of brokers, dealers and investment

advisers, the recognition of stock exchanges, and the proper

conditions for the effective regulation of post-distribution

trading. The advantages of such uniformity of regulation

would be enormous; it would mean, for example, that a broker

or dealer who was licensed in one member country could effect

an issue of securities in another member country; that an

issue of securities in country A could be automatically listed

on recognised exchanges in countries B, C and D; and that

post-distribution practices such as short-selling or margin

trading would be either allowed or disallowed uniformly

throughout all member countries.

One important result of such uniformity of regulation throughout

the region would be an increased flow of much needed private

capital and market expertise from the more developed countries,

such as Australia and Japan, to less developed countries. While

such a flow of capital would obviously be required to take

place within foreign exchange guidelines, its results would

be of great value in providing funds for the development of

industries in those less developed countries.

Secondly, once such uniformity of regulation had been achieved,

the Asian Securities Commission’s role would be to administer

the uniform regulatory system throughout the region. This

would be done by providing for all international securities

issues to be registered with the Commission; by requiring

all brokers, dealers and investment advisers who wished to

operate outside the boundaries of their own countries to

register with the Commission, by requiring all stock

exchanges in the region which sought international listings

to apply to the Commission for recognition; and by the

Commission formulating, for adoption by all member countries,

rules governing post-distribution trading.

Is such a proposal capable of practical implementation? It

is submitted that it is, that there is already, in countries

throughout the region, sufficient uniformity of basic approach

towards the relevant regulatory problems to provide a sound

basis for the creation of such a body.

The various regional regulatory bodies and the powers with

which they have been vested fall broadly into two categories.

First, Japan and the Philippines are based upon the United

States regulatory model. Although both have a very wide

range of regulatory powers derived from the American pre­

cedent, the Philippines has tended to prove the more exact

copy of that model, relying upon the full exercise of its

powers by the Commission, and the use of the adversary

system and the courts to establish the merits of a

dispute, etc. Japan, on the other hand, while it has

vested a wide range of regulatory powers in its Ministry

of Finance, has tended to rely upon amicable means of

achieving compliance with its regulatory requirements,

rather than upon the open use of its undoubted powers.

Such a difference in approach towards the enforcement of

regulatory standards does not, however, detract from the

uniformity of their standards, and is not inconsistent with

the formation of an overall regulatory body which is

designed to continue and extend that uniformity.

Secondly, India, Malaysia, Singapore and Hong Kong have all

based the powers vested in their regulatory bodies upon an

English or English/Australian model. While these powers

do in some instances go beyond their precedents (for example,

in India’s power to apply to have persons declared not ’fit

and proper’ to be managerial persons, or in Hong Kong’s wide

seizure and closure powers in respect of stock exchanges)

these provisions are not unreasonable in their particular

contexts and indeed, at least in the case of the Indian

power, could well be adopted in other jurisdictions.

Thailand’s current regulatory situation is so fluid that,

if it became a member of the proposed Commission, its

regulatory powers could without difficulty be adapted

to conform to that body’s uniform standards.

In other words, there exists in the Asian region at the

moment a sufficiently uniform basis of approach towards the

essential problems of securities regulation to ensure a

sound beginning to a proposal to establish an Asian

Securities Commission.

VII. REVIEW OF ADMINISTRATIVE BODY’S DECISIONS

A. Australia

1. Introduction

The establishment of a federal securities regulatory body in

Australia in accordance with the suggestions contained in

this study inevitably raises the question of the procedures

to be adopted for the review of decisions made by that body.

Specifically, questions as to internal review (of decisions

made, for example, by staff officers) and external review

(by a further administrative tribunal or by an appropriate

federal court) must be resolved if any such proposed body

is to function effectively. Some of the difficult problems

raised by this question are, for example, how many degrees

of review should exist within the administrative body itself?

Should there be appeal only from the initial decision-making

officer to one Commissioner, or should there be, in addition,

appeal from that single Commissioner to all five Commissioners

sitting together? Should a decision of all five Commissioners

be subject to appeal to, e.g., an Administrative Review

Tribunal on the merits, or should there only be further

appeal, on justiciable issues, to an appropriate court of

law?

While these problems are inevitably dependent for their final

1289

resolution upon constantly changing political factors, this

study will propose, on the basis of both Australian and

select overseas experience, solutions which may provide

appropriate answers to those problems.

2. Administrative Review

(i) Internal

The nature of the decisions which of necessity have to be

made by a body such as the proposed Commonwealth Securities

Commission requires that as full an internal review mechanism

as possible be established. The powers of the Commission

in relation to, inter alia, the granting and revocation of

licences to brokers, dealers and investment advisers; the

approval or rejection of prospectuses and other material

in respect of the distribution of securities; the

granting of recognition to stock exchanges and the suspension

or revocation of that recognition; and the acceptance or

rejection of materials to be filed under a system of

continuous disclosure, will all require the making of

administrative decisions, at different times and at different

levels, by various officers of the Commission.

It is suggested that the initial aspect of the decision­

making process, for example, that in respect of the granting

of licences to brokers, dealers and investment advisers; the

acceptance of prospectuses and other distribution material;

the granting of recognition to stock exchanges and the accept­

ance of continuous disclosure documentation, could be effected

by officers of the Commission on the basis of written documents

submitted in accordance with the statute and appropriate

regulations. Once decisions were made by officers at the

appropriate level, there should exist statutory means whereby

appeals against such decisions could be made by aggrieved

parties. Such appeals should lie in the first instance to

a single Commissioner and should take the form of a hearing,SOSto which the rules of natiiral justice, described above,

would apply.

Once such a hearing was completed, the single Commissioner

would, as part of the application of these rules of natural

justice, be required to provide a reasoned decision to the

parties.

Again, however, an aggrieved party should have the statutory

right to further appeal against such a decision to the full

Commission. Similarly, this appeal would take the form of

a hearing, to which the rules of natural justice would apply,

and the full Commission would be required to provide a

reasoned decision.

In the case of the Commission’s powers to revoke or suspend

the licences of brokers, dealers or investment advisers, or

the registration of a stock exchange, it is arguable that such

powers should, except in the case of an emergency situation,

be exercised only after the parties have been notified, and

a hearing before a single Commissioner has taken place. In

emergency situations, the Commission’s power would extend

to immediate suspension or cancellation, effective for a

period of, for example, one month, during which time a

hearing on that suspension or revocation would take place

before a single Commissioner. Again, such a hearing would

be subject to the application of the rules of natural

justice. Once a determination had been made by such a

single Commissioner, appeal should lie to the full Comm­

ission, also subject to the rules of natural justice.

It is submitted that an appeal procedure along the lines

suggested above would provide, within the confines of the

Commission itself, comprehensive administrative review

procedures, and would ensure that all parties affected by

decisions of the Commission were assured of fair and

equitable treatment. The question remains, however, whether

appeal to an administrative review tribunal of some kind

outside the Commission should be made available.

1292

(ii) External

Because of the limitations inherent in judicial review of

administrative d e c i s i o n s , i t is submitted that con­

sideration should be given to the provision, where possible,

of external administrative review of decisions of administrative

bodies. The existence of a means of administrative review,

to review decisions of a body such as the proposed Commonwealth

Securities Commission, does, however, raise the inevitable

question of access to that review tribunal by other adminis­

trative bodies in the Commonwealth such as the Taxation

Boards of Review, the Repatriation Boards and the numerous and

diverse tribunals which exist in the federal territories.

The question of an administrative review body was considered310in 1971 by the Commonwealth Administrative Review Committee,

which recommended the creation of a general Administrative 311Review Tribunal (rather than a number of specialised

review tribunals), and which urged the creation of a

Council on Tribunals, similar to the United Kingdom body

of that name, as a "high level administrative authority to312supervise the system."

Although the Committee’s recommendations in this respect have

as yet not been implemented, they are important in that

they recognize the need for a general administrative review

1293

body, capable of providing review, on the merits, of the

decisions of administrative bodies, and not limited to the313existing confines of judicial review. The Committee

envisaged that the Tribunal would provide review on the

merits, that proceedings before it would be commenced by

an application for review, that its jurisdiction would be

"to hear and determine an application by a person who is

aggrieved or adversely affected by a decision on the

ground that the decision was erroneous on the facts and

merits of the case," and that such review would be available

in respect of "all decisions whether taken without a hearing314or after a hearing formal or informal".

These proposals seem to this author to be eminently sensible,

as, if and when implemented, they would have the effect of

providing comprehensive administrative review, free of the

limitations constitutionally imposed in Australia upon the

scope of judicial review, of a type not currently available

in this country. They would, moreover, apply to a wide

range of administrative bodies, included amongst which

would be the proposed Commonwealth Securities Commission.

The recommendations of the Kerr Committee in relation to the

creation of an administrative review tribunal were endorsed

in many respects by the committee established by the

Attorney-General to examine administrative discretions under federal

statutes and regulations. This Committee's recommendations0

were made against the background of the Government’s decision to

appoint an Ombudsman, and this has accordingly influenced the

nature of those recommendations considerably. Thus while the Bland

Report was in favour of the creation of a General Administrative 317Tribunal (similar to the Kerr Committee's Administrative Review

Tribunal), it saw access to that tribunal as being in many318instances indirect and through the Ombudsman, rather than direct.

Also, in expressing an opinion against the proliferation of many

specialised tribunals and in favour of one general administrative 319review body, the Bland Report was continuing the clear

recommendations of the Kerr Committee in this important area.

Thus, both recent committees investigating the question of

administrative review of the decisions of administrative tribunals

in Australia have recommended the creation of a general review

body for that purpose. While as yet governmental action has not

resulted in the establishment of such a body, it is hoped that

this will be achieved without substantial delays. Its creation

would provide the ideal structure for the administrative review of

decisions of the proposed Commonwealth Securities Commission.

3. Judicial Review

Judicial review of the decisions of Australian administrative

tribunals may be effected upon only a number of limited grounds.

These are generally acknowledged to be ultra vires, jurisdictional320error, error of law, and failure to exercise power. The

tools by which judicial review is effected are the well-known

prerogative writs of prohibition, certiorari and mandamus,

and the equitable remedies of injunction and the increasingly321utilized declaratory judgment.

While these remedies do provide a useful basis for review of

administrative action, a number of faults detract from the

overall value of judicial review as an effective safeguard of

the rights of parties. Apart from the general complexity of

both the grounds for judicial review and the remedies them­

selves, the need to bring the particular case within the

boundaries of those remedies, and the often substantial cost

involved in seeking such review, the major fault lies

perhaps in the fact that such judicial review cannot

provide a full review on the merits of the administrative

action in question.

It was this aspect of judicial review, particularly, which

led to strong criticism of its limitations in the Kerr Report:

It is generally accepted that this complex pattern of rules as to appropriate courts, principles and remedies is both unwieldy and unnecessary. The pattern is not fully understood by most lawyers; the layman tends to find the technicalities not merely incomprehensible but quite absurd. A case can be lost or won on the basis of choice of remedy and the non-lawyer can

never appreciate why this should be so. The basic fault of the entire structure is, however, that review cannot as a general rule, in the absence of special statutory provisions, be obtained ’on the merits’ - and this is usually what the aggrieved citizen is seeking.322

Concluding correctly that too narrow an approach to the

question of appeals on the merits from administrative decisions 323had been taken, the Committee recommended that, if a

Commonwealth Superior Court were to be established, it should

have jurisdiction by way of judicial review, but that in

the absence of such a court, it urged the creation of a324Commonwealth Administrative Court.

Conceding that constitutional difficulties would preclude

that court having the power to review administrative

decisions on the merits, the Committee saw it as exercising325supervisory jurisdiction over such decisions, and as

granting relief on the following grounds: denial of natural

justice; failure to observe stipulated procedures where

that results in a person being materially affected; want

or excess of jurisdiction; ultra vires; error of law326appearing in or from the record; and fraud. Additionally,

relief would be given where there was a failure to reach

a decision when there was a duty to do so, and where there327has been unreasonable delay in the reaching of a decision.

The Committee also recommended that the Administrative Court

1297

have the power to state a case (on a question of law or of

mixed fact and law) to the High. Court, and that appeal

should lie by an aggrieved party, on such questions, to

the High Court. The High Court would, however, be

required to grant leave to appeal in all such cases.

The Kerr Report thus recommended a full judicial review

structure, from the initial decision of the administrative

officer or body concerned, to the Commonwealth Administrative

Court and, finally, to the High Court. While this recommended

structure was in this author's view a feasible one, it

was not immediately implemented by the then government and

subsequent events have rather overtaken it. First, the

Ellicott Committee recommended that the new Commonwealth

Superior Court be vested with the power of judicial review

of administrative decisions, which recommendation, according

to the Bland Committee, would obviate the need for any new

administrative court. (This possibility had admittedly

been foreshadowed by the Kerr Committee). Secondly, the

Attorney-General of the current government has revived the

proposal for the creation of a Commonwealth Superior Court.

In his second reading speech on the Bill, he indicated

clearly that the new court would, through one of its proposed

Divisions, plan an important role in this area:

More important still, the decisions of Australian Ministers and officials should be subject to review, so far as it is proper for courts to do so, and to judicial supervision by a court able to build up expertise in the field of administrative law. 33d

The form of the Bill as at first reading stage provides for

six Divisions of the Court, one of which is the Administrative 331Division; for the Court to have original jurisdiction in,

inter alia, all matters "in which a writ of mandamus or * 333 334 335

prohibition or an injunction is sought against an officer of

the Commonwealth"; and for it to be able to make binding333declarations of right. Provision is also made for appeals

334to the High Court in certain circumstances, and for the335removal of stipulated matters to that court.

The Bill is thus adequately equipped to provide a full range

of powers for dealing with administrative matters. It is

hoped that its passage through the Parliament will be

unobstructed and that it is permitted to take its place as

an effective instrument of judicial review of administrative

decisions in this country.

4. Conclusions

The current Australian situation in relation to both administrative

and judicial review of the decisions of a body such as the

proposed Commonwealth Securities Commission is thus extremely

fluid. The question of administrative review within the

body itself will be determined by the provisions of new

federal securities legislation, which provisions will, it

is hoped, be along the lines suggested in this study. The

nature of external administrative review, if any, will be

determined by the government’s final reaction to the Kerr

and Bland Reports. While as yet there is no firm indication

that an administrative review tribunal will be established,

its creation would, as indicated earlier, provide a

degree of administrative review of the decisions of a

wide range of administrative tribunals (including the proposed

Commonwealth Securities Commission) which is currently lacking

in Australia. Finally, the nature and extent of judicial

review of the decisions of such a body is also dependent

upon the government’s reaction to the Kerr and Bland Reports,

as well as upon the fate of the Superior Court of Australia

Bill, 1973.

The effective introduction and the successful implementation

of adequate securities legislation in Australia is so dependent

upon the creation and proper organization of a securities

administrative body, that the decisions taken in relation

to the establishment of an administrative review tribunal

and a superior court will unavoidably affect that introduction

and implementation. As this is so crucial to the future stability

and expansion of Australia’s securities market, it is hoped

that the urgency and seriousness of the situation will trans­

cend party and federal/state political rivalries on this

occasion.

While Australia’s position is thus very much an individual one

in this area, some benefit may be gained by Australian

legislators considering the experience of other jurisdictions

in respect of administrative and judicial review of the

decisions of administrative bodies in the securities field.

For this reason, this study will now examine a number of

relevant jurisdictions; of necessity, such examination

will be brief, as a full, detailed discussion of administrative

law in those countries is not within the scope or the

objectives of this study.

B. The United States

Policies and practices in relation to administrative and

judicial review of administrative decisions in the United

States differ from those in Australia in a number of

important respects. First, the United States’ constitutional

’’due process" requirement, which requires that parties

be granted a hearing before action is taken which will

infringe their rights, does not exist as such in Australia.

While its effect is partially achieved through the application

of the principles of natural justice in this country, these

do not have the weight and authority of constitutional provisions.

339Secondly, as we have seen, the United States does not insist

upon the strict separation of constitutional powers, and has,

in fact, adopted a two-fold distinction (between legislative

and adjudicative) which has had the effect of greatly simplifying

what has remained, in Australia, an unnecessarily complex area.

Although it has been argued that even this two-fold categorization

is unworkable the system whereby due process requires a

hearing in the latter while not in the former, appears in fact to

have worked well in practice.

Thirdly, the United States adopted in 1946 an Administrative

Procedure Act designed to provide a statutory basis for the

procedures of administrative bodies. This Act, which has no

equivalent in Australia, has resulted in a commendable degree

of procedural uniformity throughout a wide range of diverse

administrative bodies.

Fourthly, the availability of judicial review at the federal

level in the United States is predicated on a much more straight­

forward basis than that which currently exists in Australia.

Such review procedures include the petition for review,

enforcement proceedings, declaratory judgment and injunction.

Generally, such remedies are sought in the federal circuit

341

courts, which have at this stage (particularly in the case of

the District of Columbia Circuit) developed substantial expertise• 342m this area.

The Kerr Committee’s conclusion that, in this area, "much

of the United States experience is not strictly relevant to343Australian circumstances" is undoubtedly correct, but it

does not mean that there is not much to be gained by Australian

legislators closely examining, for example, the procedures

for hearing adopted by United States bodies, the decisions of

the circuit courts as to what exactly is required to satisfy

the "due process" requirements, and the continuing process

of change which is characteristic of this area of United States

law. In the latter respect, for example, the President’s

Advisory Council on Executive Organization in 1971 was

critical of the SEC's judicial function in full commission

reviews of agency proceedings, argued that this procedure

conflicted with the SEC’s "responsibilities to prosecute

and formulate policy" and recommended that the single admin­

istrator (whom the committee had earlier recommended should

replace the existing five Commissioners) should review such

decisions for consistency with agency policy within thirty days,

and that thereafter the proposed Administrative Court of the

United States should hear appeals.

This continuous process of proposals for improvements in

1303

existing regulatory systems is one of the most important features

of this area of United States law. Because of this, and because

of the long experience of the circuit courts with due process and

other requirements, the differences which exist between the

United States and Australian systems should not be permitted to

detract from the significance of the real advantages which may

be gained from a close study of that experience.

C. The United Kingdom

It is clear that much of Australia's administrative law background

is derived from the United Kingdom, and that two important facts

follow from this situation. First, that many of the current

disadvantages of Australian administrative law will be re­

flected in, and will in fact have been adopted from, similar

provisions in English law. This applies particularly to the

bases of judicial review and the law relating to the prerogative

writs. Secondly, any positive or beneficial changes which are

introduced to the basic United Kingdom situation in this area,

will, unless exceptional circumstances exist, be capable of ready

adaptation to the Australian scene.

This latter factor appears to have been in the contemplation of

the Kerr Committee during its consideration of the United Kingdom

experience, as it described the growth of administrative tribunals

in the United Kingdom*^ and examined the recommendations of the

Franks Committee and the provisions of the Tribunals and347Inquiries Act, 1958.

348The Kerr Committee recommended the establishment in Australia

of a body similar to the United Kingdom Council on Tribunals (as

provided for in the Tribunals and Inquiries Act), but the sub­

sequent Bland Report has taken the view that it has already

fulfilled the role envisaged for such a council and has349accordingly recommended against its establishment.

Additionally, in relation to the United Kingdom experience, the

Kerr Report stressed the role of pre-decision inquiries in

that country, although these seem more directly applicable to

large land development proposals etc., than to the regulation of

a securities market.

The Report’s description of the review procedure adopted by

administrative tribunals in the United Kingdom parallels closely

that recommended by this author for Australian tribunals, viz.,

the making of an initial decision; the right of appeal to a

"low level tribunal" (a single Commissioner of the Commonwealth

Securities Commission); a further appeal to a "high level

tribunal" (all five Commissioners of that Commission), together

with ultimate judicial review by an appropriate court.

Finally, the Kerr Report indicated correctly that the United

346

1305

Kingdom suffered similar problems in respect of the complexity

of existing procedures for judicial review as exist currently

in Australia.

The experience of the United Kingdom in respect of administrative

and judicial review of administrative decisions would thus seem

to have little advantage for Australia, except perhaps in a

negative way, in that two proposals rejected by the Franks

Committee, those relating to the creation of an administrative

review tribunal and an administrative division of the High

Court, were in fact taken up by the Kerr Committee and formed

an important part of its final recommendations for Australia.

D . Canada

While there is variation amongst the Canadian provinces in the

ways in which they have made provision for administrative and

judicial review of administrative decisions, the procedures

adopted by Ontario are, as usual, the most comprehensive. For

this reason, primary attention will be accorded to that province’s

provisions, and brief reference will be made to those of Quebec

for comparative purposes only.

The Ontario Securities Act provides that in specified instances

(for example, the refusal to grant or renew registration to

trade in securities, or to suspend or cancel any such registration),353

1306

no administrative action may be taken without the party affected

having an opportunity to be heard. Thus even at the stage of

the making of an initial decision to refuse or revoke registration,

the right to be heard must not be denied to a party. While

there are no doubt good reasons for making such a right

available at that stage, this author regards it as preferable that,

in the situation of merely refusing an initial application for

registration or for a licence, the decision should be made

merely by an administrative officer without the right to a

hearing being available, but that that right should be available

if appeal is lodged against the decision to refuse either

registration or the grant of a licence. If two levels of

administrative appeal procedure are provided, both of which

involve the right to a hearing, as has been recommended354earlier by this author it would not seem necessary to base

the making of the initial decision upon a hearing as well.

Persons in Ontario aggrieved by a decision given at a hearing

of this nature may within 30 days appeal to the Commission;355they are then entitled to a hearing and review by the Commission.

At such review, the Commission may confirm the earlier decision,

ruling, etc. , or make such other "direction, decision, order or356ruling" as it deems proper.

Additionally, appeal lies from such a review decision of the

Commission, by a person primarily affected by such decision,357to the Ontario Supreme Court. Although this right of

decision will take effect immediately unless either the Commission

itself or the Divisional Court grants a stay of that decision358until disposition of the appeal.

With customary thoroughness, the Ontario Securities Commission

has made the review and appeal procedure the subject of detailed359policy statements. Additionally, a comprehensive Manual of

360Practice on Administrative Law and Procedure in Ontario0

provides additional necessary guidelines. Finally, the usual

extraordinary remedies are available outside the specific

provisions of the securities regulatory statutes, but only361with the specific consent of the appropriate minister.

In Quebec as in Ontario, a party has the right to a hearing362before registration is either not granted or not renewed.

There is also statutory provision for appeal against admin-•7(1 *7

istrative decisions to the Commission, and, against the

decisions of the Commission, to three judges of the Provincial364Court, whose decision is final and without appeal. As with

Ontario, the Quebec Securities Commission has issued a policy

statement dealing with hearings before the Commission.

The experience of Ontario and Quebec thus differs slightly from

the procedure recommended by this author for the Commonwealth

Securities Commission in that provision is made in both for the

appeal exists, it is specifically provided that the Commission’s

granting of a hearing at the initial decision-making stage

where there is a refusal to grant or renew registration.

To this author, however, a hearing at this stage is both

time-consuming and unnecessary, particularly if provision

is made for adequate internal administrative review of that

initial decision.

E. The Asian Region * 367 * 369 370

1. Japan

The Japanese Securities and Exchange Law makes specific

provision for hearings in a wide range of regulatory situations,

and many of the powers which are vested in the Minister of

Finance can be exercised only after his personnel have

conducted a hearing into the matter in question. For example,

hearings must be held in relation to the ordering of

amendments to registration statements and other documents

connected with the public issue of securities,or the367suspension of the effectiveness of such documents; the

refusal to grant a licence to a securities company or the

cancellation or suspension of such a l i c e n c e t h e denial369of registration to a securities business association, or

the ordering of changes in its by-laws or articles of370association; the refusal to grant a licence to a securities

exchange'^ or the cancellation of such a licence;

the refusal to authorize a securities finance company to carry

on business other than lending money to purchase securities

and the suspension or cancellation of the licence of such a 374company.

These statutory provisions are designed to ensure that in those

situations in which the rights of parties are affected, such

as the suspension or cancellation of licences etc., the

right to hearing is mandatory. This principle does not accord375with this author’s suggestion that the right to a hearing

is not necessary in the initial stage of the granting or

refusal of a licence; while it does provide an additional

degree of protection to those whose rights might be affected

by such a decision, these rights are, in this author’s view,

more effectively protected by an appeal procedure of the376type suggested in this study. The provision of a right

to hearing at this early stage can only add to delays in

what is often an already slow administrative process.

While procedures for the conduct of the statutory hearings are 377laid down, no provision is made for appeal against these

decisions, either to a higher level of the Ministry of Finance

itself, or to a court. Thus, beyond the hearing stage in the

Ministry, there appears to be no statutory appeal procedure.

2. The Philippines

In provisions similar in principle to those contained in the

Japanese legislation, the Philippines Securities Act provides

for the granting of a hearing in those situations in which

the rights of parties might be adversely affected. This

applies to, for example, the suspension of registration of

s e c u r i t i e s t h e revocation of the registration of securities379and the right to sell same; the revocation of the registration

380of brokers, dealers and salesmen; and the denial of registration

as a securities exchange.

Again, no specific statutory provision is made for appeals

within the Commission against the results of such hearings,

and again, as with Japan, this practice is contrary to this

author's recommendations in this area.

In contrast to the lack of Japanese statutory provisions

dealing with appeals from administrative decisions in the

securities area, the Philippines Securities Act makes specific

provision for appeal direct to the Supreme Court of the

Philippines from final orders, rulings or decisions of the

Commission. Persons aggrieved by such decisions, etc., of the

Commission in proceedings under the Act to which they are

a party, or who may be affected thereby, may apply to the382Supreme Court for review of such order. A petition

in whole or in part, must be filed within thirty (30) days383after the entry of the Commission’s order.

The Supreme Court is given exclusive jurisdiction to ’’affirm,

modify and enforce or set aside such order, in whole or in 384part", although it may only hear those objections to the

Commission’s order which were urged before the Commission

itself, provided that opportunity to do so was available.

There can be no doubt as to the exclusiveness of the Supreme

Court's jurisdiction in this area; it has itself specifically

held that courts of first instance lack jurisdiction to grant

injunctive relief against the Commission, part of the rationale

for that holding being that because of the national importance

of the regulatory activities of the Commission, it cannot

afford to be impeded or restrained by injunctions granted385by courts subordinate to the Supreme Court.

While it is unquestionably useful to have direct access to a

court for review of the Commission’s findings, one wonders

whether it is really essential that that court be only the

Supreme Court of the Philippines. One would have thought

that a less august tribunal would have been able initially

to cope with such review, with perhaps a final right of

requesting that the Commission’s order be modified or set aside,

appeal on matters of law to the Supreme Court.

3. Thailand

To this author’s knowledge, no statutory provisions currently

exist in Thailand governing appeals against decisions made

by the officials of the Ministry of Finance, or of the Bank

of Thailand. While provisions to this effect may be introduced

once more certainty is established in Thai regulatory procedures,

regulation of the securities market at the moment remains

firmly under the administrative control of those two authorities.

As no specific recommendations were made by the Robbins Report

in this area, it may be some time before detailed provisions

are adopted.

4. India

The major Indian statutory enactment governing the conduct of

the securities industry, the Securities Contracts (Regulation)

Act, 1956, makes specific provision for a hearing to be

granted in cases involving the withdrawal of recognition of

a stock e x c h a n g e t h e exercise of the Central Government’s

power to supersede the governing body of a recognized stock

e x c h a n g e ; a n d its power to suspend the business of such 388exchanges. Presumably such hearings are conducted by

officials of the Stock Exchange Division of the Ministry

of Finance’s Department of Economic Affairs. No clear

indication is given in the statute or the regulations, however,

that this is the case, and no provision has been made

for subsequent review by the Ministry of such decisions.

Again, presumably, such review could be effected only through

the courts by means of the usual prerogative writs.

As with Japan and, to a lesser extent, with the Philippines,

regulation of the securities markets in India is tightly

controlled by government itself, not through an independent

or semi -independent regulatory agency, but by an actual

government department. In such a situation one cannot expect

the same degree of review of administrative decision to be

provided as would be the case with a more independent

regulatory body such as the United States SEC or the

proposed Australian Commonwealth Securities Commission.

5. Hong Kong

The new Securities Ordinance of Hong Kong has, while

vesting wide powers in the Securities Commission at first

instance, provided comprehensive appeal procedures for

persons aggrieved by its decisions. For example, although

the Commission has retained unto itself the right to revoke

approval given to a registered company to operate as a

stock exchange, or to suspend such approval, without

affording any hearing to the interested parties, it does

specifically provide for an appeal against such decisions

directly to the Governor-in-Council. The latter may confirm,

reverse or vary the original decision, and his decision is

final.391

Similarly, although the Commission may refuse initial registration

or renewal of registration to dealers, investment advisers392and representatives, (although after providing opportunity

for a hearing) and may revoke or suspend such registration

without a hearing,' specific provision is made for appeal

against that decision to the Securities Commission Dis-394ciplinary Committee which may either confirm, reverse, or

vary that decision. Additionally, appeal lies against that395Committee’s decision to the Supreme Court. The Court,

whose decision is final, may confirm, reverse or vary the

Committee’s decision or give such other directions as it396thinks just and equitable.

The new ordinance has thus provided a second level of internal

administrative appeal (to the Disciplinary Committee) and

an external appeal to the Supreme Court. It has also

partially followed existing practice in the region by

providing a hearing prior to deciding to refuse, or to

refuse to renew, registration. Hong Kong's procedures

thus fit well into the overall pattern of the region and

lend an element of uniformity which will be of great value

in future attempts to standardize the systems of securities

regulation throughout the region.

390

6. Malaysia and Singapore

Malaysia and Singapore, in their recently introduced Securities

Industry Acts, have both made specific provision for the

granting of a hearing prior to the refusal to grant or

renew the licence of a dealer, dealer’s representative,397investment adviser or investment adviser’s representative.

Additionally, the Registrar of Companies is empowered to

either cancel a licence or to disqualify a licence-holder

either permanently or temporarily from holding a licence,

after requiring such licence holder to appear before him398and show cause why such action should not be taken.

Specific provision is made for appeal by aggrieved persons

against the Registrar’s decision in respect of the granting

of licences direct to the Minister and, in respect of the

cancellation of a licence or the disqualification of a

licence, direct to the High Court. The decision of either

the Minister or the Court in each situation is to be regarded

as final.399

The Singapore and Malaysian authorities have thus provided

effectively for internal review in certain matters and for

review by the courts in one particular matter. In providing

for such internal review they have gone beyond what appears to

be the standard practice in the region of having only one level

1316

of administrative decision-making which is not subject to

internal appeal.

7. The Future of the Region

Although there is variation amongst the appeal procedures

utilized by the various countries in the region, it appears

that there is a degree of uniformity in the provision of a

hearing prior to the taking of action likely to prejudice

the rights of parties, at least in certain situations, and

in the provision, in most jurisdictions, of appeal to

courts outside the administrative process. While these

appeal procedures are not as elaborate as those now functioning

in some of the more developed countries, they do provide

a sufficient basis of uniformity to allow future consideration

to be given, by the Asian Securities Commission, to standard­

ization of procedures in this area.

1317

Chapter 10

EPILOGUE : THE RAE REPORT AND THE 1974 BILL

I. INTRODUCTION

The Senate Select Committee on Securities and Exchange which, as

indicated in Chapter 2 of this study, was appointed in early 1970,1

presented its report to the Senate on July 18, 1974. The Report is

a comprehensive document which examines in some detail selected aspects

of the operations of Australia's securities markets. While its initial

concern was with the market abuses and malpractices which had been so

clearly in evidence during the market boom period of 1969-70, its

investigations took it into much broader areas of the securities markets,

and encompassed aspects of securities trading which occurred during

the actual course of those investigations.

The relatively lengthy period between the establishment of the

Committee and the presentation of its report was thus to a very large

extent compensated for by reason of the additional investigations it

was able to carry out during that time. As the report was the first

document of its kind produced in respect of the Australian

securities industry, what its delayed presentation lost in terms of

immediate relevancy to the 1969-70 period was more than compensated for

1318

by the very important inclusion of additional material detailing market

malpractices. One of the major benefits of the Rae Report lies in this

provision of specific illustrations of practices which actually

occurred in the Australian securities markets over a particular period

of time. The fact that these practices did occur, and have been so

well documented, means that securities legislators, both in

Australia and in other countries, will have sound factual information

upon which to base future regulatory provisions.

The Rae Report is, in its own words, .the first account of an

enquiry in depth into the operations of the securities market in

Australia..." As such, it is obviously of great value to

Australian legislators and to those legislators in other

jurisdictions who have either based their existing or proposed

legislation upon existing Australian provisions, or whose current

regulatory systems are sufficiently similar in character to that of

Australia for the experience of the latter to be of value. From

Australia’s own viewpoint, however, perhaps the greatest

significance of the Rae Report lies simply in the fact that it does

exist. For too long Australia has attempted to regulate its national

securities industry by essentially parochial State provisions based

primarily, in the case of companies legislation, upon the latest

United Kingdom statutes, and, in the case of securities legislation,

partly upon a limited number of United States provisions. All of this

1319

detailed regulatory legislation has been introduced without the

benefit of the type of research into the securities markets which the

Rae Report has now provided.

In furnishing such a Report, the Senate Select Committee has succeeded

in giving to Australia what all except two of the other jurisdictions

examined in this study have previously enjoyed, viz., a report as to

the basis for proposed regulation of the securities markets. The Rae

Report is thus to Australia what a large number of reports and studies

have been to each of the United States and Canada; the Cohen and

Jenkins Reports have been to the United Kingdom; the Ferris Report

has been to Malaysia and Singapore; the Investor Protection Reports

have been to Hong Kong; the Robbins Report has been to Thailand; and

the Thomas and Gorwala Reports have been to India. Only Japan and

the Philippines, both of which directly adopted and adapted the

United States regulatory model, have not utilized such studies and

reports.

It is, then, to be hoped that the benefits resulting from the research

and investigations of the Senate Select Committee will lead to the

institution of further, and regular, detailed investigations into the

functioning of the Australian securities markets. Indeed, one of

the early roles of the author’s proposed Commonwealth Securities

Commission should be the examination of the possibility of studies

1320

being instituted into those areas of the securities markets not3

investigated in the Rae Report.

It must be acknowledged, however, that not all sections of the

Australian securities industry saw the Rae Report in quite the

favourable manner described above. Its overall reception was

relatively muted, partly, perhaps, because a lengthy period of time

had elapsed since the occurrence of the major events which led to

the establishment of the Committee, and partly because some of the

Committee's major recommendations, including that relating to the

establishment of a federal regulatory agency, had long been public

knowledge. Editorial comment on the Report varied substantially,

from the opinion that it was a great historical document which was4

too late to contribute anything new to the industry, to a rather

more balanced assessment which saw the Report establishing the

existence of a national securities market in this country and

producing evidence which made it inpossible to argue against the

necessity of a national regulatory body "to police the securities

industry with a view to protecting the investing public."*’

The reaction of the Australian Associated Stock Exchanges (A.A.S.E.)

to the Rae Report was prompt but predictable. The A.A.S.E. President,

Mr. McAlister, indicated that consideration would be given to those

of the Committee's recommendations which had not already been adopted

or implemented by the exchanges, that the exchanges would welcome

1321

any proposals contained in the report to "strengthen the existing

regulation of the securities industry", and, most importantly, that

"all the member exchanges will take prompt and appropriate

disciplinary action should any member or member firm named in the

report be found guilty of malpractice or breaches of the articles

and regulations of the exchanges". Although Mr. McAlister’s

latter statement was subsequently supported by the Chairman of the4

Sydney Stock Exchange, and although the Sydney, Perth and Adelaide

exchanges have indicated that certain of their members have been

fined as a result of the Report’s disclosures, very few details have

been made publicly available. The A.A.S.E. appears at this stage to

be waiting for the final form of the Government's recently-introduced

securities legislation. It does not give the impression of being

anxiously setting its house in order as a result of the Report's

revelations. This fact in itself is additional evidence to this

author of the pressing need for governmental control, rather than

industry self-regulation.

Additionally, the Rae Report received a less than enthusiastic

reception from certain of the named players in its regulatory drama.g

Included amongst these were the Swan Brewery Co.Ltd. and Devex Ltd.,

the activities of the former having been described in connection with 9

private placements and those of the latter in connection with

market practices in public issues.^

1322

Criticisms from interested observers aside, it is clear that it

will be some lengthy period of time before any final assessment of the

contribution made by the Rae Report can properly and objectively be

made. As more and more information as to the nature of the

Australian securities markets becomes available and as market

analysts and commentators acquire more experience and greater

sophistication, the activities of the Senate Committee, the material

which it examined and the areas which it left unexamined, will be seen

in their correct perspectives. This said, however, it is apparent

that a number of general statements can accurately be made about the

report at this early stage. First, it is a political, rather than

an economic or a legal, document. As any report of any politically

constituted committee which seeks to be unanimous must be, it

reflects the existence of political realities. To this author, this

is a positive rather than a negative factor, as it provides a clearer

illustration of the likely nature of future legislative

possibilities in this area than could an economic or legal treatise

which was divorced from those political realities.

Secondly, the Report appears not to have relied to any significant

extent upon overseas experience in the regulation of securities

industries. While its primary concern must obviously have been the

Australian industry, it does seem surprising that so little attention

to overseas experience is reflected in the report itself.

1323

Thirdly, the form of the Report published to date contains very few

concrete recommendations for the future control of the Australian

securities industry. Again, it is surprising that these

recommendations were not included, as they would seem to logically

complement the vast amount of information acquired by the Committee.

It appears, however, that there are two additional chapters of the

Report not yet published, one of which consists of such 11recommendations. It is hoped that these will be published without

additional delay.

Fourthly, while the exact future of the Senate Committee is at this

stage uncertain, it is clear that its report is substantially in

accordance with the thinking of the current Labor Government in

Canberra, and that its findings will provide additional justification

for that Government’s recent securities bill. As described in

Chapter 2 of this study, the Government plans comprehensive economic12regulatory legislation for Australia, and the Rae Report provides

a sound base for one important aspect of that overall plan, viz.,

federal regulation of the securities markets.

From this author’s viewpoint, the Rae Report provides detailed

factual information against which the conclusions and recommendations

made earlier in this study may be tested. This Chapter will now,

therefore, consider the extent to which the Rae Report has dealt with

1324

the critical aspects of a proper system of securities regulation,

and, when those aspects have been included in the Report, will examine its

findings against those of the author.

II. THE SUBSTANCE OF THE RAE REPORT

Before proceeding to a consideration of what is included in the Rae

Report, it is as well to note two important features which do not

appear to have been included in the Report material published to

date. First, although it is indicated that "The Committee sought and

obtained extensive information from overseas countries, in particular,

the United Kingdom, South Africa, the United States of America,

Canada and Japan", the exact extent of the utilization of this

information does not appear from those portions of the Report now

available. While the logical section of the Report in which to

apply such information is the chapter of recommendations not yet

published, one would also have thought that, where relevant throughout

the body of the Report itself, such information would have been used

for comparative purposes. It is likely, however, that that important

overseas information will have been applied in the process of

preparing the Committee's recommendations, which it is hoped will

soon be published.

1325

Secondly, the portions of the Rae Report thus far made available

do not contain the detailed examination of the constitutional

difficulties inherent in the introduction of federal securities

legislation in Australia which one might have expected. Although14again it is indicated that this information was obtained, it has

not as yet been made publicly available. While it is arguable that

the proper time at which to discuss such information is in respect

of the recommendations to be made by the Committee, it is also

relevant to any consideration of, for example, the control of15operators within the securities markets, the regulation of insider

trading,^ and the establishment of a federal administrative 17authority.

It is now proposed to examine the substance of the Rae Report against

the particular aspects of market regulation utilized by this author

in this study.

A. The Distribution of Securities

1. Private Placements

(i) Rae Report Findings

The Senate Select Committee provided a valuable service for Australian

legislators by detailing the manner in which the provisions of the

1326

State companies legislation and the regulations of the A.A.S.E. were

both failing to prevent the use of the private placement procedure

to avoid the more onerous prospectus disclosure requirements

associated with issues of securities to the public. It made no secret

of its "astonishment that such practices had not only been going on but

had been taking place for so long, unchecked, and had apparently18never been mentioned in Press or any other comment."

While the Australian State companies legislation does not prevent private 19placements, it does aim to prohibit the use of such placements as a

means of avoiding the necessity to comply with prospectus disclosure

requirements when there is in fact an issue of securities to the public.

Additionally, the A.A.S.E. requires that the exchanges be notified

immediately of both (i) information concerning the company which,

consistent with the interests of the company, should be communicated

to the exchange for public announcement, including any information

necessary to avoid the establishment of a false market in the

company’s securities, and (ii) any alteration of the company’s issued20share capital, and particulars thereof. 21

21As indicated by this author in Chapter 7 of this study, these

A.A.S.E. requirements have a number of defects, included amongst which

are the following: (i) that the effectiveness of the "immediacy"

requirement depends entirely upon the strict policing of the

provisions by the various exchanges, and that the practice does vary

1327

from exchange to exchange; (ii) that the phrase "consistent with

the interests of the company" would enable companies to avoid the

effect of the provision, and (iii) that the provision does not

indicate either the nature of the information which comes within its

scope or who has the responsibility for deciding whether such

information should be so communicated.

The Rae Report's findings, encompassing as they do the activities

of a number of companies and a number of stockbroking firms,

establish some disconcerting facts. First, that issues of securities

to the public were being made through the mechanism of the private

placement, in breach of both statutory and A.A.S.E. provisions.

Secondly, that such securities were sold to the public in advance of

any announcement to the exchanges (and, through them, to the investing

public) that the shares being sold were in fact part of a placement of

new securities. Indeed, in at least one situation, the issuing company

was expressly requested by the firm of stockbrokers involved in the

issue not to make any announcement about its intention to issue new

shares until advised to do so by that firm. Thirdly, that stock­

brokers were in many instances acting as principals on the purchase

and sale of the securities which were being placed, yet they were23charging brokerage fees on the transactions in question, and were

not marking the contract notes in the manner required by the A.A.S.E.24 . . . . . . .rules. Fourthly, that brokers were in many situations avoiding their

own professional responsibilities by arguing that it was the obligation

1328

of the issuing company rather than the broker to ensure that the

market was fully informed as to the correct nature of a particular25sale of securities in this type of situation. This argument is

obviously of some relevance to the question of the suitability of

stockbrokers to act as effective industry regulators. Fifthly, that

the industry itself has an unclear understanding of exactly what is

permitted and what is prohibited in respect of private placements of 26securities.

Against the background of these disconcerting features of the

securities market in Australia, the Rae Report again stressed the

failure of State regulatory bodies to control private issues

(referring in this respect to the difficulties of adequately defining

the term ’’issue to the public”) and used the fact of the problems of

regulation at State level to call for national regulation in this area.

While it is not possible to disagree with the Committee’s call for

federal, rather than State, regulation, it is surprising that the

Committee did not address itself, at least in the material published

to date, to attempting to resolve the problem of detemining what will

constitute an ’’offer to the public”. Whether or not State legislation

is superseded by federal legislation in this field, the problem of

defining this concept will remain, and it is a matter which was

worthy of the Committee’s detailed attention.

(ii) "Offer to the Public*'

The definition of this phrase is one of the most important determinants

of the scope of securities regulatory legislation. If this phrase is

defined in small numerical terms (if, for example, there is deemed to be

an offer to the public when an offer is made to only ten or more

persons) then the legislation will have a wide scope of operation, as

only offers made to a smaller number of persons will escape regulation.

Correspondingly, where a large numerical criterion is used (for

example, 500 persons) the legislation will be restricted in its

operation, as all offers to a smaller number than 500 will not be

within its regulatory ambit.

Is such a numerical criterion, however, a valid one? Should the

number of individuals or companies to whom an offer is made really be

the determining factor, or should the nature of those individuals and

companies also be considered? Is an offer of securities to ten large

institutional investors as much in need of regulatory supervision as

an offer to ten inexperienced individuals purchasing their first

securities on an exchange market? In other words, should some form of

"need" criterion be utilized, either in place of, or in addition

to, a numerical criterion, in determining when an offer to the public

will be deemed to have been made?

1330

Should, on the other hand, an altogether different approach be taken

towards the problem, and should all issues of securities be subject

to regulation except in those instances in which the appropriate

administrative body decides that such regulation is not necessary?

Is this in fact a different approach, or will the criteria utilized

by the regulatory body in determining whether to grant exemption from the

regulatory provisions be the same types of criteria, viz., number and

need, as discussed above?

This problem exists in Australia despite a number of attempts to

provide an accepted criterion for determining exactly when such an

offer will be deemed to exist. The State companies legislation27includes a provision which stipulates that bona fide offers or

invitations relating to shares or debentures will not be deemed offers

to the public if they come within any of the following categories:

(i) offers or invitations to enter into an underwriting

agreement;

(ii) offers or invitations made to persons whose ordinary

business it is to buy or sell shares or debentures,

whether as principal or agent;

(iii) offers or invitations made to existing members or

debenture holders of a corporation which relate to shares

in or debentures of that corporation;

1331

(iv) offers or invitations made to a dissenting offeree

within the meaning of section 18OX, or within the meaning

of section 185, to existing members of a transferor

company with regard to shares in a transferee company;

or, within the meaning of section 270, to existing

members of the company relating to shares in the 28corporation.

Thus, while it has added specific details of situations in which there

will not be deemed to be an offer to the public, the Australian State

companies acts’ definition has not indicated clearly and positively

what will in fact constitute an offer to the public.

The specific exclusions detailed in the Australian State legislation

are, however, of great importance, not so much for their specific

content, but for their implied acceptance of the ’’need” principle in

relation to the question of determining what will constitute an "offer

to the public” . Each of situations (i) - (iv) above is able to be

exempted from the prospectus and other requirements which must be

satisfied when there is an offer to the public only because there is,

in these situations, no need to provide the protection of the statute

to those offerees. Where, for example, there is an underwriting

agreement, or where persons are in the business of buying or selling

securities, there is already a degree of expertise which obviates the

need for the protection provisions to be implemented.

1332

If this implied acceptance of the need principle is evident in the

negative exemptions granted from the concept of offer to the public,

one wonders why it was not given expression in a positive way by

providing in the statute that the whole method of determining when

there would be an offer to the public would be based upon that "need"

principle.

The major Australian decision on the phrase "offer to the public",29Lee v. Evans, does not provide any clear criterion or set of criteria

which one can apply to all "offer to the public" situations. Chief

Justice Barwick’s specific statement that, in the case of

invitations which are not in their terms or nature invitations to the

public, whether they do become invitations to the public will depend

on "the context of each particular enactment and the circumstances 30of each case", leaves unresolved the whole question of what exactly

constitutes an "offer to the public".

31A recent New South Wales Supreme Court decision dealing with an

offer of interests under Section 83 of the Companies Act, has held

that the statutory prohibitions "encompass any solicitation of the

public to enter into a course of negotiations calculated to result in32the issue of an interest". Again, however, no indication is given

as to exactly what comprises "the public" in this context.

1333

The Eggleston Committee recommended that, first, a maximum number of

fifty persons might be approached in respect of an issue of securities

within any one period of three months without the prospectus provisions

becoming operative, and secondly, in the case of offers or invitations

to existing shareholders, where those offers or invitations exceed

fifty in number, a "director's proposal" be required to be attached to

any such offer or invitation. The concept of a numerical criterion

as recommended by the Committee was rejected by the Wheat Report in

the United States and the Eggleston Committee’s attempt to overcome

this fact by reference to the existence of the American over-the-

counter market and the lack of such a market in Australia fails to

overcome the significance of that rejection. Surprisingly, the

Eggleston Committee made no reference to the important recommendations

of the Ontario "Merger Study".

While its recommendations in many areas have been sound, the

Committee's adoption of a single numerical criterion for determining

the complex problems associated with defining "offer to the public",

particularly when that criterion has been so strongly and so widely

criticised, detracts from the strength of its recommendations in this

particular area.

1334

The memorandum*^ prepared by Professor Loss during his visit to

Australia last year dealt only briefly with a number of important

substantive matters, included amongst which was the problem of

determining when exactly there is a public offering of securities.

Disappointingly, Professor Loss recommended only that the problem be

resolved by following the United States Federal Securities Draft Code’s

concept of a ’’limited offering”, defined in terms of not more than 35

buyers,apart from an indefinite number of "institutional investors".

While it may be beneficial to resolve this question in terms of

’’buyers” rather than ’’offerees”, the continued reliance upon a

numerical criterion (reflected in both the Draft Code and in the Fifth

Interim Report of the Eggleston Committee) indicates a basically

unsatisfactory approach to the problem. A large number of other

countries have adopted, in whole or in part, an alternative ’’needs”

approach which provides a far more reliable indication of when exactly

a "public offering” occurs and thus when certain regulatory provisions

come into operation. This author rejects the numerical criterion

approach, and recommends the adoption of an approach towards this

problem based upon the needs criterion alone.

The report prepared in 1973 by the New South Wales Assistant35Commissioner for Corporate Affairs, Mr. A.B. Greenwood, examined

Australian, United States and Canadian experience in relation to this

problem, and was correctly critical of the numerical criterion as a

basis for deteimining where there was a public offering of securities.

1335

Wisely favouring the needs approach of the United States Ralston Purina

case as the basis for any worthwhile attempt to overcome the problem,

and rejecting the A.L.I. Draft Code’s numerical concept, the

Greenwood Report expressed the view that the SEC’s proposed Rule 146

provided a model which could with advantage be adapted to Australian

conditions.

The significance of this recommendation lies in the fact that it

accepts the ’’need” criterion as the proper basis for determining whether

there is to be an offer of securities to the public. The acceptance

of this criterion by one of Australia’s most highly placed securities

administrators does indicate that it may yet be possible for it to

be adopted in this country. It represents not only the most equitable

manner of resolving the problem, but it is consistent with the whole

range of exemptions granted from the regulatory provisions. To adopt

any other criterion would be, as is currently the situation, to fly

in the face of that well established exemption procedure.

This author agrees with the recommendations of the Greenwood Report,

and suggests that Australian legislators examine both the Canadian

and the United States experience in this area. In respect of the36former, attention should be accorded to the Merger Report, and to

the public and non-public offering concept of Ontario’s Business

Corporations Act, 1970. In respect of the latter, attention should

1336

be accorded to the Ralston Purina case, and to subsequent decisions38 39applying the principles established therein, the Wheat Report, and

particularly to the SEC's proposed Rule 146.^

The most important of these North American developments confirm the

trend towards the acceptance of a '’need” standard for detamining when

there is an offer of securities to the public. Against this background,

this author recommends that the approach to be adopted by the

Commonwealth Securities Commission should be as follows. It should be

assumed that all issues of securities which are not within specific

exemptions granted by that body will be deemed to be issues or offers

to the public. Such exemptions should, it is suggested, be strictly

limited to only these few situations in which it can be clearly

established that there is no need for the protective provisions of the

legislation to be implemented. This author recommends that exemption

be granted only to issues to institutional investors and to under­

writers and to those issues of securities which, in the opinion of

the Commonwealth Securities Commission do not, in the public interest,

require the application of the regulatory provisions. This latter

provision would enable the Commission to grant exemption to companies

falling within the category of what are today 'private* companies

(including family companies and small business enterprises) but to

require the application of those provisions to any other companies whose

issue of securities it regards as being affected with the public

interest. In the case of all other offerees or purchasers, no matter

37

how great their reputed experience in the securities markets nor the

closeness of their relationship to the issuer, the protective

provisions should apply. By restricting the exemption situations to

those in which it is absolutely clear that investor protection

is not needed, it may be ensured that those investor protection provisions

will have a very wide application throughout the securities markets, and

that the level of investor protection within any particular market will

be substantially enhanced.

The vesting of such wide discretionary power in a securities regulatory

body is, it is submitted, necessary if there is to be effective control

of both the distribution of securities and the post-distribution

reporting of the activities of companies in which the public has an

interest. This author’s proposal, if adopted, would ensure that the

appropriate regulatory body would be adequately equipped to ensure

that the result was achieved.

2. Public Issues

As with its earlier treatment of private placements, the Rae Report's

examination of public issues has taken a number of case-studies which

it has used to illustrate particular defects in the Australian

regulatory system. Again, however, its treatment is essentially very

selective, and while its examination of the particular case-studies

in question is detailed and comprehensive, many other important

aspects of the regulation of public issues are not examined.

1337

1338

The first case-study detailed by the Report, that of Australian

Consolidated Minerals N.L. (ACM) illustrates two important and related

problems, the first of which is that in many "public" issues of

securities, the public itself was, through a number of means,

precluded from participating fairly in those issues. In this

particular company's case, it was finally the position that some 26141of the total issue was not available to the public, largely as the

result of the operations of the broking firms associated with the issue

and the directors and promoters of the company. The Senate Committee

rightly concluded that the company's prospectus, which did not42disclose this plan of distribution, was "significantly misleading".

Additionally, the Committee was correctly critical of the absence of

any State government or stock exchange guidelines which would43regulate such practices.

Secondly, and closely associated with the first problem, is the role

of brokers, underwriters and stock exchanges in connection with such

practices. For example, brokers felt under no obligation to disclose44their interest in a particular flotation to the public; their

eagerness for new business appeared to influence the quality of the

new issues which they would s u p p o r t t h e y were often placed in

serious conflict of interest situationsand they derived advantages

through, for example, not charging their associated share-trading47companies the normal brokerage charges on share transactions.

1339

Additionally, the Senate Committee found that brokers also failed,

in their industry self-regulatory roles as members of stock exchange

committees, to act in a manner which adequately protected the interests

of investors. Thus, for example, they had failed to introduce an

exchange rule requiring that brokers’ interests in public issues be 48disclosed, they were reluctant to investigate closely the affairs

of their colleagues, and they failed to apply to themselves the

full disclosure standards which they required of public companies.

While the Rae Report's criticisms of the activities of brokers in

these respects is valid (although it probably relates equally to the

problem of regulating the operators within the securities markets as

it does to regulating the public issue of securities), it is difficult

to agree with the additional criticism which it levels at the practice

of brokers acting as directors of those public companies the securities

of which are recommended by that broker's firm.^ To this author, so

long as it is disclosed in, for example, the prospectus and in any

investment advisory literature forwarded by that firm, that the

broker is a director of the company in question, that should

constitute adequate protection for investors in the securities of that

company. It is only in the event of potential investors being unaware

of that broker's position in the company that problems would be likely

to arise.

1340

Finally, in respect of this particular case-study, the Rae Report

made very useful references to the United States’ attempts at52regulating the "hot issue" market, references which will no doubt

be elaborated upon in the Committee’s chapter of recommendations.

The Rae Report’s second case-study in this area highlighted an aspect

of the securities markets to which little attmtion has previously been

directed by Australian securities legislators, viz., the secondary

distribution of securities already previously issued. The Report’s

conclusions, drawn from the examination of the issue of securities in53Flinders Petroleum No Liability, clearly establish that such a

practice may deny to investors that information as to the other

securities of the particular company concerned which is needed to allow

a properly informed investment decision to be made. Again, however,

the Committee appears not to have investigated the criteria necessary

to adequately distinguish between those issues which are "to the

public" and those which are not.

The Report’s two remaining case-studies in this area, those of Rimibo

Resources Limited*^ and Devex Limited,^ are important primarily

because they illustrate the manner in which funds raised from the

public are used for purposes other than those of which the public is

informed prior to the investment funds being raised. In both case-

studies, although the prospectus indicated that the company was

1341

concerned with mineral exploration or management activities, in fact

the intentions of the company's directors were that a major portion of the

funds raised from the public would be used for share-trading purposes.

Thus, the public was being invited to invest funds for a particular

stated purpose, while those who controlled the issuing company in each

instance had quite different intentions as to the manner in which the

monies would be utilized. Additionally, neither State companies

legislation nor stock exchange requirements were effective in

preventing such practices.

Despite the fact that it so clearly identified these abuses, however,

the Rae Report, at least at this stage, made no recommendations as

to possible means of preventing their occurrence. To this author, one

method of providing appropriate regulation, as recommended in Chapter 4

of this study, is to adopt a rather more "merit"-orientated approach

towards the control of this area of market activity.

This could be done through the appropriate regulatory body, at the

federal level, requiring all proposed issuer companies to have

established a sound business record or, if newly incorporated, to

have sound management capability; to require such companies to

demonstrate the need for, and the bona fide nature of, the proposed

public issue; and for that body to satisfy itself as to the

arrangements which have been or will be made for the use of the funds

raised from the public. It will be recalled that it was suggested

1342

in Chapter 4 of this study that the proposed Commonwealth Securities

Commission be empowered to require an issuer company to deposit with

it a percentage of the funds raised from the public until the company

can establish that it has used or has commenced to use the balance of

those funds in accordance with its prospectus commitments.

It is submitted that the findings of the Rae Report in this area

illustrate the need for a provision of this kind in federal securities

legislation in this country.

Although the Rae Report did deal coup rehens ively with those areas of

the public distribution of securities which it examined, it was again

very selective in its approach, and it did not appear to consider many

other important areas, nor did it consider the overall problems posed

by that whole aspect of the securities market. It did not, for example,

consider either the proper role of the prospectus or its contents;

the usefulness or otherwise of the preliminary prospectus; the

regulation of prospectus, etc., publicity; the permitted and

prohibited activities on the part of issuers, brokers, underwriters,

etc., during each stage of the distribution process; or the relation­

ship which should exist between the provisions regulating the initial

distribution of securities and those regulating the continuous

reporting of the post-distribution activities of public companies.

While it is appreciated that the Senate Committee could not deal with

all aspects of the regulation of the Australian securities market, it

1343

is submitted that the features of that market mentioned immediately

above are of great importance to its effective regulation, and that

they were within the Committee’s terms of reference.*^

Finally, at least in those portions of the Committee’s report

published to date, there does not seem to have been any questioning

of the continued validity of the disclosure principle as the sole

criterion for market regulation in this area. For the reasons detailed

in Chapter 4 of this study, and as illustrated in relation to the Rae

Report's Rimibo and Devex case-studies, this author believes that

consideration must be given to tempering that disclosure approach

with "merit” criteria if an effective regulatory system is to be

eventually devised.

B. Regulation of the Exchange Markets

The Rae Report has discussed the problem of regulating the exchange57markets in the context of a number of its case-studies. It has,

however, adopted a fundamentally different approach to the problem from

that utilized by this author. Whereas the Senate Committee appears to

have been primarily concerned with detailing a number of the abuses

which have occurred within the securities exchange markets (such as,

for example, "pools", "churning" and "runs") and with establishing

the defects in current exchange practices aimed at regulating those

1344

particular abuses, this author has concentrated his attention upon the

structure of the exchange markets, upon their present form and their

likely future composition. In particular, this study has

concentrated upon legislative attempts at regulating the exchange

markets, has pointed out weaknesses in those existing statutory

provisions and has made specific recommendations for the overall

regulation of this country’s exchange markets.

Given this fundamental difference in approach, what evidence has the

Rae Report provided of abuses within the exchange markets? The

Committee found evidence of the occurrence of what were previously58described as ’’pools”, ’’churning" and "runs” , all of which are well-

known practices within most developed securities markets. Although it

found that "...the ’run’ type of manipulation has been practised to59an appreciable extent in recent years”, it concluded that attempts at

regulation had not been effective. In this situation, it correctly

concluded that a body capable of carrying out immediate checks on a

national basis was required,^ and that ” ...a more effective method

of preventive treatment would be by means of a regulatory body61designed to monitor and control current events” .

The Committee’s findings in this respect were, in this author’s view,

unexceptionable, particularly in the light of its subsequent discussion

of a case-study revealing the extent of the conflict of interest

1345

f\7situation in which a broker associated with a run may be involved.

The Committee’s conclusion based on its findings was again

unexceptionable; "...a lax and complacent method of self-regulation

by the stock exchanges has permitted brokers freely to develop multiple

associations involving them in irreconcilable conflicts.”

Perhaps the Committee’s most important findings in respect of the

exchange markets, however, are to be found in its discussion of the

failings of the stock exchanges.^ Examining the role of the exchanges

as industry self-regulatory bodies, the Committee found that they had

limited jurisdiction and power; that they could not regulate many

intermediaries in the securities markets and that their power over

listed companies was limited; that their regulation of their own

members provided examples both of situations where the exchanges had

incomplete information on the activities of those members^ and of

situations in which then existing stock exchange rules weref\ Vinadequate.

Of particular importance were the Committee’s findings relating to

the defects in the exchange rules governing the financial soundness

of m e m b e r s t h e lack of uniformity in the ’’uniform" A.A.S.E.69rules; and the unprofessional, haphazard and "clubbish” approach

70adopted by exchange committees and chaiman. These findings are

paralleled by those of this author in Chapter 5 of this study.

1346

Finally, in this area, the Committee examined the exchanges’ capacity

to regulate the market itself, and again it found that the then current

regulatory procedures were lacking, particularly in relation to the

granting of listing to companies without a proven track record and to71the enforcement of A.A.S.E. listing requirements.

As was stated above, this author's recommendation for a greater ’’merit"

emphasis on the granting of listing, thus forcing companies seeking

listing to have, inter alia, a good business record, would go some way

towards resolving the foimer of these two defects. The latter defect

was discussed in Chapter 5 of this study, and constitutes one of the

reasons for this author's recommendation for the establishment of a

federal regulatory body to ensure uniformity in this area.

While the Committee’s general conclusion in this area was again 72unobjectionable, it did not proceed to recommend what positive

steps should, in its view, have been taken to resolve the problems

which, it had undoubtedly established, did exist. While it provides

strong support for this author's view that the exchange markets must

themselves be subject to strict governmental regulation, it did not

consider, for example, the overall role of the exchange markets in a

national securities market; the extent to which government should

control those markets; the desirable powers of the exchanges in

relation to listing, membership, discipline of members, rule-making

1347

and amendment of rules; the concept of a national stock exchange or

the likely future structure of the exchange markets in the light of

technological developments in this country and overseas.

1347

and amendment of rules; the concept of a national stock exchange or

the likely future structure of the exchange markets in the light of

technological developments in this country and overseas.

1348

C. Regulation of Brokers, Dealers and Investment Advisers

The Rae Report has devoted the major portion of its contents to the

problems associated with the regulation of the operators in the

securities markets. After providing detailed information as to73the financial structure and activities of stock exchange member firms'

74the Report examined a number of case-studies, before generally

discussing the activities of investment consultants and share brokers75m the context of share tipping. This study will ocamine the findings

and conclusions of the Senate Committee in each of these areas in the76light of this author's own recommendations.

1. The Financial Structure and Activities of Exchange Member Firms

The information presented by the Senate Committee in this area is of

great significance in that it represents the first occasion on which

such information has been collected and made available in this country.

It provides an insight into the financial basis for the operations

of exchange member firms which will be immensely helpful to federal

legislators concerned to introduce legislation aimed at protecting

investors against the possibility of loss through broker defalcation,

mismanagement of funds, etc.

A number of matters raised by the Committee are, in this author's view,

of particular importance. First, the Committee's appreciation of

the restrictions which are imposed upon the operations of brokers

1349

by virtue of their trading as partnerships (particularly in that this

prevents their utilisation of public funds) supports this author's

proposal that brokers in Australia should be required to adopt a

corporate structure, and that it should not be open to them to trade

as partnerships. Once the partnership concept was dispensed with

and the corporate structure adopted, it would be possible for such

companies to issue their own securities to the public. Precedents for

this type of structure and practice do of course exist in both the

United States and the United Kingdom. The Rae Report did, however,

at least at this stage of its deliberations, stop short of making

a recommendation to this effect.

79Secondly, the Committee’s discussion of debtor's balances indicated

the need for a standard set of broker reporting and accounting

procedures to ensure that all brokers on all exchanges adopted uniform

criteria. This type of requirement is one which this author sees as

being within the function of the proposed Commonwealth Securities

Commission; part of its role in establishing criteria for the

operations of the proposed Australian Stock Exchange should be the80existence of such uniform reporting and accounting standards.

The Rae Report has itself recommended that a national regulatory authority

give attention to ”__the present lack of uniformity in the preparation

and presentation of the financial accounts of members of the different

stock exchanges".^

1350

Thirdly, the Committee's examination of the manner in which brokers'

bank trust accounts have been operated was rather disquieting in its

revelation that such accounts were not always properly maintained;

that although they were designed to keep clients' funds separate,

they were sometimes listed as assets in brokers' accounts without

being listed correspondingly as liabilities to clients; and that82such treatment of the trust accounts often gave rise to audit problems.

The Report's findings in this area will oblige a future federal

regulatory body to ensure that provision is made for the effective

separation and maintenance of such trust funds and for their accurate

and separate listing in brokers' accounts. In this respect, the Report's83reference to the United States experience will be of assistance.

Again, in this particular area, the criticism of the usual form of net84capital requirements expressed in a report cited by the Committee

confirms this author's view that consideration should be given to

entirely new methods of attempting to ensure the protection of 85investors .

Fifthly, the Senate Committee provided valuable information in respect

of the activities of exchange member firms trading as principals. The

Report's findings as to the methods of trading used by brokers in their86capacity as principals will provide material which will be of

assistance to legislators in their tackling of the problem of conflict

of interest situations involving brokers acting both as agents and

principals.

1351

Sixthly, the Rae Report correctly pointed out that at the time of

the A.A.S.E. commission rate increase in 1971, the question which

should have been asked was "... whether the public interest would

have been better served by replacing the structure of fixed commission87rates with competitively determined rates." As this author has

recommended in this study's examination of the regulation of the88securities markets, such rates should be on a purely competitive

basis, and fixed commission rates should be prohibited.

Finally, the Rae Report confirms what has been long known but too

seldom acknowledged, particularly by state securities legislators

and administrators, viz. , "... that there is a national market in

Australian share securities with the Sydney and Melbourne firms89accounting for by far the major proportion of turnover".

While again suffering from the absence of detailed and comprehensive

recommendations for the future regulation of the Australian securities

industry, the significance of this aspect of the Report lies in the

background information it provides for the future regulation of the

activities of exchange member brokers.

2. Case-Study: John T. Martin $ Co.

In the first and most detailed of three case-studies of brokers in

the Australian securities industry, the Senate Committee examined the

activities of John T. Martin § Co., a Melbourne broker which, during its

1352

short life history of 13 months, managed to incur losses, on the

part of itself and two public companies, totalling approximately

$3 million. While careful to qualify the extent to which its findings

in relation to Martin § Co. could be applied generally to the stockbroking

profession, the Committee produced a significant quantity of information

as to the manner in which it is possible for a broking firm to operate

with relative immunity as far as stock exchanges and State regulatory

legislation is concerned.

The Rae Report presents a number of aspects of the activities of the

broking firm which, when combined, resulted in the abovementioned loss

of approximately $3 million. Included amongst these are the following.

First, there was large trading in speculative securities by a limited90number of employees of the firm on very favourable terms as to credit. This

trading, some of which took place under false names and in the names

of proprietary companies (to avoid complying with the firm’s internal

regulations in this respect and to avoid taxation) seemed invariably

to result in losses on the part of the employees concerned. The

major problems raised by this practice were the losses incurred by the

brokerage firm through its provision of credit to employees, and the

inevitable conflicts of interest. It is difficult to see, however,

that even if the stock exchanges concerned had promulgated rules

against such employee trading, that it would in many cases be possible

to establish that such trading had in fact occurred. The use of

fictitious names and companies would effectively conceal most such

transactions.

1353

Secondly, the Report's information in relation to Martin § Co. indicated

that the firm's employees had permitted quite extensive short selling91on the part of some of the firm's clients. In particular, the

reported series of transactions between "The Client" and "The Employee"

reveal the difficulties which can arise through the giving and the

subsequent denial of merely verbal instructions to effect securities

transactions. Of even greater significance in this respect, however, on

a national level, is the Report's illustration of how a Melbourne

broker, prohibited from short-selling in Melbourne because of exchange

rules, was obliged to allow its clients to short-sell through its

Sydney branch office, in order to remain competitive in Sydney, where

such practice was not prohibited. This phenomenon clearly points to

the need for national regulation which alone is capable of imposing

State by State uniformity in respect of such a practice.

The other disquieting aspect of the short-selling situation revealed

in the report is the extent of the involvement of Martin Co. as

principals. Not only did the firm attempt to cover the short positions

of its clients through extensive buying, but it also speculated heavily

itself in the shares of the Leopold company. The worrying aspect of

this activity lies not in the principal's use of the mechanism of

short-selling (which is, if properly regulated, a proper market feature)

but rather in the evidence which it produces of a willingness on the

part of supposedly astute market operators to speculate heavily in the

stock of a particular company in an endeavour to retrieve losses

occasioned by other firm activity.

1354

The two floatations described by the Rae Report with which Martin § Co.

were associated, those of Australian Continental Resources Limited

(ACR) and Glomex Limited, are important for three major reasons. First,

that after both floatations, the directors of those companies began

to use portion of the funds raised from the public for market trading in

speculative securities. This was despite the fact that the prospectus

for the former issue indicated, inter alia, that ”... the management

does not intend to make investments in high risk projectsl and for the

latter, that its primary objective was the implementation of "... an

active mineral exploration and development programme on 101 Western94Australian mineral claims the Company has agreed to acquire." Despite

equivocations by the directors involved, it is clear that neither

prospectus envisaged that the investment funds raised from the public

would be used for such speculative trading. Again, this author

reiterates his recommendation that strict controls be imposed upon the95use by public companies of such investment funds.

Secondly, the ACR float revealed the extent to which brokers’

investment advisory newsletters to clients could place those brokers96in inpossible conflict of interest situations. In the case of

Martin § Co., the subscribers to the broker's newsletter were better

informed as to the activities of a particular company with which that

broker was associated than were either the stock exchange or the

public. As the Rae Report points out, the propriety of this particular

newsletter had not at the time of the Report (so far as the Committee

was aware) been investigated by any stock exchange or State97governmental authority.

1355

Thirdly, the Senate Committee correctly emphasised, as a result of

its investigation of Martin § Co.'s accounts, the difficulties involved98in adequately supervising clients’ trust accounts. This was a

matter which the Committee had mentioned in an early chapter of

the Report and is one which deserves the close attention of federal

legislators in this country.

Finally, the Report's conclusion that the supervisory system which

failed to detect the Martin § Co. problem would have the same

negative result in respect of other firms is undisputable. Once

again, without presenting detailed recommendations of its own, the

Committee produced valuable evidence to enable federal legislators

to gain an awareness of the type of problems they should be attempting

to regulate in this complex area.

3. Case-Study : Michael Ricketson § Co.

In its second major case study of a particular broking firm, the

Senate Committee examined a Melbourne firm which, during the brief

period in which it carried on business, relied upon its house account99trading for its very survival. The Committee's examination of this

particular firm is valuable for a number of reasons. First, it

illustrated the extent to which one particular, small firm became

dependent upon trading as a dealer in securities for its commercial

viability. However, no general conclusions as to the extent to which

other firms relied upon such trading can be drawn from the experience

of this one firm.

1356

Secondly, the Report illustrated the manner in which, by virtue of

not having to pay brokerage costs, brokers who deal for their own

account are in fact in a more favourable position than the clients

for whom they act on an agency basis.Additionally, it was

correctly pointed out, there is a question as to whether the commission

rates set by the exchanges do in fact mean that the investing public

is paying not only for the cost of the public’s transactions, but101also the broker's private transactions.

Thirdly, the collapse of Michael Ricketson § Co. revealed a distressing

picture of the inability of the particular stock exchange and the

relevant State regulatory authority to discover the true financial

picture of the firm. To this author, this is an extremely serious

problem and it calls into question the whole concept of the financial

soundness criteria ostensibly imposed by stock exchanges and State

regulatory agencies in this country. That is, despite the

calculation and promulgation of elaborate criteria as to net liquidity

requirements, etc., a small broking business was for a lengthy period of

time able to continue trading without its breach of these provisions

being detected. To this author, this situation indicates that the

future emphasis of the Commonwealth Securities Commission should be

directed towards the imposition of financial soundness criteria which

will not only bear a closer connection with commercial reality, but

will also be capable of rigorous and regular checking by that federal

authority, or by the proposed Australian Stock Exchange under its close

supervision.

The need for such an objective regulatory authority, as distinct

from an interested industry self-regulatory authority such as a

stock exchange committee, is superbly illustrated in the Committee’s

extract from Mr. Ricketson’s evidence;

1357

It is an extremely delicate thing even to talk off the record to one of your fellow members and to seek his advice or help in certain situations. You are imposing a great load on him both from his own business point of view and from his approach to his fellow members as a whole. As far as the chairman is concerned, it is again virtually impossible to talk to the chairman of the Stock Exchange of Melbourne on an off the record basis. He just cannot do this. 02

Fourthly, the same need for objective regulation is evidenced by the

Senate Committee’s evidence as to the failure of the exchange or the

auditors to question Mr. Ricketson's well-established practice

of ’’line-switching”; this evidence highlights the failure of the

auditors on monthly visits to detect the firm’s problems, and, perhaps

most importantly, the failure of the exchange to provide adequate

guidelines within which the auditors could confidently carry out their

appointed tasks.

The overall value of the Rae Report’s examination of the affairs of

Michael Ricketson § Co. thus lies in its clear indication of the failure

of the exchange as a proper self-regulatory mechanism and the failure

of the relevant State regulatory agency. The Report’s evidence provides

strong support for this author’s general contention that a disinterested

federal body is required to adequately control the activities of operators

1358

in the securities market, and for his specific contention that a

close examination needs to be made of the current approach towards

the criteria utilised for determining the financial soundness of

brokers and dealers in that market.

4. Case-study : A.J. Green, Burchell § Co. * 104

Continuing its emphasis upon the lack of effective regulation of stock

exchange member firms, the Senate Committee also investigated the failure

of the Adelaide firm of A.J. Green, Burchell § Co.,which defaulted in

early 1971 with an estimated deficiency of almost half a million

dollars.103

The Committee’s major reasons for undertaking yet another investigation

of broker failure were that this case-study provided an example of

the neglect of procedures for maintaining a separate trust account

for clients’ funds and that it revealed aspects of the standards of104self-regulation existing in the Adelaide Stock Exchange. While

it might be agreed that these aspects of regulatory procedure had been

adequately covered in earlier evidence contained in the Report, the

Committee did, in this author’s view, produce additional evidence in

respect of the Adelaide broker which illustrated some important defects

in current regulatory procedures.

First, the Committee expressed surprise that an individual broker could

not understand the balance sheet and profit and loss account of his

1359

own firm, and stated that neither the Adelaide nor other exchanges

required their members to be able "... to understand elementary

accounting and financial records___"105 Two points need to be made

in respect of the Committee's observation: (i) the fact that Mr. Green

was unable to understand basic accounting documents is not evidence

that any other broker suffered from the same disability; and (ii)

the existence of Mr. Green's disability is the natural end result of

the neglect in Australia's securities industry of the question of

whether stockbrokers need to be in some way qualified to carry out

their profession. As this author has recommended in Chapter 6 of this

study, it is essential that educational and business experience

requirements be imposed by the proposed Commonwealth Securities

Commission, and that these requirements be complied with by all intending

applicants for membership of the proposed Australian Stock Exchange.

Secondly, the Committee found that the Adelaide Stock Exchange took

no effective steps to ensure that its member firm was able either

directly, or indirectly through sub-underwriting agreements, to meet the

financial commitments it assumed when it entered into an agreement to106underwrite a particular issue of securities. This finding raises

the important question of the extent to which an exchange should be

liable for the day-to-day supervision of the activities of its members.

In relation to this particular question, the choices open to the

exchange would seem to be either to insist that all member brokers entering

into an underwriting agreement establish to the exchange's satisfaction

1360

that they can, directly or indirectly, meet the financial commitments

which they are undertaking, or that the exchange impose only its

normal financial liability criteria upon its members, and that it rely

upon their business commonsense (as well as a large fidelity fund

should that commonsense fail) to protect investors.

While it would be reassuring to think that the latter alternative would

be consistent with a high degree of investor protection, the evidence

furnished by the Rae Report is sufficient to cast doubt upon this conclusion,

and it seems that the close supervision of the underwriting commitments

undertaken by exchange members may have to be part of the regulatory function

of the proposed Australian Stock Exchange under the supervision of the

proposed Commonwealth Securities Commission.

Thirdly, it is clear that one of the major reasons for the collapse

of the firm in question was that its employees engaged in unsuccessful

speculation in the market, encouraged to some extent by the generous

profit-sharing conditions then prevailing in the firm. While this was

undoubtedly a causal factor in the firm’s collapse, it seems to this

author that such ill-advised activity will be prevented only if exchanges

take the step of prohibiting brokers absolutely from trading for their

own account. In other words, until such time as the ’’broker” and "dealer"

functions of operators are conpletely separated (and, as indicated

earlier in this study, there is some doubt as to the necessity for that

course of action) it will always be open to exchange members,

through artifices of various kinds, to trade in a speculative market

situation.

1361

Fourthly, the Rae Report’s findings in respect of the inadequacy of

the Adelaide Stock Exchange’s fidelity fund highlight this author's

earlier recommendation that there must be both close supervision of

such funds and final governmental support for investors once such

funds are exhausted.

Finally, the Committee's evidence established once again that the self-

regulatory activities of the exchanges cannot be relied upon to provide

adequate protection to investors. This fact was, in this particular

situation, clearly revealed through the failure of the Adelaide

exchange to properly investigate the auditor’s report which indicated

that the firm had not complied, in its handling of its trust account,108with the appropriate statutory provisions.

Again, however, the Report suffers through not proceeding at that

stage to make detailed recommendations for overcoming the problems

revealed by the important information which it acquired.

5. Investment Advisers

In attempting to indicate the problems which exist in respect of the

regulation of investment advisers, the Senate Committee has, to this

author, been less convincing than it has been in its treatment of,

for example, exchange member brokers. The Senate Committee relied

primarily upon the activities of Australian Investment Counsellors

Pty. Ltd. (AIC) to illustrate the defects which it saw existing in

the present regulatory mechanisms. It must be recognised at the outset,

1362

however, that the control of investment advisers is not a matter for the

stock exchanges, but rather for the various State regulator/ authorities.109Although this was conceded by the Committee, its report did not

accord sufficient emphasis to present State attempts to regulate

the activities of these operators, nor did it accord attention to the

very comprehensive overseas experience which exists in this area,

particularly in the United States.

In relation to AIC, the Committee did establish both that brokers were110the main source of the company’s information, and also that it

"...took no steps to check the reliability of the information which111it received from brokers and which it was distributing in the market."

The first of these findings does not appear to this author to be a

source of concern, as one might expect that certain worthwhile information

would be in the possession of brokers, particularly those closely

concerned with particular companies, as, for example, in the underwriting

situation. The latter finding is, however, rather., disturbing, as the

widespread promulgation of unreliable or unverified information might be

expected to cause serious investor loss.

There are a number of possible methods of attacking this problem.

First, the natural degree of regulation imposed through the rejection by

investors of inaccurate investment advice might occur only after

substantial investor losses have been incurred. For this reason, it

would not appear prudent to allow only the natural market forces to

regulate the problem.

1363

Secondly, it would be theoretically open for investors who had acted

on the basis of the negligently given information to bring private

suits against the investment adviser. Such actions would, however,

be extremely difficult to maintain, as, apart from the possibilities

of disclaimers of liability, it would be in some cases impossible to

establish that the information could have been verified by the adviser

and thus that he had acted negligently in not doing so.

Thirdly, it would be possible for the governmental regulatory authority

to require that copies of all investment advisory bulletins forwarded

by investment advisers be sent to that body. These could then be

checked carefully and, in the event of dubious information or advice

appearing therein, the adviser concerned could be called upon to

justify that information or advice. Failure to satisfy the regulatory

body in this area could lead to suspension or the withdrawal of

registration.

While it might initially have been hoped that the imposition of business

experience qualifications by the various State acts may have gone

some way towards resolving this problem, it appears that if the findings

of the Rae Report in this area may be applied to other investment

advisers as well as to AIC, some greater and continuing degree of

supervision of the activities of such advisers may be required.

1364

In relation to AIC’s activities as a share trader in addition to its

advisory role, the Senate Committee was critical of the purchase of

securities, by the adviser’s associated share trading company, after

the adviser had recommended those particular securities to its subscribers.

Before such criticism may be validly directed at the adviser, however, it

seems to this author that two assumptions must have been made. First,

that the circulation of the adviser’s newsletter was substantial enough

to result in a price increase in the particular securities if the

subscribers followed the advice; as that particular investment adviser

was only one of a number of such operators functioning within the market,

it appears unlikely that a price increase would flow so directly.

Secondly, it would have to be assumed that the subscriber who purchased

the recommended securities and thus forced up the price acted only

on the basis of that investment newsletter's advice, and that he was not

aware of any other advice relating to those securities. Again, because

of the nature of the market, especially a speculative market, it does not

seem to this author that that assumption can necessarily be made. These112points were implicit in the Committee’s questioning of Mr. M.R.L. Dowling

and the Committee’s attempt to overcome them was, in this author’s view,

not successful.

The other major criticisms expressed by the Committee relate to AIC’s role

as a company promoter and manager. Despite the fact that the Committee

seemed opposed in principle to such activities on the part of the adviser,

it seems to this author that the major problem revealed by the Committee's

1365

evidence was that which had been discussed earlier in the Report,

viz., the absence of exchange or governmental regulations requiring

the management of a listed company to utilise the funds raised from a

public issue of its securities only in accordance withthe objectives113stated in the prospectus, Again, this author’s recommendation for

strict controls in this area would deal effectively with this situation.

Probably the most disappointing aspect of the Committee’s examination114of the role of investment advisers (apart from its concentration

merely upon one case-study which may or may not have been representative)

was its failure to examine closely the securities industry legislation

recently introduced in some Australian states. While it is not suggested

that these statutes provide a perfect means of regulating investment

advisers, they do at least attempt to impose qualification requirements

relating to financial soundness and business experience. As such, they

did merit the Committee’s attention. Additionally, as indicated earlier

in this chapter, the experience of the United States with the

Investment Advisers Act, 1940, might have been expected also to form part

of the Committee’s examination of this area.

D. Continuous Disclosure Requirements

Although the problem of effectively regulating the post-distribution

activities of public companies, in particular of ensuring that their

activities are fully and fairly reported, is of paramount importance

to any system of securities regulation, it does not appear to have

1366

formed part of that material which received the Senate Committee’s

detailed consideration. While the Committee's enphasis was under^

standably on the types of abuses prevalent in the boom and post-boom

conditions in Australia, the consideration of continuous reporting115requirements was well within the scope of its terms of reference.

Particularly as any future Australian federal regulatory body would

be inadequately equipped unless it had a wide range of powers in116the post-distribution reporting area, it is rather surprising

that the Committee did not obtain information as to the defects in

Australia’s current regulatory provisions in this area to use as a

base for future federal legislative provisions.

E. Insider Trading

In one of the most comprehensive sections of its report, the Senate

Committee examined the activities of a number of persons and companies

associated with Poseidon N.L. The background to this company is

too well-known to require reporting in this study; suffice it to say

that it appeared to provide the Senate Committee with an ideal vehicle

by which to demonstrate the evils of insider trading. To this author,

it was partly successful and partly unsuccessful in this endeavour.

The following examination of the Committee's findings will discuss in

turn each of the different categories of persons and companies involved.

1367

1. The Geologists

Although Poseidon’s geologists had been buying shares in the company

throughout the period April-July, 1969, and it was suggested that such117purchases were on the basis of inside information, it was the

purchase of 4000 shares by their company, and the purchase of 3600 shares

by one of the individual geologists, on September 25, 1969 that the

Committee particularly saw as evidence of insider trading in those

securities. As it was eventually established that the favourable

drilling on the company's prospect took place on September 24, 1969, if

the geologists had purchased the securities on the following day on the

basis of that information, it would appear that they had been acting

on the basis of information not generally available to investors.

Two factors need to be noted, however, before the actions of the

geologists are used as an example of insider trading. First, despite118the Committee's findings, it was not conclusively established

that the geologist who placed the purchase orders for the geologists'

company and for himself (Mr. Jones) was aware of the results of the

drilling operation on the day prior to the purchase. Secondly, even

if the geologists were aware of such information, were they under any

legal or moral duty not to buy or sell shares on the basis of that

knowledge? Were they under any fiduciary duty to the company or its

shareholders not to utilise the knowledge which they had acquired, for

their own financial benefit? Was their purchase of the company's

securities the only factor responsible for the subsequent increase in

1368

value of those securities? Were they the only persons who had

possession of that knowledge? Was it not possible that a large

number of other persons associated with the drilling operation were

also purchasing securities at that time? Indeed, the possibility that

the geologists’buying was "__probably one of the reasons for119the rise in the price of Poseidon shares at the time..." was

conceded by the Committee. Thus the actions of the geologists in

this instance do not provide a straightforward illustration of what is

sometimes regarded as "insider trading" in a company’s securities.

2. The Broker/Company Director * 120 121

Mr. N.C. Shierlaw seems to have been in a rather different position.

Again, it has not been conclusively established that the purchases by

Mr. Shierlaw on September 25 and 26 were made on the basis of knowledge

of the drilling results of September 24 (despite the Committee's120conclusions in this area) as Mr. Shierlaw was able to advance two

believable reasons for those purchases which were not associated with121the drilling results.

In respect of his other actions, however, it appears that Mr. Shierlaw

may well have been in breach of his fiduciary obligations as a director

of Poseidon N.L. For example, the placement of 500,000 shares in

the coup any which was arranged at very short notice between the company’s

initial announcement to the stock exchange on September 29 and its

subsequent announcement on October 1 was largely taken by companies

associated with Mr. Shierlaw, As the announcement of October 1

caused a doubling in the value of the company's shares, and as the

information which caused that price increase was within Mr. Shierlaw’s

possession at the time of the making of that placement, the Committee

was correct in its finding that:

We believe that improper advantage was taken of this knowledge in arranging the placement to the companies associated with three of the Poseidon directors, to the clear advantage of those directors, their families and associates. z

To this author, Mr. Shierlaw’s actions were deserving of criticism

not because of his use of inside information as such, but rather

because, in his position as a director of the company, he took

advantage of that information and thus breached his fiduciary duties.

3. Mr. Biggs

Although the Senate Committee strongly inferred that Mr. Biggs knew

of the drilling discovery on September 24 and that his September 25

purchase of approximately 15,000 shares was based upon that information,

this was again a matter which to this author was not conclusively

established by the Committee. This is particularly so in the light

of Mr. Biggs' evidence that there were numerous rumours prevalent at

the time, and that he had heard talk,in a bar,of sulphides being 123found in Laverton.

1369

Indeed, the Committee did not indicate that it disbelieved this

evidence, but merely criticised the M... inadequate security arrangements

for preventing the dissemination of information about the progress with

the drilling before the market was informed" and urged "...a close

examination of the circumstances in which there should be prohibitions

on the dealings in shares by tippees and others before material124information has been made public."

The Committee's experience with Mr. Biggs highlights this author's 125earlier argument as to the impossibility of enforcing restrictions

upon what is regarded as insider trading. For example, will all of

the persons in the bar frequented by Mr. Biggs who act on such a rumour

be liable as tippees? If enough of the people in the bar come to know

of the information in question, will that information then be deemed

to have been made available to the public? It is unresolved

difficulties such as these, which of necessity arise in what are regarded

as insider trading situations, which require a detailed study of the

phenomenon in this and other jurisdictions before decisions are taken

to impose what may easily be an unsuitable and an unworkable regulatory

system upon the Australian securities markets.

4. Exchanges and Government Regulatory Agencies

Once again, the Senate Committee's criticism of the failure of the

exchange and State government regulatory mechanisms is very compelling.

Perhaps the most disturbing features of the evidence provided in this

1370

connection are the following. First, that it is quite possible

for an exchange chairman, from whom most regulatory initiative

seems to be required, to flow, to be placed in a hopeless conflict

of interest situation, with the inevitable result that it is the

investor rather than the broker who suffers. The activities of

Mr. Hynam, the Chairman of the Perth Stock Exchange, bear witness to

this fact.

Secondly, and this is probably not unrelated to the fact that it is the

brokers themselves who comprise stock exchange committees, neither the

Perth nor Adelaide exchanges exercised the powers, which they undoubtedly

had, to examine the buying and selling details of their member firms to125determine whether there were any irregularities.

Thirdly, it seems clear that there was, at least in the periods under

review, no effective liaison between the exchanges and the StateX 26government regulatory bodies in either Perth or Adelaide.

Particularly disturbing in this respect was the admission of the South

Australian Registrar of Companies that ,rNo surveillance has been127maintained on trading on the Stock Exchange during the past four years."

Finally, the conclusions drawn by the Committee in this area are sound

in so far as they relate to the need for a national regulatory body;

for that body to have adequate power to inquire, and to obtain

documents and records; for the existence of proper controls on the

1371

1372

activities of geologists associated with prospectuses; and for overall

regulation by persons other than interested members of the industry

itself.128 * 130 131

What this portion of the Committee's report does not do, however,

is to establish that there is a clear need for the total regulation

in this country of what is described as "insider trading." In the

case of Mr. Shierlaw, the company director, certainly there was breach

of a fiduciary obligation. In the cases of the geologists, Mr. Biggs

and the men in the bar, this section of the Report has not established

that their actions need be the subject of moral condemnation or legal

prohibition.

F. Administrative Bodies

1. Criticism of Existing Regulatory Bodies

As might have been expected, the Senate Committee was highly critical

of the regulation of the Australian securities industry by the various

State bodies charged with that responsibility. It was, for

example, critical of their lack of effectiveness on a national, rather130than a State, level; and of the lack of uniformity both in the

laws of the various States and the manner in which those laws were131administered. Although it did not make any comparative references

to overseas jurisdictions in this respect, the Committee could have

cited the United States and Canada (particularly the latter) as

countries in which attempts have been made to resolve similar problems.

1373

Additionally, the Committee criticised the differing standards in the

quality of the administration by the States of regulatory legislation.

First, it found that there were problems in the investigatory and

enforcement areas, due partly to the lack of experienced and

adequately qualified staff. While this is unfortunately true of the

State bodies, it must be remembered that it will also be true of any

new federal body to be established in this country. Depending upon the

extent to which any such new body is able to absorb existing State

personnel, the need may be even greater at federal level than

it currently is at State level.

Secondly, the Committee correctly identified the area of administrative

functions, and especially prospectus scrutiny, as one in which there

have also been regulatory problems. To this author, the need in this

particular area is of the utmost significance, especially in the event

of future federal legislation in this country being based to any extent

upon merit criteria. In this event, the administrative scrutiny of

the initial or base document will be critical, and sophisticated

decisions will have to be taken as to the business background of the

proposed issuer company, the justification for the proposed issue of

securities to the public, etc. It is in this situation that any

new federal body will be unable to fulfil its proper function unless

it has adequate, highly trained, personnel.

Thirdly, the Committee referred to the United States Securities and

Exchange Commission as an example of a regulatory body which had

developed a core of expertise and was capable of providing leadership

132

1374

in the improvement of the securities market. While this is? as

a general proposition, undoubtedly true, it must also be borne in

mind both that the SEC has not been immune from criticism for its

regulatory role within the securities markets, and that its expertise

has been built up over an extended period of time and in a market situation

which has been able to make available much more administrative, legal,

accounting and economic ability than will be available in the forseeable

future in this country.

The Senate Committee’s criticisms of the existing State regulatory

system in Australia thus appear to this author to be substantially

correct. Indeed, their recommendation for a national regulatory

body was supported, in evidence, by "a highly qualified witness who

had had experience in companies office administration.... This is,

however, only one side of the regulatory coin. As well as pointing

out the deficiencies in the existing system, recommendations must be

made for an effective replacement for that system. In so far as

administrative bodies are concerned, it is this author’s view that the

Senate Committee has failed to achieve that end.

2. Proposals for a Federal Regulatory Body

The Committee’s conclusions in respect of the national character of

the Australian securities market and its basic recommendation for a135national body to regulate that market are unexceptionable, and

1 'ZAare completely in accordance with this author's own views.

133

1375

Similarly, the Committee's reasons for rejecting the applicability of

the "City Panel” type of regulatory authority to Australian conditions

are in agreement with this author's views as to the problems inherent

in attempting to apply the "City" type of regulation, based largely

upon the maintenance of reputation in a closely-knit and geographically

small community, to the diverse type of capital market which exists in

Australia.

Finally, in this respect, the Committee's recommendations as to the137role to be played by self-regulatory bodies are perhaps a little

stronger than this author would have preferred, in that they do not

appear clearly to accept the principle that the self-regulatory bodies

would in all but the exercise of severelylimited discretions be

subject to the supervision of the proposed Commonwealth regulatory

body. It is possible that this is what the Committee did envisage,138but it is not made clear in this particular recommendation.

It is in the area of specific recommendations for a national regulatory

body that this author believes the Senate Committee has not provided

the detail which it might, with advantage, have supplied. For

example, first, although it refers briefly to a number of con-139stitutional powers, it does not examine either the serious con-

stitutional limitations which will govern the creation of such a body,

or the detailed application of the particular constitutional powers

necessary to enable it to function effectively.^^

140

1376

Secondly, the Committee does tackle the problem of the cost of a142proposed federal body, but, to this author, this is really a

problem of secondary importance and one which has drawn the Committee's

attention away from a number of more important issues. As will be

indicated below, the Committee does not appear to have considered

in detail a series of other issues, the resolution of which is

essential to the establishment of the kind of regulatory body which

it envisaged.

The Committee's argument for the creation of a separate commission

rather than for the use of a government department is a sound one143for the reasons expressed in the Rae Report. This author would,

however, accord more emphasis to the fact that the regulatory body

would be able to achieve greater independence from governmental pressure

if it were a commission than would be the case if it were part of a

government department. While the function of such a body is to

interpret and enforce the regulatory statutes of a government of the day,

it must be seen not to be merely a creature of that government. To

be effective, it must be seen to be working in the interests of

investors and to be maintaining an even balance between government on

the one hand and industry on the other.

This author disagrees with the Senate Committee's recommendations in

respect of the structure of the proposed commission. First, the

Committee has rejected the concept of one commissioner and a number of

1377

deputy or assistant commissioners, despite the recommendation of the

Ash Report that the United States SEC have one commissioner, and

despite the practice of a number of Canadian provinces, the Philippines 144and Hong Kong, where similar bodies are administered by single

commissioners. The Rae Report’s reason for recommending against such

a policy (that each of the proposed commission’s divisions should have

a full-time commissioner enjoying equal status with the other commis­

sioners),'^ is accommodated by this author’s recommendation that the

proposed Commonwealth Securities Commission have one commissioner and

four assistant commissioners, each of the latter having responsibility

for the administration of one of the commission’s divisions. This

author remains convinced that the initial creation of the Commission,

and the injection of its formative character and policy, can best

be effected by one able securities administrator with a number of

capable assistants, rather than by a committee of commissioners.

Secondly, the Senate Committee recommended the appointment of three 146commissioners, presumably one to head each of three divisions, but

it does not appear to have indicated what these three divisions would be.

This author has recommended that the proposed Commonwealth Securities

Commission consist of four divisions, viz., a distribution division,

a secondary market division, a stock exchange division and a147licensing division.

1378

Thirdly, in respect of the choice of commissioners, the Senate

Committee has recommended that at least one of the three proposed148persons be a leading public servant. Although it argued that

this would be advantageous "...from the point of view of continuity of149dealing with the government and of ensuring objectivity__,"

it seems to this author that these objects could as readily be

achieved by qualified commissioners who were not public servants,

and that one of the Committee's stated aims, that of removing the150commissioners from normal public service gradings, would be

compromised by the continued appointment of at least one public

servant.

While the final choice of individuals to fill the roles of commissioners

(or, in this author’s recommendations, commissioner and assistant

commissioners) will be influenced by the form of structure eventually

established and the types of divisions created, it is clear that

preference should be accorded to those persons with experience in

business, and in the accounting, economics and legal professions.

While the mix may change from time to time, these are the fields most

directly concerned with the effective regulation of the securities market.

Fourthly, while the Senate Committee’s recommendations in respect151of the disclosure of interests and the nature of the staff to be

152employed are sound (particularly in their assessment, in the latter

area, of the SEC experience), this author disagrees with the Committee’s

1379

reasons for declining to recommend the siting of the proposed regulatory153body in Canberra. As indicated earlier in this study, this author

does recommend that the proposed Commonwealth Securities Commission be

located in Canberra, precisely because it is important that the very real

Sydney-Melboume commercial rivalry be kept out of the commission’s

operations. It does not appear axiomatic to this author that such a

location would prevent the commission from being in close touch with the

market place, or that it would be more difficult to attract suitable

commissioners and staff to Canberra, or that it would be likely to154be staffed by career public servants. The United States SEC,

located since its inception in Washington, does not appear to have

suffered from any of these alleged defects.

Finally, the Rae Report’s examination of the proposed regulatory body

for Australia is .important for what it omits. As indicated earlier,

it does not consider in detail the constitutional limitations upon

the powers which may validly be vested in such a body, nor does it

examine in detail which powers may provide such a body with positive

constitutional bases. It does not consider the structure which the

proposed regulatory body should have; although implying that it should

have three divisions, the nature of these divisions is not revealed.

It does not consider in detail the powers which should be vested in the

proposed body. Although a brief reference is made to a limited number

of powers, this question is of crucial inportance and, one would have155thought, is deserving of both close and comprehensive consideration.

1380

Further, it did not consider the question of either administrative

or judicial review of the decisions of the administrative body.

Again, these are problems of signal in^portance, without a resolution

of which no such proposed body could be created.

1381

G. An Early Overall Assessment

It will only be possible to finally assess the significance of the

Rae Report after many years have passed? after other reports have

been made on the Australian securities industry, and after the level

of awareness of the functioning of that industry in Australia is

greatly increased. It is not too early, however, to indicate that

the Report represents the first real study into the workings of the

Australian securities market and that the information it has presented,

and many of the conclusions it has drawn, will provide the base for

future securities legislation in this country in the forseeable future.

While it is possible to disagree with some of its recommendations

and to point to areas to which it should, perhaps, have accorded more

detailed attention, these criticisms are of small moment in comparison

with the positive benefits which will flow from the existence of the

Report. It does more than merely place Australia in a similar position

to that occupied by other jurisdictions, particularly the United States

and Canada, which have long enjoyed the benefit of detailed and

comprehensive studies and reports on their securities industries. Its

most important benefit lies in the encouragement it provides to those

persons, both in the government and outside the government, who are

concerned to bring about the introduction of an effective regulatory

system in this country.

1382

III. THE CORPORATIONS AND SECURITIES INDUSTRY BILL, 1974.

A. The Introduction of the Legislation

On Thursday, December 6, 1974, the Australian Attorney-General,

Senator Murphy, presented the Corporations and Securities Industry Bill,

1974 to the Senate. The Securities regulatory wheel had thus turned full

circle; it was Senator Murphy, then Leader of the Opposition in the

Senate, who in 1970 moved the original motion forthe creation of a Select

Committee to examine the Australian securities industry. Some four

years and one Select Committee report later, Australia's Parliament had

its first securities legislation to consider.

The Bill was introduced in the second last week of the 1974 Parliamentary

sittings, in accordance with an earlier statement from the Attorney-

General to the effect that it would be presented to the Parliament in

those sittings. Presented some months after the Rae Report had been

tabled in the same chamber, it is to some extent related to the information

and the recommendations contained in that report.

The Bill has to date received only scant industry and press attention.

While the attitude of the stockbroking industry has been not to oppose

the Bill in principle, it has been critical of certain of its specific

provisions. It has been especially critical of the attempt by the

legislature to prohibit brokers from acting as directors of companies

listed upon stock exchanges. The press comment published to date

1383

reports only the more immediately newsworthy aspects of the legislation

such as the restrictions upon the permissible activities of brokers and

the regulation of such well known post-distribution practices as short-157selling and insider trading.

The paucity of the reaction to the Bill at this stage reflects the fact

that many of its provisions are novel in the Australian context and that

time will be needed to absorb their implications. This said, however,

it is in this author’s view important to examine the Bill’s provisions

against both the findings of the Rae Report and the recommendations

contained in this study. Because of the far-reaching effects which

legislation of this kind will have, it is crucial that its provisions,

even in Bill form, be examined in detail. Although the Senate and the

House of Representatives may in the 1975 Parliamentary sittings either

reject the Bill or amend it substantially, its current provisions will

form the basis for the Parliament’s deliberations in those sittings.

The following examination of the Bill's provisions will emphasise

those of its features which have been dealt with in this study and no

attempt will be made to consider those aspects, such as the regulation

of take-overs and investment corporations, excluded from the study.

B. Preliminary Matters

Part I of the Corporations and Securities Industry Bill 1974 contains a

number of preliminary matters which are of interest both because of the

1384

indication they give of the manner in which particular problems are

approached in the Bill and also because they acknowledge certain of the

limitations and restraints upon the Government’s powers in the area of

securities regulation.

Included in the former of these categories is the Section 7 reference

to the concept of a "public company”. Although the Bill provided the

opportunity for the inclusion of a comprehensive definition of this

term, a valuable opportunity was missed when the legislation relied

upon the existing meaning of the term under the law of the State or

Territory in which the corporation in question was incorporated.

Despite this missed opportunity however, the section's confirmation

that the Bill will emphasise the public rather than the private,

company, is a welcome improvement upon existing state companies

legislation. As this author has argued throughout this study, systems

of securities regulation should be essentially concerned with the

control of the means whereby funds pass from investors to industry,

viz. that form of corporation in which members of the public are permitted

to invest. The controls necessary for the effective regulation of such

corporations are not necessarily those which are either needed for, or

best suited to, the regulation of private companies.

Additionally, the preliminary sections of the Bill indicate that the

concept of "offer to the public" will be approached in a manner similar

to that now utilized under state legislation. This means only that

1385

the Bill does not positively and specifically define an offer to the

public but rather uses a blanket provision and then provides for

specific exemptions therefrom. Although this is much less

satisfactory than a detailed and specific definition, the two exemptions159specified in the legislation are in accord with this author’s suggestions

and do represent a practical expression of the acceptance of the

’’need” principle in framing legislation in this regulatory area.

Finally in the category of preliminary indications of the manner in

which particular problems are approached, the Bill clearly reveals the

Government’s intent that the Australian securities industry should be

controlled at national level only, and not at State level. The

Government has utilized its Section 109 constitutional power to exclude

the laws of any State or Territory which deal with those mattersX60dealt with by the federal bill. As indicated in Chapter 3 of this

study, this constitutional power is properly available to the Federal

Government and it was natural to expect that it would be used in

legislation of this kind. This is particularly the situation where,

as now exists in Australia, the Liberal-Country Party governed States

will be reluctant to cede power to the Federal Government in this area.

In respect of the category of preliminary matters which indicate the

Government’s appreciation of its constitutional limitations, the161definition of ’’prescribed corporation” reveals perhaps most clearly

the extent of those limitations. As indicated in Chapter 3 of this

1386

study, the Federal Government’s regulatory capacity is, under the

corporations power, constitutionally limited to those types of

corporations contemplated by Section 51(xx) itself. The exact

determination of the scope of that power finally depends, of course,

upon the High Court’s interpretation of the terms ’’foreign corporation”,

and "trading” and "financial” corporations.

The insertion by the Government in the legislation of a definition of

the key term "prescribed corporation" which acknowledges these limitations

immediately restricts the scope of the possible future application of

the legislation. So long as it is reliant upon the corporations power,

the legislation cannot affect those companies incorporated within

Australia which do not come within the High Court's interpretation of the

terms "trading” and "financial” corporation. As Chapter 3 of this study

has established, this may be a significant range of those corporations

operating within the Australian capital market.

Additionally, the extent to which the Government appears to be relying

upon the corporations power as its constitutional base for the

legislation is confirmed by Section 13, which attenpts to provide for

the alternative regulation of the stock market in Brisbane in the event

of that market not being provided by a corporation when Part IV of the

Act comes into operation. The same reservations expressed above in

relation to the definition of "prescribed corporation" apply in this

situation. Further, this illustrates the argument put by this author

1387

in the Chapter 3 examination of the core areas of the securities markets,

viz; that while it is reliant upon the corporations power, the Government

will he unable to regulate those stock exchanges which remain

unincorporated. Additionally there is, at least to this author, some

doubt that the High Court will classify a non-profit making

incorporated stock exchange as either a "trading" or a "financial"

corporation. As the other possible constitutional powers relevant to

this area would have to be the subject of an affirmative High Court ruling

before they could be safely relied upon, it does seem that a difficult

constitutional path lies ahead of the Federal Government in this area.

C. The Distribution of Securities

The Corporations and Securities Industry Bill, 1974 provides a detailedX6 2scheme of regulation of the distribution of securities. As part

of that regulatory scheme, it has adopted the device of requiring

the particular public companies at which the Bill, as a whole, is aimed,163to become registered corporations. This device is one of the two

alternatives available to a regulatory authority, viz; either to

require all such corporations to become registered, or (in what amounts

to basically the same stipulation) to require them to file a basic

document such as a cornerstone statement (or "base -document") which

would be up-dated from time to time.

While this device is a very commendable one, and is in accordance with

this author’s recommendations in Chapter 4 of this study, the Bill

1388

again makes allowance for its possible constitutional deficiences by

limiting the range of those corporations required to register to

those which come within the ambit of Section 51 (xx) of the Constitution

and those other corporations which are, for example, incorporated inrp • . 164a Territory.

On the positive side, however, Part III of the Bill does stress that it

is concerned with the operations of public, rather than private,

companies. Again, this is in accordance with this author’s recommend­

ation, throughout the course of this study, that proposed securities

legislation for Australia should be concerned with the former rather

than with the latter. It is the operation of those corporations in

which the public is encouraged to invest that the greatest opportunities

for market malpractice and investor loss occur. The Bill’s

recognition of this fact constitutes one of its most important features.

In respect of its proposed substantive provisions for regulating the

distribution of securities, however, the Bill has followed existing

State companies legislation very closely. The Federal Government has

not taken the opportunity presented by the drafting of the new Bill to

re-assess the philosophical basis of the regulation of the distribution

of securities. In its prospectus and allotment provisions, the Bill

represents only a more sophisticated version of current State

legislation; this is particularly disappointing, and indicates that the

critical significance of the distribution process in the total context

1389

of the Australian capital market appears not to have been fully

appreciated by the government,

For example, the prospectus and allotment provisions represent a strict

adherence to the disclosure philosophy, and show no real signs of any

’'merit" approach towards the problem having received detailed consideration.

The only manner in which the merit philosophy may, in the future, be

introduced into the legislation is through Section 162(5), which enables

the proposed Corporations and Exchange Commission (CEC), after perusal

of a prospectus, to make "such inquiries and investigations as appear

necessary or desirable for the protection of investors or in the

interests of the public___" Although the Attorney-General' s

Explanatory Memorandum justifies this provision by reference to the16 5findings of the Rae Report, no indication is given of the manner in

which the Government expects that it will be interpreted by the proposed

CEC. To this author, this broadly drafted provision, if interpreted

appropriately by the CEC, may enable it to require merit criteria to be

satisfied. This is not entirely clear on the wording of the section,

however, as it appears to be primarily designed to deal with the problem

of false or misleading statements. In any event, the Government has

declined the clear opportunity which it had to change the bias of the

regulatory philosophy in this area and to impose merit criteria in

addition to the standard disclosure criteria. To this author, an

invaluable opportunity to increase the available degree of investor

protection in this area of the securities markets, by altering the

currently accepted regulatory philosophy, has been lost.

1390

The Bill is disappointing also in that it makes no provision for the

use of the preliminary prospectus. For the reasons advanced in

Chapter 4 of this study, the preliminary prospectus, adequately regulated,

can provide important additional opportunities for potential investors

properly to consider their proposed investment. Again, at least to

this author, another valuable opportunity has been wasted.

Further, the Bill has, through its failure to include merit criteria in

its overall approach, omitted to consider what is, to this author, one

of the most important of the recommendations contained in Chapter 4 of

this study, and one of the major problems raised by the disclosures of

the Rae Report. This problem does, of course, relate to the need for

any particular public company to raise funds from the public at any

given time, and the use to which such funds are put. There appears to

be no provision in the Bill which would allow the CEC to rule on the

alleged need for a particular company to raise capital from the public

at a particular time, nor to insist that monies so raised are in fact

used in accordance, and only in accordance, with the company's stated

intention as revealed in its prospectus. This is another area in which

a consideration of the applicability of merit criteria would have

resulted in significantly stronger legislation.

Finally,in respect of the distribution of securities, it will be recalled

that this author suggested in Chapter 4 that the proposed Commonwealth

Securities Commission should have the power to prohibit particular

1391

individuals from serving as directors of public companies if their

business reputation was such as to cause concern for the interests of

investors. While this proposal does not appear as such in the present

bill, Section 284(1) (g) does enable the Governor-General to make

regulations for or in relation to ”the qualifications and experience to

be possessed by directors of corporations (other than foreign corporations)

to which Part III applies.” This provision is sufficiently broad, it

is submitted, to encompass this author’s proposal, and it is suggested

that an appropriate regulation be drawn to that effect.

This portion of the Bill thus deviates little from the long-accepted

disclosure criteria; it applies what are to this author inadequate

disclosure principles in an attempt effectively to regulate what is

becoming an increasingly sophisticated securities market. Unfortunately,

it is difficult to believe that, notwithstanding its national

uniformity, the 1974 Bill would control this regulatory area any more

effectively than its state predecessors have done.

1392

D. Regulation of the Securities Markets

The 3974 Bill has taken a number of positive steps towards the effective

regulation of Australia’s securities markets. Perhaps most importantly,

the Bill reflects the Government's acceptance of the need for

governmental control, rather than self-regulatory control, over those

markets. While this attitude towards the regulation of securities

markets is well-established in most of the other jurisdictions examined

in this study, it has certainly not been evident at State level in

Australia, despite the introduction of securities industry legislation

in some of those States.

The regulatory scheme reflected in the Bill does contain a number of1 f\ f\positive features. The basic registration requirement1 is dependent

16 7upon a wide range of qualifying conditions being satisfied, ' included168amongst which is a very worthwhile reporting provision.

Additionally, there is a requirement that the CEC must approve169amendments to exchange constituent documents, and the CEC is itself

170empowered to require amendments to be made to such documents.171 172There is power in both the CEC and the Governor-General to

prohibit trading on stock markets; and there is a power of cancellation173or suspension of a stock exchange's registration. Finally, a

commendable hearing and appeal procedure is included within this last-

mentioned provision.

Granted these positive features of the Bill, however, it must also

be noted that its exchange regulatory provisions are defective in

certain important respects. First, and most importantly, they are

dependent upon those stock exchanges which they are seeking to control

operating as corporations; those stock exchanges which function other

than as corporations would almost certainly be beyond the Federal

Government’s legislative fiat. This constitutional deficiency explains

the special attention accorded in the legislation to the position of174the Brisbane Stock Exchange.

Secondly, the legislation gives only a brief indication, in its

statement of the functions and duties of the CEC, that the Government

has considered the possibility of introducing a national exchange

system into Australia, along the lines of this author’s proposed

Australian Stock Exchange(ASE). While it does envisage a wide research

and innovatory role for the CEC (in such matters as the improvement of

accounting principles, and the use of collective investment schemes),

the Bill's only acknowledgment of the concept of a national market is

its direction to the CEC to "promote the establishment of a national

stock market" (Clause 20(2)(g)). Unfortunately, at least for the

moment, the Government appears content to accept the present structure

of a number of different, independent exchanges all serving portions

of what is in reality a national capital market. One would have

imagined that, particularly with the important recent overseas

developments in respect of national market systems, the 1974 Bill

1393

1394

would itself have presented the Government with an ideal opportunity

for innovatory moves in this area.

Thirdly, the legislative scheme which the Government proposes to

introduce grants automatic approval to those stock exchanges listed in175Schedule I of the Bill. As these comprise all of the current

Australian Stock Exchanges with the exception of the Brisbane Stock

Exchange, it appears that the full rigour of the registration

provisions will only be applied to any future exchange which is

incorporated and which applies for registration. The Government’s

decision to grant automatic approval to existing exchanges seems to

this author to have been the wrong way of approaching the problem.

While no doubt the Government will be able, under the legislation,

to effect changes in the rules and procedures of the existing exchanges,

it would seem to this author to have been a preferable course of action

to have insisted upon the exchanges themselves making such changes

before they were initially granted registration.

Fourthly, the Bill reflects no appreciation on the part of the

Government of the future technological changes which will inevitably

alter the structure of the securities markets as we now know them.

In particular, the creation of a national exchange market at this stage

would have been the first step towards the eventual replacement of

today’s form of stock exchange mechanism.

1395

Fifthly, and most surprisingly, the Bill contains no requirement for

the establishment and maintenance of guarantee funds by the various

stock exchanges. While it is possible that such a condition could be

imposed under two of the broadly stated requirements of registration,

it seems to this author unusual that no specific provision for the

creation of such a fund or funds was contained in the legislation.

Additionally, of course, as this author has argued in Chapter 5 of this

study, the movement of the Federal Government into this regulatory area

carries with it attendant responsibilities. One of these

responsibilities should be government participation in an overall

guarantee fund covering all Australian stock exchanges or, preferably,

the Australian Stock Exchange.

Sixthly, the vexed question of institutional membership of exchanges

appears also to have been ignored by the Bill. Membership of registered

exchanges is open to those corporations able to justify the Bill's

requirements for the grant of a dealer's licence; these do not give

any clear indication as to whether an institutional investor would be

precluded from complying with those conditions. Again, this seems to

be another problem which has not at this stage been finally resolved;

it will no doubt be resolved later under the appropriate rule-making

power.

1396

Finally, two other features of stock exchanges in other jurisdictions

which have been discussed in Chapter 5 of this study, viz., the use of

a consolidated tape and the division of trading floors into First and

Second Sections, do not find a place in the draft legislation. Again,

however, they could be dealt with later under the relevant rule-making

power.

Thus the overall effect of the Bill's stock exchange registration

provisions is that they do represent a welcome advance upon existing

State legislation (particularly in respect of their acknowledgement of

the need for full governmental regulation) but that their constitutional

base is rather narrow and that they have missed the opportunity of taking

any innovatory steps aimed at the effective long-term regulation of the

future securities markets in this country.

E. Brokers, Dealers and Investment Advisers

As with the stock exchange registration provisions, the dealer

registration requirements have both positive and negative characteristics.

As to the former, first, they clearly reveal the Government's

acceptance of the need for governmental rather than industry regulation.

As recommended by this author in Chapter 6 of this study, a scheme of

regulation under which all dealers are required to register with the

one federal body has been introduced in the Bill. This will provide

the much-needed uniformity which has been lacking in the existing State

provisions.

1397

Secondly, the Bill does provide, although not as categorically as

might have been desired, for an educational requirement. Unfortunately,

its provision is phrased in rather inconclusive terms: "The

qualifications that may be prescribed ... may include the qualification of

having passed such examinations as are provided for by or in accordance178with the regulations." For the reasons advanced in Chapter 6

of this study, this author believes that an educational requirement

should be mandatory for registration as a broker or dealer within the

Australian securities industry. Until such time as detailed

regulations are promulgated under any new federal act, however, it

will not be clear whether such a requirement will in fact be a

meaningful one.

Thirdly, the draft legislation does contain sound reporting

requirements, obliging dealers to lodge such reports as are prescribed

by the CEC "relating to the carrying on by the holder of the licence

of any business or activities, or the entering into by the holder of179the licence of any transactions, relating to securities". There is

a similar notification provision in relation to changes in the

particulars of, for example, a dealer's carrying on of business, or an

investment adviser's ceasing to act as such in respect of the

securities of prescribed corporations

177

1398

Fourthly, and again as recommended by this author in Chapter 6, the

draft legislation makes detailed provision for the revocation and

suspension of licences by the Commission itself, rather than by an

outside body such as a Court of Petty Sessions. Further, adequate

provision is made for the granting of a hearing before any such182orders are made by the Commission.

Fifthly, the draft legislation has attempted to resolve some of the many

conflict of interest problems inevitably arising in any sophisticated183securities market. The Bill has tackled conflict problems arising in

184respect of the giving of priority to clients' transactions, trading by185dealers as principals, the holding of directorships in listed or

186associated corporations by dealers, the performance of underwriting187functions by dealers and the provision of credit by dealer/under-

188writers for subscribers to a public issue of securities. While each

of these provisions represents a worthwhile attempt at regulating what

is seen by the Government as a serious conflict of interest situation,

perhaps the most important is that relating to dealers acting as

principals. This falls into two categories; (i) which requires all

non-broker dealers to give appropriate notice in all those transactions

with persons not themselves holders of a dealer's licence, and (ii)

which prohibits all broker-dealers from acting as principals except in189certain stipulated categories. While the exact circumstances of the

exemptions to be granted under the regulations will not be clear for

some time, it seems to this author that it would have been sufficient

1399

for the same notification procedure to have been applied to both

dealers and broker-dealers. As long as notification is given (as argued

in Chapter 6) this should constitute adequate protection for the other

party to any particular securities transaction.

Sixthly, the Bill attempts in Clause 118 to extend the provisions of the

Trade Practices Act, 1974 to the securities industry, and specifically

to prohibit the use of fixed commission rates by dealers. This is to

be effected by deeming all dealers to be corporations within the

meaning of that act. Whether or not this provision would be upheld by

the High Court is problematical; its significance at this stage lies in

the fact that it illustrates once again the Government’s almost total

reliance upon the corporations power in this area. The AASE has, however,

recently applied to the Prices Justification Tribunal for an order that190fixed commission rates are an authorised restraint of trade,

presumably as a precautionary measure against the enactment of the

Bill in 1975.

Finally, amongst the positive features of this aspect of the Bill, are191the provisions as to dealers' accounts. These require, inter alia,

192that full accounting records be kept; that clients’ securities193be handled in accordance with strict requirements; that separate

194trust accounts for clients' funds be opened and maintained; and that195auditors be appointed. Additionally, there is a general overall

196supervisory power vested in the Commission in this area. Together,

1400

these provisions constitute a welcome, uniform code of financial conduct

for the operators within the securities markets.

As well as having positive features, however, this portion of the Bill

does have its negative attributes. First among these is that which is

common to the whole Bill, that is, the doubt as to its constitutional

validity. While the Government may arguably have power over those

brokers, dealers and investment advisers which are corporations, it is

doubtful as to whether it has power over those which operate either as

individuals or as partnerships. While the trade and commerce and

taxation powers may be relevant here, the matter must await final

decision by the High Court in the inevitable constitutional challenge

which this portion of the Bill will face.

Secondly, and in the light of the above, it is surprising that the

Bill did not attempt to restrict membership of securities exchanges

and the grant of dealers’ licences to corporations. This course of

action would have been beneficial in two respects; first, it would at

least have given the Government control of all dealers (not merely part

of the whole) and secondly, it would have provided dealers with the

protection of limited liability and could have resulted in the

imposition of a uniform financial soundness criterion, common to all

corporate dealers, as recommended in Chapter 6 of this study.

1401

Thirdly, it is unusual that no fidelity fund requirement was imposed

upon dealers who are members of registered exchanges. As indicated

above, the ensuring of both the creation and the continued effective

maintenance of such a fund should be amongst the Government's first

legislative priorities in this area.

Fourthly, the stipulated qualifications for the grant of the dealer's

or investment adviser's licences do not clearly require any degree of

business experience. While there is a condition that an applicant197must have the "prescribed qualifications", the details of such

qualifications remain at this stage unspecified. For the reasons

advanced in Chapter 6 of this study, this author urges that strict

experience criteria be included in the regulations which will no doubt

be promulgated to govern this area. Similarly, no clear-cut criterion of

financial soundness appears to have been imposed by the draft legislation

in respect of the financial soundness of dealers; again, it seems to be

a matter which it is anticipated by the Government will later198constitute the subject of regulations. This would, in this author's

view, be an ideal opportunity to change the focus of the traditional

financial soundness requirements, and to consider the system of mandatory

insurance recommended in Chapter 6 of this study.

F. Continuous Reporting (Disclosure) Provisions

As with the other provisions of the 1974 Bill examined above, the

1402

disclosure requirements do represent in some respects an advance

upon existing State provisions, yet at the same time they do not reveal

any desire on the part of the Government to break with traditional

disclosure principles and to take significant new or innovatory measures.

As the Explanatory Memorandum itself concedes,^ the major source of the

BilTs disclosure requirements is the accounts and audit provisions of

current State and Territory legislation. While some heed has

obviously been paid to the experience of overseas jurisdictions, it

appears, unfortunately, that the major emphasis has been accorded to201the United Kingdom (in particular, to the Companies Bill, 1973)

and not to North America, where the most important recent developments

in this field have occurred.

Amongst the positive features of the Bill's provisions in relation

to disclosure by registered corporations are the following. First,

the Bill acknowledges the need for an investigation into existing

accounting principles and requires the CEC to carry out such an

investigation. This represents a sound move on the part of the

Government and may lead to a detailed official examination of the

alternatives to the currently accepted historical cost method of. . 203accounting.

Secondly, in addition to the standard annual filing requirements

the Bill has added a provision requiring that the turnover of the205registered corporation and its subsidiaries be disclosed.

199

This

1403

is a welcome, although cautious, extension of previous disclosure

standards in this country and will be of some additional value to

investors.

Thirdly, the Bill also represents a positive extension of existing

disclosure requirements in its expansion of the information required206to be contained in directors’ reports. Based to some extent upon

Part III of the United Kingdom Companies Bill of 1973, the new

provisions reflect the present Government’s concern with current

social issues in the requirement that the directors’ report detail,

inter alia, arrangements made for protecting the safety and health of

its employees, for environment protection, and for the protection of207the consumers of the company’s goods or services. However, while

these provisions do reflect the Government's social awareness and do

transpose that awareness into the company sphere, they do to some

extent represent window-dressing in the Bill, as their inclusion is

unlikely to be of much moment to potential investors in a company's

securities.

Fourthly, the Government has taken positive steps in relation to both

the time by which accounts must be laid before an annual general 208meeting and the need to lodge a copy of the accounts with the CEC

209and with the appropriate stock exchanges. The latter provision ,

especially, is an important one, as it enables both the CEC and the

1404

relevant exchange to be expeditiously informed of the company's

trading record over the preceding financial year.

Fifthly, the Bill provides for the filing of unaudited quarterly 210reports containing particulars of, inter alia, profit and loss and

turnover for the particular quarter in question and "such other matters211as are prescribed." While the filing of quarterly reports is a

practice which has found quite widespread use in the United States and

Canada, and has been recommended by this author for use in Australia,

care must be taken by Australian legislators to ensure that these

reports do not, through over-enthusiastic use of the regulation-making

power, become unduly burdensome on registered companies. Particularly

in this area of frequent and regular reporting, the necessary

disclosure criteria should be tempered with an appreciation of the

practical problems likely to be faced by companies in meeting those

reporting requirements.

Finally, the Bill provides that auditors must be registered with the 212CEC, thus providing an overall and uniform auditor registration

requirement throughout the whole of Australia. Registration with the

CEC is required even of those auditors already registered under

State laws, and the CEC must be satisfied that "the applicant is

capable of performing the duties of an auditor and is otherwise a fit

and proper person to be registered as an auditor." In other words,

the CEC is correctly imposing its own registration criteria upon those

1405

persons already registered under the various State laws. If the

CEC is to take this commendable although precautionary step in relation to

auditors, one wonders why a similar procedure was not introduced for

stock exchanges. It would surely have been even more important for

the CEC to have, from the outset, imposed its own criteria for the

registration of exchanges, rather than merely to grant automatic

recognition to the existing exchanges, the admitted defects in the

procedures of which the CEC is designed to overcome.

On the debit side of the disclosure balance sheet, the constitutional

problem is once again important. The Explanatory Memorandum

specifically acknowledges the problem when it states that "The

provisions in the Bill will supersede the State and Territory provisions

in so far as registered corporations are concerned (cl.18), but the

State and Territory provisions will continue to apply for the time

being in relation to other corporations." In other words, the

Government is able only to regulate a segment of the companies operating

within the Australian securities markets; those which are beyond its

constitutional reach will be subject to an entirely different

regulatory regime, that of the non-unifonn "uniform" companies acts

of the various States. Additionally, as indicated in Chapter 3 of this

study, there is some doubt as to whether the corporations power itself

will validly base legislation governing reporting and other post­

distribution trading requirements. Until this constitutional question

is clarified, the 1974 Bill serves only to confuse the regulatory picture,

1406

by in effect adding another level of regulation, at least for some

companies, to the present regulatory structure.

Secondly, the drafters of the Bill did not take the opportunity of

incorporating within its provisions detailed requirements for the

prior disclosure of particular information. As discussed in Chapter 7

of this study, there are many situations in which effective investor

protection can be achieved only through the prior disclosure, to a stock

exchange or administrative authority, of actions which a particular

company is about to carry out. In particular, the prior disclosure

requirement should apply to all proposed changes in the control of a

company, the proposed acquisition or disposition of its material assets,

and any proposed changes in its capital structure. As with so many of

its other features, the Bill presented,in this area,an ideal

opportunity for the inclusion of such innovatory moves.

Finally, the legislation has unfortunately emphasised the

disclosure of information at the expense of ensuring the effective

dissemination of that information. As argued in Chapter 7, the effective

disclosure of information is only half of the investor protection

battle; the other equally important half consists of the dissemination

of that disclosed information as widely and as effectively as

possible. In this respect, the Bill has failed to include the type of

measures recommended in Chapter 7 (for example, the use of a weekly

1407

Commission newsletter or bulletin)which could achieve that effective

dissemination.

G. Insider Trading

215The 1974 Bill contains insider trading provisions which establish

at federal level the type of regulation of this activity which is found

in some Australian states and in some overseas jurisdictions.

Specifically, the Bill relies upon the United Kingdom Companies Bill of

1973, Section 16(a) of the United States Securities Exchange Act of

1934, and the Loss Memorandum; if enacted, it will have the effect of

strictly regulating the practice throughout Australia.

Disappointingly, the Explanatory Memorandum which accompanies the Bill

does not attempt to justify the need to regulate insider trading, but

apparently assumes that such regulation is necessary. Similarly, neither

in the United Kingdom nor in the United States has adequate consideration

been given to the question of why such trading should be regulated.

Further, the Explanatory Memorandum makes no reference to the Rae

Report, one of the most highly-publicised sections of which related to

alleged insider trading in the securities of Poseidon N.L. Was the

practice of insider trading regarded by the Bill's draftsmen as so

heinous that no reference could be made to its occurrence in

1408

Australia, or was it simply that the Rae Report did not in fact

provide conclusive evidence of the need to regulate the practice

strictly in Australia?

It is hoped that, either as a result of submissions put to the

Attorney-General, or during the Parliamentary debate on the Bill, the

opportunity will be taken to re-assess the Government’s attitude towards

these particular provisions.

H. The Corporations and Exchange Commission

Amongst the most important provisions of the Bill are those which

relate to the body which it is proposed will administer the legislation,

the Corporations and Exchange Commission (CEC). The successful

implementation of the provisions establishing this body, in whatever form

they are finally approved by the Parliament, are crucial to the success

or otherwise of the legislation as a whole. Unless this body can be

validly established upon sound constitutional bases, and unless it is

vested with an adequate range of constitutionally valid powers, the

legislation itself will be ineffective as a means of investor

protection.

1409

1. Nature and Form of the CEC

This author has recommended in Chapter 9 of this study that the

administrative body governing the Australian securities industry

should be one federal body rather than a number of State bodies. The

introduction of the 1974 Bill represents the essential first step towards

the creation of such a national body. Additionally, the proposed CEC

embodies the philosophical approach recommended by this author, viz.,

that overall regulatory control should be effected by the Government,

with a degree of self-regulation exercised by the various industry

bodies, such self-regulation to be subject to final governmental

control. The form of the proposed CEC is also in accordance with this

author’s recommendations in that it is to comprise a separate

administrative entity (rather than merely to form part of an existing

government department) with final control resting in the Federal

Government itself.

2. Constitutional Limitations

There are, as discussed in Chapter 9 of this study, important

constitutional limitations upon the powers which may be exercised by

such a body and in relation to the creation of the body itself.

First, the serious problem of the separation of administrative and

judicial powers which flows from the current state of constitutional

interpretation in this area appears to have been acknowledged by the

1410

draftsmen of the Bill. The proposed CEC is not vested with any aspect

of the judicial power of the Commonwealth, but is rather vested with

those powers which, although arguably quasi-judicial in character may

(again under presently accepted constitutional principles in this area)

be exercised by non-judicial bodies. This applies particularly to the

proposed body’s powers in relation to hearings, such as, for example, the

power to compel witnesses by summons to appear at a Commission hearing216to give evidence and to produce documents.

Secondly, however, the constitutional bases for the establishment

of the proposed body are not as clearly defined. As indicated in

Chapter 9 of this study, the corporations power alone is insufficient

because of its limited scope. As this seems to be the major power

upon which the Government has relied throughout the draft Bill,

serious constitutional difficulties could be expected to arise unless

other suitable bases can be found. As suggested in Chapter 9, it may

also be necessary to rely upon the taxation, postal and trade and

commerce powers and, to a lesser extent, upon the credit of the

Commonwealth, banking, insurance and bankruptcy and insolvency powers.

It appears inevitable that, should any of the Liberal Party g)vemed

States, or any corporation, challenge the constitutional validity of

the proposed new body, a lengthy and complex course of constitutional

litigation would follow, the final outcome of which would not

necessarily result in the validation of the creation of that body.

1411

3. Composition and Location

In respect of the composition of the proposed Commonwealth Securities

Commission (CSC), this author recommended that there be one Commissioner

for Securities, together with four Assistant Commissioners. It was

further recommended that the CSC comprise four Divisions (each to be

headed by an Assistant Commissioner) and a Legal Office and an

Accounting Office. The proposed CEC is to consist of a Chairman and217four other Commissioners, although the Bill contains no details of any

administrative breakdown of the Commission into particular divisions or

offices. Basically, however, the proposed CEC will take the form of

this author’s proposed CSC, and will not comprise a number of

commissioners of equal status, or one sole commissioner.

In respect of the location of the proposed body, this author

recommended that its head office be located in Canberra (partly in

order to avoid the often bitter inter-state commercial rivalry which

has existed between the two major financial centres of Sydney and

Melbourne) and that regional offices be established in State capital

cities. The 1974 Bill does not specify the place of the Commission’s

principal office, although the Explanatory Memorandum does indicate218that the Commission will have regional offices in each State capital.

It is hoped that, for the reasons expressed in Chapter 9, the proposed

CEC is established in Canberra rather than in either Sydney or

Melbourne. The United States SEC provides a clear illustration of the

1412

ability of such a body to function effectively in a national capital

and away from the major financial centres.

4. Powers

The powers of the 1974 Bill's proposed CEC are very similar to those

recommended by this author for the proposed CSC. They include,

inter alia, the power to grant licences (including, most importantly,219the power to suspend or revoke those licences); the power to require

registration of stock exchanges (including the power to prohibit trading

on those exchanges and what appears to be a rather limited power to

cancel or suspend the registration of those exchanges for220failure to enforce their business rules); the power to carry out

221investigations; and the power to apply for injunctions and to222initiate prosecutions.

Additionally, the proposed CEC is given wide powers in respect of the223conduct of hearings. These are to be conducted on an informal rather

than a formal basis, and the Commission will be required, inter alia,224to observe the rules of natural justice.

Perhaps most importantly, a very wide rule-making power is to be vested

in the proposed CEC. As recommended by this author, the inclusion of

such a power in a regulatory body of this kind is essential if it is to

have any realistic opportunity of keeping up with the rapid

developments which are characteristic of any large securities market.

1413

Additionally, a wide regulation-making power is vested in the

Governor-General.

Finally, the Commission is to be vested with a useful range of

miscellaneous powers, including, inter alia, the power to delegate,227to inspect documents, and to attend meetings of stock exchange members

or committees, and of company directors, shareholders and debenture, -i i 229 holders.

In this respect (and provided that the powers are able to survive

constitutional challenge) the proposed Bill has provided for an

adequately wide range of regulatory powers.

5. Review of Administrative Decisions

It will be recalled that this author recommended in Chapter 9 of this

study that the proposed CSC have a procedure for internal

administrative review (from the original decision-maker to a single

Commissioner and then to a full Commission) and that as well there be

a procedure for external administrative review, on the merits, by the

proposed Administrative Review Tribunal. Unfortunately, the 1974 Bill

provides for neither internal nor external administrative review. To

this author, this is a serious defect and is a feature of the Bill

which should receive additional legislative attention.

1414

In respect of judicial review of the administrative body’s findings,

this author recommended that appeal lie to the proposed Commonwealth

Superior Court (or Commonwealth Administrative Court) and from there to

the High Court. The 1974 Bill does not provide for judicial review of

decisions reached at hearings of the Commission and, indeed, specific

provision is made that, subject to the Act and to the jurisdiction of the

High Court under Section 75(v) of the Constitution, ”a decision of the

Commission shall not be challenged, appealed against, reviewed,

quashed or called in question, or subject to prohibition, mandamus,230certiorari or injunction, in any court on any account whatever.”

To this author, such a blanket prevention of judicial review is both

unwise and unnecessary. Particularly in the Commission’s early stages,

but equally as importantly throughout the whole of its developing

operations, it will be necessary from time to time for decisions of the

Commission to be subject to judicial review whether for errors of law,

excess of jurisdiction, or any of a number of other causes. To attempt

to preclude such judicial review, even on the ground of administrative

efficiency, is to deny both to private parties and to the Commission

the full range of the machinery of the law. Perhaps significantly, the

Explanatory Memorandum is silent on this particular proposal.

I. An Early Assessment

While the structure and contents of the 1974 Bill may change as a

result of Parliament’s deliberations and of submissions made to the

1415

Government by interested parties, the Bill itself is an important step

in the gradual process of developing an adequate securities regulatory

system for Australia. In this author’s view it has been generally too

conservative in its approach, yet it has made advances over current

State legislation, and it will constitute a suitable basis for

Parliament's preliminary consideration of the problems associated with

the introduction of an Australian system of securities regulation. It

is hoped that, in those areas in which it has either revealed defects

or not been adventurous enough, this study will be of some assistance.

>006946054>006946054

ADDENDUM

TO

SYSTEMS OF SECURITIES REGULATION:

A COMPARATIVE STUDY WITH RECOMMENDATIONS

FOR AUSTRALIA

David Geddes

This thesis, having examined securities regulatory patterns

in a number of widely diverse jurisdictions, has made

recommendations for the introduction of new securities

legislation in Australia. In order that these recommendations

might be considered against the most comprehensive background

as to Australia's current regulatory situation, it has been

thought desirable to emphasise two particular aspects of

that background in this Addendum.

1. Constitutional Considerati·ons

In Chapter 3, a number of constitutional heads of power

were considered as possible bases of federal securities

legislation. Included amongst these was the corporations

power (placitum 51 (xx)). This power, it was argued,

could assist in providing a constitutional base for

securities legislation relating to the distribution of

securities; 1 the organs of the securities markets;2

the

operators in the securities markets; 3 and post-distribution

trading. 4 In none of these four areas, however, was it

envisaged that the corporations power alone would provide

an exclusive constitutional base for the proposed

legislation.

2

Notwithstanding this caveat, the relevance of the corporations

power was particularly highlighted because of two related

factors. First, there has been in recent years in the

Barwick High court an acceptance of the increasing

concentration of economic power in the Commonwealth. 5

Secondly, and as an illustration of this acceptance, the

Concrete Pipes 6 decision seemed to promise both a broad

interpretation of the corporations power itself and,

specifically, an extension of the possible scope of the

concept of trading corporations and the activities of such

corporations which the Commonwealth might be able to

regulate effectively. 7

While these developments did give some cause for optimism

to those favouring Commonwealth legislation in the

securities field, this optimism was in many instances

tempered with a realistic appreciation that the question

was one which would have to be specifically considered

by the High Court in respect of each particular area of

legislative activity. 8 Additionally, it was appreciated

that there would in any event be significant limitations

upon the breadth of the corporations power itself,

particularly in that it could only relate to foreign

corporations and to trading and financial corporations

3

formed within the limits of the Commonwealth. 9

In a recent case, In the Matter of An Application for a

Writ of Prohibition Against the Trade Practices Tribunal

The Honourable Sir Richard Moulton Eggleston and Ronald

Moor Bannerman, The Commissioner of Trade Practices.

Ex Parte The St. George county council, 10~ .. the High court

has given an indication that this realistic and cautionary

approach was well founded, in that the concept of a trading

corporation may not in fact be accorded an expansive

interpretation• As a result of proceedings instituted

under the Trade Practices Act against the St. George

County Council, alleging that it was engaging in

"monopolization," the council sought a writ of prohibition

to restrain proceedings before the Trade Practices Tribunal.

The ground of the application for the writ was that the

council was not a trading corporation formed within the

limits of the Commonwealth. As the Trade Practices Act's

definition of "corporation" involved the expression

"trading corporation formed within the limits of the

Commonwealth," a question of direct relevance for

constitutional interpretation arose.

Chief Justice Sir Garfield Barwick, whose judgment evidenced

a continuation of the broad interpretation of the corporations

4

power which he adopted in the concr·e·t·e Pipes case, dissented

on the question of whether the county council was a trading

corporation. His Honour stated that it was clear that the

applicant did trade, as it bought and reticulated electricity,

bought and sold electrical appliances, installed and repaired

such appliances, etc.; these were the purposes of the

body's incorporation. 11 However, in his view, the ter.m

"trading corporation" "refers not to the purpose of

incorporation but to the activities of the corporation at

the relevant time." 12

It was argued that there were four grounds upon which it

could be held that the county council was not a trading

corporation.

1. The sour~e of the incorporation, i.e., the

Act as an Act providing for local government.

Chief Justice Barwick rejected this argument,

holding that it was not necessary that the

'1 b f d d' 13 counc1 e or.me as a tra 1ng company.

2. The council's power to levy a loan rate.

The Chief Justice, in rejecting this argument,

felt that in terms of increasing government

intervention in business, the power to look

to ratepayers for contributions to its

capital did not preclude a body having a

trading character. 14

3. The statutory limitation on profitability

with the object of ensuring that a public

service is performed by the council for

the county district. Again, the Chief

Justice rejected this argument, indicating

that there was no evidence that the prices

charged by the council were minimal, and

holding that even if a county district was

benefited by low charges, this would not

preclude description of the entity as a

"trading corporation." 15

4. That, by reticulating electricity to

residents of its district, the council was

merely performing a public service and thus

could not be regarded as a trading body.

This argument was also rejected by the Chief

Justice, on the basis that to say that the

council does perform a public service does

not deny that it trades (~., an incorporated

State bank is a financial corporation within

s.Sl(xx)). 16

5

6

The Chief Justice was thus able to hold, by, inter alia,

rejecting these four arguments, that the county council

was in fact a trading corporation. This finding, as

indicated earlier, was consistent with His Honour's

expansive approach in the Concrete Pipes case.

It is difficult to agree with the criticism that Sir

Garfield's judgment represented an 11 over-reading of the

Engineers case 11 and that, by implication, it interpreted

Commonwealth powers 11 aggressively, as though they were

national powers, not federal powers.: 11 17 The Chief Justice

had indicated, early in his judgement, that as the statutory

formula bore a relationship to the terms of section Sl(xx)

of the Constitution, principles of construction appropriate

to the construction of the Constitution should be utilised:

The words must be given their full import without any constraint derived from the circumstance that so construed the constitutional power they express will affect State power, legislative or executive, or that the exercise of the consti­tutional power so construed will or may affect the exercise of State power. The reserved powers doctrine of the past has been fully explored: but care needs to be taken that it does not still in some form or another infiltrate one's reasoning when construing commonwealth powers or Acts of the Parliament.l8

As His Honour pointed out, the question had recently been

19 discussed in the Concrete Pipes case.

7

Had the Chief Justice's construction of the term "trading

corporation" formed the majority decision, it may have

provided a significantly widened constitutional base for

proposed federal securities legislation in this country.

However, Justices McTiernan, Menzies and Gibbs all held

that the county council was not a trading corporation within

the meaning of the statute.

Mr. Justice McTiernan considered that sections 35 & 36

(and, by extension, section 37) of the Trade Practices Act

were applicable to "private business, not a public under-

taking supplying goods or services." The county council,

on the other hand, conducted a municipal trading undertaking:

This is not sufficient to put into the category of a "trading corporation" - a trading company which is incorporated. The council does not supply electricity or electrical goods purposely to win sums of money as profits. If the council's operation of the undertaking is revenue-producing that does not changeth~ character of the enterprise from public to private.20

His Honour reached his conclusion, at least in substantial

part, on the basis of the profit-making factor as a

characteristic of a trading corporation. This was a factor

which was, however, not treated by other judgments as being

of critical importance.

8

Mr. Justice Menzies examined Pt XXIX of the Local Government

Act, 1919 (N.S.W.), under which the council was established;

His Honour also examined the general functions and responsi-

bilities of county councils, finding in the latter respect

that "all county council powers are powers derived from

h . d . . 1. . .. 21 s 1res an mun1c1pa 1t1es.

His Honour expressed the view that

According to the law under which any county council is established, it is incorporated as a municipal corporation for "local government purposes" whatever its particular powers and functions may be at the time of its establishment or later.22

Stressing the necessity both for the exercise of governmental

powers and for public supervision to ensure the proper

functioning of municipal government bodies, His Honour

emphasised the "subordination of trading to community

purposes" 23 through the applicability of Section 419 of

the Local Government Act. He concluded in this respect

that "the council is unquestionably a corporation for

local government purposes which has defined trading

powers." 24

In then considering whether the council could also be

properly described as a trading corporation, His Honour

9

relied upon a number of historical precedents, as well as

the judgment of Mr. Justice Isaacs in the Huddart Parker

case, to show that a distinction has historically been

made between municipal and trading corporations. His

overall conclusion was that "corporations for local

government purposes" are not comprehended within the limits

of the classification of "trading corporations." 25

Mr. Justice Gibbs also examined the provisions of Pt XXIX

of the Local Government Act in detail; in his view, these

provisions made it clear that a county council was a

municipal body, performing powers or duties which would

otherwise be exercised or perfor.med by the municipal or

shire councils within the county district.

His Honour then illustrated the public nature of a county

council by referring generally to its functions under the

Local Government Act. 26 He also noted specifically that

the intention of Section 419(1) was that a trading

undertaking shall not be undertaken with a view to making

a profit if that could be avoided (i.e., electricity

was to be supplied as cheaply as possible). 27

Although His Honour conceded that the activities of the

county council could properly be described as trading,

10

he concentrated on the public character of its activities

(the supply of electricity, the obligation to supply that

electricity as cheaply as possible, the power to levy

rates, and its ability to borrow money under Treasury

guarantee) and concluded that:

The county council is a corporation constituted for the purposes of local government to provide an essential service to the inhabitants of an aggregation of local authority areas, under conditions thought most likely to prove beneficial to them. It is properly described as a municipal corporation.28

He held that the county council was not a trading corporation;

"The purpose of its formation is more properly described as

29 that of fulfilling a function of local government." His

Honour thus adopted the same criterioft as that of McTiernan

and Menzies JJ., i.e., the purposes of the corporation, as

distinct from its activities.

Mr. Justice Stephen, who was in basic agreement with the

Chief Justice and thus dissented from the majority view,

also examined the provisions of the Local Government Act,

1919. He noted that, in New South Wales, local government

bodies did undertake "trading activities, the supply of

goods and services," and that it would be proper for a

separate corporate entity undertaking such activities to

11

be described as a trading corporation. 30 His Honour also

indicated that he rejected matters domestic to the county

council as irrelevant in determining whether it was a

trading corporation.

In an important finding, His Honour indicated that one

factor distinguishing the council ffom a commercial

undertaking was the existence of restrictions upon its

terms of trading (e.g., section 419). He did, however,

reject the argument that this factor_: (combined with the

council's incorporation under local government legislation,

its power to levy rates, and the fact that its functions

benefited the area it served) was sufficient to prevent

it being a "trading corporation." 31 He thus concluded

that the county council was a trading corporation. 32

While His Honour went on to reject the statutory incorporation

and public service arguments (both also earlier disapproved

by Chief ~ustice Barwick), the majority opinion of McTiernan,

Menzies and Gibbs JJ. prevailed.

This narrow three-to-two majority decision has thus supported

the view of those who felt that the expansion of the

corporations power, despite the Con·cr·e·t·e Pipes case, would

12

be a gradual and painstaking process. The decision would

appear to limit the scope of any proposed federal securities

legislation founded upon the corporations power, as the

breadth of the interpretation given by the High Court

to the term "trading corporation" under placitum Sl(xx)

is of critical importance in determining exactly which

areas of Australia's securities markets will come within

the sphere of the placitum and thus, perhaps, under the

proposed federal regulatory umbrella.

2. Insider Trading

In considering the problem of "insider trading," this

thesis has sought to examine the philosophical bases of the

introduction of the regulatory schemes currently used in

a number of subject jurisdictions. The object of this

examination has been to determine whether there are in

fact sound philosophical bases for such schemes; this is

particularly important in view of the fact that legislation

seeking to regulate the practice is expected to be soon

introduced at federal level in Australia.

The current methods of legislative and administrative

control utilised at federal level in the United States

13

represent the most advanced scheme yet adopted. An

examination of the philosophical bases of these methods

does not, however, reveal any planned, cohesive legislative

design behind their initial introduction or subsequent

evolution.

As it is these United States federal provisions which have

been utilised as models by some of the Australian states

and a number of other subject jurisdictions, one would

have imagined that the rationale for the introduction of

the relevant provisions in the former jurisdiction would

have been the subject of close study by securities legislators

prior to the introduction of legislation in the latter

jurisdictions. However, it appears that the "insider

trading" provisions in a number of subject jurisdictions

consist merely of adoptions (and in some instances,

adaptations) of the basic United States statutory and

administrative provisions. To this author, this is an

unfortunate situation, as there remains so much doubt as

to both the need for and (if that need be established) the

most efficient form of regulation of, insider trading

activity, that the mere introduction of United States

provisions or their local counterparts can only lead to

future confusion in this important area.

14

This thesis has examined both the United States33 and the

New South Wales 34 substantive provisions currently regulating

the practice of insider trading. It is clear, however, from

the Parliamentary Debates35 at the time of the introduction

of section 75A of the New South Wales Securities Industry

Act, 1970, as amended, that no adequate consideration was

given to the reasons behind the introduction of the

important United States provisions. Further, it is clear

that these United States provisions for.med the model for

the New South Wales legislation in this area. In order to

illustrate further the debt owed to the United States

model, and in particular to Rule 10b-s, 36 the ensuing

brief comparison of the relevant provisions is in. order.

As indicated in the thesis, sections 11, 12 and 17 of the

United States Securities Act, 1933, do relate to the

problem of insider trading, but specifically in the context

of the sale of securities. 37 Further, there are three

aspects to the relevant regulatory provisions of the

United States Securities Exchange Act, 1934. 38

First: Section 16 (a) imposes a reporting requirement which

obliges beneficial holders of more than 10 percent of any

class of any equity security registered under section 12

15

of the Act, and directors or officers of the issuing

company, to file a statement of the amount of all equity

securities of which they are the beneficial owners.

Such statements must be filed when the securities are

registered on a national securities exchange {or at the

time a section 12(g) registration statement becomes

effective) or within ten days after the person becomes a

beneficial owner, director or officer. A similar reporting

requirement exists in relation to changes in such beneficial

owne_rship; such changes must be reported within ten days of

the end of each month in which they occur.

As explained in the thesis, 39 this author is of the opinion

that there is too long a period allowed before such reporting

must be effected; a mandatory seven-day reporting period

should, it is suggested, be imposed in this respect.

The companies legislation in various Australian states

does impose similar reporting requirements upon substantial

shareholders. 40 These provisions, while not directed

solely toward the problem of insider trading, are relevant

to that area. However, as with section 16{a) of the

United States 1934 Act, the question does arise as to how

16

effective such a disclosure device can be as a tool for

h 1 t . f . 'd t d' 41 t e regu a 10n o 1ns1 er ra 1ng.

Second: Section 16(b) of the Securities Exchange Act,

1934, provides for recovery by a company or its security

holders, from 11 insiders, 11 of any profits made by those

11 insiders 11 from any sale or purchase {or purchase and

sale) of any of the company's equity securities within

any period of less than six months.

As elaborated in the thesis, 42 the various Australian

State companies Acts do contain provisions which render

officers of corporations liable to the corporation for the

improper use of information acquired by virtue of their

positions. Additionally, and with the exception of New

South Wales, the State statutes contain what this author

regards as a rather unsatisfactory provision, section 124A,

providing for civil liability on the part of officers of

a corporation in 11 insider trading .. situations. 43 The

latter provision, in this author's view, will inevitably

lead to many of the complexities of interpretation which

have been faced by United States securities legislators in

this area.

17

The New South Wales Governeent did not introduce section 124A,

but instead added a new Section 75A to its Securities

Industry Act. This section creates the offence of insider

trading in extremely wide terms, and, in its general scope,

it appears to be much wider than section 16(b), particularly

in that it relates to persons who are associated with a

corporation or body, which ter.m is very broadly defined in

the legislation. 44

Third: Rule lOb-S is the major insider trading regulatory

weapon in the United States. The major effect of the Rule,

as widely interpreted by the courts and the Securities and

Exchange Commission, has been to impose civil liability on

persons who have utilised inside information (to those persons

who have purchased or sold securities without that inside

information) without the necessity of establishing privity

of contract. 45

As discussed in detail in the thesis, there is considerable

doubt as to the validity of the expansion of the Rule

from what was originally an anti-fraud device to what is

now a major regulatory tool, the exact limitations of which

have yet to be determined. Additionally, serious technical

problems relating to materiality, the possible extent of

18

the concept of "insiders," and the liability of "tippees"

and "sub-tippees, .. remain unresolved. 46

Section 7SA(2) of the New South Wales Securities Industry

Act, 1970, also provides a right of action against persons

gaining an advantage from insider trading, at the hands

of either 11 another person .. (for the amount of any loss

incurred by that person by reason of the gaining of that

advantage) or at the hands of the corporation or body which

issued or made available those securities (for any profit

which accrued to the insider by reason of the gaining of

that advantage).

It will thus be seen that, although it has yet to be

subject to judicial interpretation, section 75A of the New

South Wales Securities Industry Act contains the seeds of

many of the problems which have arisen in the interpretation

of Rule lOb-S in the United States. 47 As section 75A is

based in large part upon the American provision, it is

regretted that full consideration does not appear to

have been given to the problems encountered with that

provision in the United States before the framing of the

New South Wales legislation.

F 0 0 T. N. .0 .T. E. S

1. See Chapter 3 supra at 208-227

2. See id. at 253-255 ----3. see id. -.at 264-265 ----4. See id. at 274-276 ----5. See id. at 194-201 ----6. See id. at 215-227 ----7. See id. at 222 ----8. See id. at 2261 253-255 1 264-265 and 274-276

9. See id. at 226-227

10. 48 A.L.J.R. 26 (1974) (hereinafter referred to as "the St. George County Council Case"}

11. Id. at 27

12. Id.

13. Id. at 28

14. Id. at 30

15. Id. at 29

16. Id.

17. p. Lane I Federal C'ont·r·o'l ·o•f• T'r'a'd'i·n·g· eo·rpo·rations I 48 A.L.J. 233 at 238 (1974).

18. The St. George County Council case, cited note 10 supra at 28.

19. Id.

20. Id. at 31

21. Id. at 32

22. Id.

23. I d.

24. I d. at 33

25.

26.

27.

28.

I d.

I d.

Id.

I d.

29. Id.

at 35

at 36

at 38

30. I d. at 39

31 Id. at 40

32. Id.

33. ~ Chapter 8 supra at 1045-1052

34. See id. at 1127-1133

35. See id. ----36. See id. at 1050-1052 and at 1060-1081

37. See id. at 1045-1047

38. S~e ~d. at 1047-1052

39. See id. at 1048 ----40. See, for example, the Companies Act, New South

Wales, Part IV, Division 3A

41. · See Chapter 8 supra at 1048

42. See Chapter 8 supra at 1119-1120

43. See id. at 1120-1126

44. See Securities Industry Act, New South Wales, Section 75A(6)

45. See chapter a· supra at 1052

46. See id. at 1078-1081 and at 1089-1090

47. s·ee,for example, ·id. at 1090

Chapter 1

1. H.E. Dougall, Capital Markets and Institutions 4 (1965)

2. S ..Robbins. The Securities Markets, Operations andIssues 4-12(1966)

3. Dougall, supra note 1 at 7.

4. Id. at 8

5. Id.

6. Id.

7. Dougall, supra note 1 at 8-9

8. For a detailed description of the short-term money market in Australia (as at 1964) see R. Hirst, The Short Term Money Market, in R. Hirst and R. Wallace. Studies in the. Australian Capital Market. 346 (1964) .

9. Dougall, supra note 1 at 9.

10. For details of the interaction which does occur between the capital and money markets, see Dougall, supra note 1 at 6.

11. See generally SC Robbins, supra note 2 at 47-48.

12. G. Cooper and R. Cridlan. Law and Procedure of the StTock Exchange 8(1971) .

13. W. Eiteman, C. Dice and D. Eiteman, The Stock Market3 'P'tF'ia': 1966)."----- ------- ---------------------------

14. See T. Hadden. Company Law and Capitalism. 125-126 (1973) which cites factors such as market sentiment, influenced by, for example, the death of a president of the United States.

15. Organisation for Economic Co-operation and Development,CapitalMarkets Study. Vol III at 19(1968).

16. Under this classification, ’’brokers" are members of Stock exchanges, "dealers" are non-member operators, and "investment advisors" are what their name implies. 17

17. Stigler, Public Regulation of the Securities Market. 37 J. Bus, 117-42 (1964).

I: 2

18. See, for example, Friend and Herman, The SEC Through a Glass Darkly. 37 J. Bus. 382-405 (1964); Robbins and Werner,Professor Stigler Revisited, 37 .T. Bus. 406-13 (1964); Stigler, Comment, 37 .T. Bus. 414-22 (1964); and Friend. Professor Stigler on Securities Regulation, A Further Comment. 38 J. Bus. 106 (1965).

19. Wu, An Economist Looks at Section 16 of the Securities Exchange Act of 1934. 68 Colurn, h. Rev. 260 (1968).

20. Id., at 265-66.

21. Id.., at 266-69.

22. H. Demsetz, Perfect Conpetition, Regulation, and.the Stock Market. in Economic Policy and the Regulation of Corporate Securities. 1 (H. Manne, ed. 1969).

23. IcL , at 16.

24. Id., at 14-15.

25. G. Benston, The Effectiveness and Effects of the SEC's Accounting Disclosure Requirements, in Manne (ed.) siffiia note 22 at 23.

26. See id., at 31-41.

27. Id., at 50.

28. Id., at 76.

29. I. Friend, The SEC and the Economic Performance of Securities Markets, in Manne (ed.) supra note 22 at 185.

30. Id*, at 186.

31. Id.

32. Id.

33. For support for this view, see S. Robbins, supra note 2 at 79-80.

34. Cohen, Toward an International Securities Market. 5 Law and Policy in International Business 357 (1973).

Chapter 2

11: 1

1. This author held discussions during 1971 with persons concerned with the securities industry in the United States, the United Kingdom, Canada, and many European and Asian countries. In particular, he visited securities institutions in Amsterdam, Bangkok, Bombay, Brussels, Chicago, Frankfurt, Geneva, Glasgow, Hong Kong, London, Manila, Milan, Montreal, Nagoya, New Delhi, New York, Osaka, Paris, Rome, San Francisco, Singapore, Tokyo, Vancouver, Washington and Zurich.

2. 1 L. Loss, Securities Regulation, 428 (2d ed. 1961).

3. The Australian Financial Review, March 22, 1972, at 11, cols. 1-4.

4. de Rothschild, The International Capital Market in the Seventies, The Australian Director 28 (Jan. 1972). See also Our Stake in Asian Dollars, Editorial, The Australian Financial Review,Dec. 14, 1971, at 2, cols. 1-2; and Cohen, International Securities Markets: Their Regulation 46 St. John’s L. Rev. 264 (1971).

5. It is felt that the project presently being carried out in Indonesia is insufficiently advanced, and those studies completed in Pakistan and Korea inadequately documented, to allow the inclusion of these countries in this study. 6 7 8 9 10 11 12 13 14

6. N. Carr, Asian Dollars. 14 Bangkok Bank Monthly Review 708 and 778.

7. Li- at 709.

8. Id, at 717.

9. Id- at 710.

10. gee M. Borsuk, The Making of Offshore Capital Markets in Asia. Insight. Jan. 1974 at 59, where it is estimated that at the end of 1973 the market had reached $4,340 million.

11. See Carr, supra note 6 at 786.

12. Id. at 782.

13. Organization for Economic Co-operation and Development (OECD), QECD Economic^Surveysf Australia, at 9 (December, 1972), (herinafter cited as "OECD study").

14. Id. at 14-28.

15. Id. at 9.

II: 2

16. For a brief description of some of the components of the Australian Capital market, see P.J. Rose,, Australian Securities Markets (1969).

17. OECD Study, note 1 supra at 75-76: the total proportion of bankassets decreased from 69.8% in 1953 to 48.2% in 1969 (the latter being a preliminary figure only).

18. Election Policy Speech of E.G. Whitlam Q.C. Leader of the Opposition, at 4:

n...we are determined that the Australian people shall be restored to their rightful place in their own country - as participants and partners in government, as the owners and keepers of the national estate and the nation’s resources, as fair and equal sharers in the wealth and opportunities that this nation should offer in abundance to all its people. We will put Australians back into the business of running Australia and owning Australia. We will revive in this nation the spirit of national co-operation and national self- respect, mutual respect between government and people.”

19. Id. at 9: "We will make a massive attack on the problem of landand housing costs. The land is the basic property of the Australian people. It is the people’s land, and we will fight for the right of all Australian people to have access to it at fair prices.”

20. Id_. at 25: "...one of those problems we all share in common is thedevelopment and ownership of our own resources. Unless Australians re-assert a greater measure of control over their own industries and resources, they will find opportunities within their own country closed to them.”

"Australia’s most profitable, important and fast growing industries are already in foreign hands. The companies which control them are, more and more, multi-national corporations - corporations whose resources are as large as those of many national governments andlarger than any of our own state governments."

21. Id. at 10.

22. Id. at 11.

23. Id. at 14.

24. Id. at 16.

25. Id.

26. Election Policy Speech of E.G. Whitlam, note 18 supra, at 11

27. Id. at 22-23.

II: 328. Id. at 24.

29. Id. at 27.

30. The First Year. Statement by the Prime Minister. The Hon.E.G. Whit lam. Q.C. M.P., on the Achievements of the Labor Government's First Year of Office, at 4 (Dec. 2, 1973).

31. Id. at 6.

32. P.A. Management Consultants Survey.

33. The Australian Financial Review, Apr. 24, 1973 at 1, cols. 1-4 and at 11, cols. 1-6.

34. The Australian Financial Review, Aug. 2, 1973, at 6, cols. 1-6.

35. The Australian Financial Review, Aug. 16, 1973, at 18, cols. 1-6.

36. The Australian Financial Review, Oct. 8, 1973, at 4, cols. 3-6.

37. The Australian Financial Review, Oct. 17, 1973, at 19, cols. 2-3.

38. Id. at 1, cols 2-5 and at 11, cols. 1-4.

39. 2 Australian Stock Exchange Journal. No.1, at 22-23 and at 38(Mar. 1973). In November, 1973, Mr. McAlister, President of the AASE, noted the criticisms which had been expressed by some members of the government of certain industry leaders and urged that the government "give urgent consideration to the possibility of undertaking a serious study of ways and means of generally improving the relations between Government and Business and, in particular, of establishing better and more effective ways of communicating with each other": 2 Australian Stock ExchangeJournal No.9, at 39 (Nov. 1973).

40. 2 Australian Stock Exchange Journal No.9 at 18 (Nov. 1973).

41. See 3 The Australian Director at 20 (Nov. 1973).

42. Id. at 20, 21 and 23

43. Id. at 25.

44. Id. at 27.

45. Id. at 28.

46. Id.

A. Schlesinger. Jr.. The Coming of the New Deal 173 (1960).47.

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48. B. Rauch, The History of the New Deal 1933-1958 25-26 (2d ed.1963). " ... ;

49. Id. at 80-81. See also The New Deal and the American People 8 (F. Freidel ed. 1964) where this act was described as going /'Measurably in the direction of nationalization of public services."

50. M. Parrish, Securities Regulation and the New Deal 2 (1970).

51. Id. at 7.

52. Id. at 9.

53. See, for example, The Sydney Morning Herald, Mar. 30, 1972, at 18, cols. 3-6, and The Australian, Aug. 12, 1972 at 2, cols. 3-5.

54. See Parrish, supra note 50 at 12. See also 2 Australian Stock Exchange Journal No.6 at 47 (Aug. 1973).

55. See Parrish, supra note 50 at 14, and The Australian, Aug. 11, 1972 at 12 (Editorial).

56. See Parrish, supra note 50 at 21.

57. Id. at 31.

58. Id. at 36-39.

59. See Id. at 39; in respect of the New York Stock Exchange, Parrish cites E.H.H. Simmons as stating "The New York Stock Exchange isa private organization, and as such is not a suitable means for the performance of an obviously public function .... It is by no means equipped to undertake any policy of controlling American corporate practice."

60. Id. at 41.

61. Id. at 47.

62. See Chapter 3 infra.

63. The 1973 Roy Milne Lecture by the Prime Minister, Mr. Whit lam - Australia’s Foreign Policy: New Directions. New Definitions.

64. See The Australian Financial Review, June 7, 1973, at 1, col. 2 and at 7, cols. 1-2; and The Australian, Jan. 14, 1974, at 2, col. 10.

65. See The Australian Financial Review, Feb. 15, 1973 at 19, col. 4.

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66. See The Australian Financial Review, Sept. 28, 1973 at 25, cols. 2-3 and at 36, cols. 4-6.

67. See The Australian Financial Review, Jan. 25, 1973 at 16, cols.3-4.

68. See The Australian Financial Review, Feb. 21, 1973 at 19, cols.1-3; The Australian Financial Review, Jan. 25, 1974 at 30, cols. 4-5; The Australian Financial Review, May 24, 1973 at 1, cols. 1-5 and at 22, col. 4.

69. An Act to regulate the Establishment of Banking Companies in the Colony of Western Australia; and to enable the proprietors of such Companies to sue and be sued in the name of any of their Public Officers (8 Will. 4, No. 1).

70. An Act to make good certain Contracts which have been and may be entered into by certain Banking or other Co-partnerships(3 Vic. No. 21).

71. For full details as to the companies legislation passed by the individual states, sge. Kavass and Baxt. Australian Supplement to the Third Edition of Gower’s Modem Company Taw 8-44 (1970).

72. Quick and Garran. The Annotated Constitution of the Australian * 206Commonwealth 604 (1901).

73. Leach, The Uniform Law Movement in Australia. 12 Am.J Comp. L.206 at 214 (1963):

At the time, Australian company law was badly in need of revision and up-dating. Although rooted in English example, it had long since begun to diverge from the original and in each state to differ from the others. Some of the states had kept their acts pretty well up to date; others had not. By the mid­fifties, the New South Wales Act had gone over twenty years without revision and Tasmania’s nearly fifty. In the meantime, the ramifications of modem commerce had become so widespread in Australia that they could no longer be adequately controlled by separate and divergent laws. Rapid communications, the increasing tendency of large industrial organizations to take over smaller ones, and the consequent concentration of capital in a small number of industrial giants, all combined to make better regulation necessary.

74. The Uniform Act (excluding later amendments) was adopted asfollows: New South Wales Companies Act, 1961, assented toDecember 27, 1961, commencement date July 1, 1962; Victoria, Companies Act, 1961, assented to December 19, 1961, commencement date July 1, 1962; Queensland, Companies Act, 1961, assented to December 28, 1961, commencement date July 1, 1962; South Australia, Companies Act, 1962, assented to November 22, 1962, commencement

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date July 1, 1963; Western Australia, Companies Act 1961, assented to January 22, 1962, commencement date October 5, 1962; Tasmania, Companies Act 1962, assented to December 11, 1962, commencement date January 1, 1963; Australian Capital Territory, Companies Ordinance 1962, notified in Gazette June 21, 1962, commencement date July 1, 1962.

For an early assessment of the uniform Legislation see Parsons, Uniform Company Law in Australia, Jnl. Bus. Law 235 (1962)

75. Companies Act, New South Wales, Part IV, Divison 1.

76. Companies Act, New South Wales, Part V, Division 2.

77. Companies Act, New South Wales, Part V, Divison 3.

78. Companies Act, New South Wales, Part 111.

79. Companies Act, New South Wales, Part X.

80. Companies Act, New South Wales, Part VI.

81. Companies Act, New South Wales, Part IV, Division 3A.

82. Companies Act, New South Wales, Part VI, Divisions 1-4.

83. Companies Act, New South Wales, Part V1B.

84. Companies Act, New South Wales, Part VIA.

85. See, for example, The Institute of Chartered Accountants in Australia, Press Release, June 1, 1972, and The Chartered Secretary (Journal of the Institute of Chartered Secretaries and Administrators) (Editorial) August, 1972.

86. These were introduced against the background of the share "boom” of 1969-1970 and the subsequent collapse of that "boom". In this respect, Australia was following what has now become a well- established pattern of introducing regulatory legislation after the occurrence of such a phenomenon.

87. This legislation, in one form or another, had been introduced in only New South Wales, Victoria, Queensland, and Western Australia. The manner in which these acts fail to achieve uniformity is discussed, where appropriate, throughout this Study.

88. See The Australian Financial Review, June 22, 1973 at 5, cols.1-2.

89. Attorney-General of New_South Wales, News Release, July 12, 1973.

90. See The Australian Financial Review, Dec. 14, 1973 at 22, cols. 4-6.

91. See The Australian Financial Review, Jan. 23, 1974 at 4, cols. 3-6.

92. See The Australian, Mar. 16, 1974 at 10, cols. 7-8.

93. Company Law Advisory Committee, Report to the Standing Coi ittee o O t t < ^ e YSr^erai,,m.Accomts_jaid.^dit, 5 (Oct. 17V 1968). This Committee consists of Mr. Justice Eggleston as Chairman,Mr. J.M. Rodd, a Melbourne solicitor and Mr. P.C.E. Cox, a Sydney accountant; it is popularly known as the Eggleston Committee.

94. Id., paras. 51 and 52. In recommending the establishment of such a body, the Committee stated in para. 49:

One very important advantage which will flow from the establishment of a Companies Commission is that there will exist for the first time in this country a permanent and responsible organization which will develop a fund of knowledge on the practical operation of the legislation and be in a position to give advice to governments as to desirable amendments in the future. The cumulative experience of an authoritative body which is regularly dealing with problems arising under the legislation will be of very material assistance in the essential task of continued review of the statutory requirements.

95. February 28, 1969.

96. June 2, 1969.

97. February 20, 1970.

98. October 12, 1970.

99. Undated, 1971.

100 .

101. See Commonwealth of Australia, Pari. Deb. Senate, 25th November, 1969 to 7th May, 1970, 17 and 18 Eliz. 11, Vol.S. 43, at 489-517.

The original motion proposing the establishment of a Select Committee was moved by the then Leader of the Opposition in the Senate, Senator Lionel Murphy Q.C. (now Commonwealth Attorney- General) .

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He was critical of the practice of many brokers who also acted as traders on exchanges and described the success of the United States Securities and Exchange Commission in regulating the securities industry in that country, in relation to both initial distribution and post-distribution trading of securities. He was critical of the projected Australian State legislation, and, recognising the national character of the industry, called for one body to exercise supervision, rather than a body in each State. In the latter regard he was able to rely upon the recommendation of the Eggleston Committee that a single Companies Commission be established to administer company law throughout the country.

Senator Wright (then Minister for Works) supported the motion on behalf of the Government, but emphasised the continuing steps towards regulation of the industry which had been taken by the Standing Committee of Attorneys-General, the Eggleston Committee, and the States of Victoria and New South Wales in introducing securities industry legislation. He also emphasised the role of stock exchanges themselves in regulating their affairs so as to protect the interests of their clients.

In supporting the motion on behalf of the Democratic Labor Party, Senator Byrne called for the appropriate regulatory measures to be effected through co-operation between the Commonwealth and the States, and sought to make any Commonwealth supplanting of state powers in this regard, an action of last resort.

Senator Rae (Liberal, Tasmania and later to become Chairman of the Committee) also supported the motion, although dis­associating himself from Senator Murphy’s specific references to companies and individuals whose actions were the subject of then current enquiries.

Senator Greenwood, (later Federal Attorney-General) also supported the motion, foreshadowed some of the constitutional problems likely to arise, and indicated that he was of the opinion that an early High Court judgment might in fact have allowed the Commonwealth greater power than had been supposed.He also called for uniformity of particular laws throughout Australia and stated that once seven Attorneys-General had agreed on a uniform law, he could not see why seven different statutes were required to give effect to their agreement.

Senator Webster of Victoria was the only Senator to speak against the motion. He did so on the basis that the investi­gations by the Standing Committee of Attorneys-General and the actions by the states in introducing their own legislation would

II: 9

adequately deal with the situation. He called for a deferral of the motion for a period of twelve months.

Senator Murphy’s motion was passed.

102. Id. at 870.

103. See Commonwealth of Australia, Pari. Deb., Senate, August 17, 1971 at 9 (1971 4th Period).

104. Id. at 27.

105. The Australian, Apr. 6, 1974 at 1, col.

106. See, for example, for arguments to this effect, The Australian, Nov. 18, 1971 at 12 (Editorial); The Australian, Jul. 25, 1972 at 11, col. 4; The Australian; Aug. 11, 1972 at 12 (Editorial); The Chartered Secretary (July-August 1972) 195 (Editorial); Senate Select Committee on Foreign Ownership and Control of Australian Resources, Report No.l, Oct. 1972; The Australian Financial Review, Nov. 8, 1973 at 14, cols. 5-6; The Australian Financial Review, Jul. 2, 1973 at 2 (Editorial); The Australian Financial Review, Nov. 27, 1973 at 18, cols. 3-6.

For arguments to the contrary, see The Australian, Nov. 26,1973 at 11, col. 10; The Australian, Aug. 12, 1972 at 2, cols.3-6; The Australian Financial Review, Sept. 10, 1973 at 4, cols. 3-4 and The Australian Financial Review, Nov. 15, 1973 at 3, col. 3.

107. The Sydney Morning Herald, Nov. 16, 1971 at 1, cols. 1-2.

108. The Sun, Nov. 16, 1971 at 48, cols. 2-6.

109. The Australian Financial Review, Nov. 17, 1971 at 1, cols. 1-5 and at 13, cols. 1-4.

110. See, for example, The Sydney Morning Herald, June 23, 1973 at 13, col. 4; The Australian Financial Review, Sept. 6, 1973 at 15, cols. 1-6; and The Australian Financial Review, Nov. 15, 1973, at 5, col. 3.

111. See Chapter 9 infra for detailed recommendations as to the composition of the proposed Commonwealth Securities Commission.

112. See Chapter 10 infra.

113. See Chapter 8 infra.

114. For details as to even earlier forms of commercial associations, see L.C.B. Gower. The Principles of Modem Company Law. 22-24 (3d ed. 1969)...

115* E.V. Morgan and W.A. Thomas, The Stock Exchange. 11-15 (2d ed. 1969).

116. Id. at 14.

117. See G . C ooper and R . Cridlan. Law and Procedure of the Stock Exchange 2 (1971):

But there was no market to which intending buyers had access, nor did they have any means of knowing the fortunes of the enterprises in which they were purchasing "adventures” (i.e. , stock), since most of them kept their capital structure a secret and many operated overseas.

118. Id. at 3; Morgan and Thomas, supra note 115 at 16.

119. Morgan and Thomas, supra note 115 at 16.

120. Killick, The Work o f the Stock.Exchange. 28 (2d ed. 1934), cited in 1 L. Loss, supra note 2 at 1.

121. See Morgan and Thomas, supra note 115, at 22-23, citing House of Commons Journals, Nov. 25, 1696:

The pernicious Art of Stock-jobbing hath, of late, so wholly perverted the End and Design of Companies and Corporations, erected for the introducing, or carrying on, of Manufactures, to the private Profit of the first Projectors, that the Priveleges granted to them have, commonly, been made no other Use of, by the First Procurers and Subscribers, but to sell again, with Advantage, to ignorant Men, drawn in by the Reputation, falsly raised, and artfully spread, concerning the thriving state of their Stock: Thus the first Undertakers,getting quite of the Company, by selling their shares for much more than they are really worth, to Men allured by the Noise of great Profit, the Management of that Trade and Stock comes to fall into unskilful Hands, whereby the Manufactures intended to be promoted by such Grants, and put into the Management of Companies, for their better Improvement, come, from very promising Beginnings, to dwindle away to nothing, and be in a worse Condition than if they were perfectly left free, and unassisted with such Laws, or Patents; an Instance, whereof, we humbly conceive, is to be found in the Paper and Linen Manufactures, which,

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122.

123.

124.

125.

126.

127.

128.

129.

130.

131.

132.

we fear, feel the Effects of this Stock-jobbing Management, and are not in so thriving a Condition, as they might have been, had they not fallen under this Kind of Misfortune.

For details of the South Sea Bubble and those who participated, see Morgan and Thomas, supra note 115, Ch. 2; 1 L. Loss, supra note 2 at 4; Kilbride, The British Heritage of Securities Legislation in the United States, 17 Sw. L. J. 258 at 260-261 (1963); Cooper and Cridlan. supra note 117 at 3-4; and Gower. supra note 114 at 28-29.

supra note 115 at 34 and 36.

Id. at 34.

1 L. Loss, supra note 2 at 4.

6 Geo 1, c.18

For a contrary view, see L.C.B. Gower, A South Sea Heresy. 68 L.O.R. 214 (1952).

See generally, 1 L. Loss, supra note 2, at 4-6: Morgan and Thomas, supra note 115 at 38; Kilbride, supra note 122 at 261; and Cooper and Cridlan. supra note 117 at 3.

Morgan and Thomas, supra note 115 at 39.

Cooper and Cridlan. supra note 117 at 3; and see Kilbride, supra note 122 at 261:

Public confidence in joint-stock companies and their securities had been so effectively destroyed by the South Sea debacle that it was three quarters of a century before there was even another boom.

It is difficult to reconcile the seriousness of the affair with Morgan and Thomas' conclusion that "The lasting consequences of this most notorious episode in British financial history were comparatively slight." See Morgan and Thomas, supra note 115 at 40.

Gower. supra note 114 at 31.

See id. at 41, where it is argued that it was in large part the existence of bogus assurance companies of the kind described in Dicken's "Martin Chuzzlewit" which led the Board of Trade to secure the appointment of this Committee.

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133.

134.

135.

136.

137.

138.

139.

140.

141.

142.

143.

144.

145.

146.

147.

148.

149.

Cited in R.L. Knauss, A Reappraisal of the jtole of Disclosure,62 Mich. L. Rev. 607, 611 (1964).

An Act for the Registration, Incorporation and Regulation of Joint-Stock Companies, 1844; 7 and 8 Viet., c.110.

Kilbride, supra note 122 at 262.

7 and 8 Viet., Section 11.

Id. Section Vll. For a brief discussion of what in effect amounted to a system of provisional registration, see Gower. supra note 114 at 42 and at 42, note 13.

7 and 8 Viet., Section IV.

Id. Section XI.

Id. Section XXV11.

Id. Section XXXIV.

Id. Section XXXV.

Id. Section XXXV11.

Id. Sections XXXV111, XXXIX, XL, XL1 and XL111.

Gower, supra note 114 at 43. This qualification is also applied by Professor Gower to the associated, but for the purposes of this study not relevant, Companies Clauses Consolidation Act of 1845.

10 and 11 Viet., C. 78, Section 4.

Kilbride, supra note 122 at 265.

Cooper and Grid!an. supra note 117 at 4. For a detailed description of the struggle for, and the attainment of, limited liability, see Gower. supra note 114 at 44-50.

The Companies Act, 1867, 30 and 31 Viet., C.131, Section 38.This section required that the prospectus disclose:

The Dates and the Names of the Parties to any Contract entered into by the Company, or the Promotors, Directors, or Trustees thereof, before the Issue of such Prospectus of Notice, whether subject to Adoption by the Directors or the Company, or otherwise,

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and provided that

Any Prospectus or Notice not specifying the same shall be deemed fraudulent on the Part of the Promotors,Directors, and Officers of the Company knowlingly issuing the same, as regards any Person taking snares in the Company on the Faith of such Prospectus, unless he shall have had Notice of such Contract.

150. Loopholes were found to exist in this provision. See 1 L. Loss, supra note 2 at 6; Kilbride, supra note 122.

151. This act was designed to overcome the effect of the House of Lords decision in Derry v. Peek, 14 A.C. 337 (1889).

152. 63 and 64 Viet., C. 48.

153. Cmd. 7779 (1895) Sections 5, 6, cited in 1 L. Loss, supra note note 2 at 6-7.

154. 7 Edw. 7, C.50.

155. For example, the United States, Canada, Australia, India, Malaysia, Singapore and Hong Kong.

156. A prospectus was defined in Section 30 of this act as "any prospectus, notice, circular, advertisement, or other invitation, offering to the public for subscription or purchase any shares or debentures of a company". This definition has been retained in Section 455 (1) of the current United Kingdom companies legislation; see Chapter 8 infra.

157. cf. the nature of the information required to be disclosed in the prospectus by the Companies Act, 1867; see note 149, supra.

158. See note 154, supra.

159. The effect of the application of these sections was to continue the imposition of the restrictions relating to the appointment or advertisement of directors (Section 2); the commencement of business (Section 6) and the alteration of terms of contracts referred to in prospectuses without the approval of a statutory meeting (Section 11).

160. 8 Edw. 7 C. 69.

161. Gower, supra note 114 at 54.

162. See note 160, supra.

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163. Gower, supra note 114 at 54. The 1939 Act was introduced partly to prevent the practice which had arisen of forming unit trusts to raise capital while at the same time avoiding the regulatory provisions of the companies legislation.

164. Report of the Company Law Committee, Cmnd. 1749, 1 (1962).

165. IV L. Loss, Securities Regulation 2464 (Supp. 1969).

166. These will be discussed, where appropriate, throughout this study.

167. 9 and 10 Eliz. 2, Ch. 62.

168.

169.

170.

171.

11 and 12 Eliz. 2, Ch. 16.

11 and 12 Eliz. 2, Ch. 18.

13 and 14 Eliz. 2, Ch. 50.

13 and 14 Eliz. 2, Ch. 25. These statutes will also be discussed, where relevant to the context, throughout this study.

172. C.M. Schmitthoff, Some Considerations on the Issue of Securities in English Law, in The Legal ,Status pf,Securities in Europe and the United States fLe Regime Juridique Des fitres De Societ.es En Europe et Aux Etats-Unis.) 205 at 218 (1970).

173. The Federation of Stock Exchanges in Great Britain and Ireland, Articles of Constitution, para. 4 at 2.

174. Report of the Company Law Committee, note 164 supra} paras. 256, 257:

We have received no evidence that the operations of these small stock exchanges have led to serious trouble or difficulties. But it seems to us improbable that they can perform, as adequately as the large exchanges, the two important functions of disciplining their members and scrutinising applications for quotations.

It seems to us--and the representatives of the Council of Associated Stock Exchanges who gave evidence to us agreed-- that the time has come for some rationalisation of the existing exchanges, perhaps by the amalgamation of some of the smaller ones. We also think that investors dealing with members of a recognised stock exchange should be protected by a compensation fund or by insurance if this is a practical alternative. We recommend, therefore, that

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the Board of Trade should re-examine the existing list of recognised stock exchanges with a view to reducing their number and increasing their size; and that the Board should satisfy themselves, as a condition of recognition, that stock exchanges have, or will have within a reasonable period, suitable arrangements for the compensation of investors who suffer loss as a result of default by members.

175. Articles of Constitution, note 173 supra, Appendix C.

176. The Federation of Stock Exchanges in Great Britain and Ireland, Detailed Scheme for the Amalgamation of the Federated,Stock Exchanges into a. Singly Organization (Nov. 1971).

177. See Chapter 5 infra.

178. The City Code on Take-overs and Mergers 3 (rev. ed. Feb. 1972).

179. The initial acceptance of the Code by the City was, however, something less than voluntary. This author was informed in London in July, 1971, that the Code was accepted because of the clear indication at the time that the alternative was the possible introduction of "Securities and Exchange Commission- type" legislation. This is borne out by Gower. supra note114 at 56 and at 56, note 12.

180. The structure of the Panel on Take-Overs and Mergers isdiscussed during the course of this study: see Chapter 9*infra.

181. Gower. supra note 114 at 56.

182. See The Australian Financial Review, Mar. 29, 1974 at 7, cols. 1-4. See also The Australian Financial Review, Aug. 28, 1973 at 12, cols. 1-6.

183. See The Australian Financial Review, Jan. 31, 1973 at 2, cols.4-6 and at 3, cols. 1-2.

184. See Chapter 8 infra.

185. Securities and Exchange Commission, Future Structure of the Securities Markets 5 (19

186. 1 L. Loss, supra note 2 at 23.

187. This was the Securities Act of 1933.

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188. IV L. Loss, supra note 165 at 2209. For a detailed description of the historical development of blue sky legislation see Loss and Cowett, Blue Sky Law (1968). This study will be concerned in detail with the"BTue sky legislation of only California,New York and Illinois, first, as these states contain the major United States stock exchanges (Pacific Coast; New York and American; and Mid-west, respectively) and secondly, inthe case of California, as it recently introduced a new and in many ways controversial blue sky statute.

189. Gadsby, Historical Development of the S.E.C. - The Government View. 28 Geo. Wash.L. Rev. 8 (1959-60).

190. 1 L. Loss, supra note 2 at 90.

Id. at 94.191.

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192. IV L. Loss, supra note 165 at 2264-2265; Alabama, Alaska, Arkansas, Colorado, the District of Columbia, Hawaii,Idaho, Indiana, Kansas, Kentucky, Maryland, Michigan,Missouri, Montana, Nebraska, Nevada, New Jersey, New Mexico, Oklahoma, Oregon, Puerto Rico, South Carolina,Utah, Virginia, Washington and Wyoming.

193. Id. at 2265: Georgia, Iowa, Louisiana, New York, RhodeIsland, Texas, Connecticut, Maine and North Dakota;

194. For a detailed examination of the act, see Loss and Cowell. supra note 188.

195. 1 L. Loss, supra note 2 at 34.

196. Uniform Securities Act, 1956, Appendix A.

197. IcL Appendix B.

198. IcL Appendix C.

199. Bloomenthal, Blue Sky Regulation and the Theory of Overkill.15 Wayne L. Rev. 1447 (1968-69). Bloomenthal concludes(at *1493): ~"much of the blue sky regulation has a capacity to destroy more than is necessary to accomplish a rational scheme of securities regulation ...."

200. Gray, Blue Sky Practice - A Morass. 15 Wayne L. Rev. 1519at 1534 (1968-69) '

201. Mofsky, Blue Sky Restrictions on New Business Promotions, Securities Law Review 791 (1970). Mofsky argues (at 806) that: "It is apparent that blue sky legislation may result in important and dangerous economic consequences with respect to three related entrepreneurial problems: financing a new business, promoter control and sufficient reward for entrepreneurship."

202. Mofsky, Reform of the Blue Skv Laws. 23 Vand. L. Rev. 599 (1970). Mofsky realistically assesses the importance of the political bridges which would have to be crossed to effect this revision, and is particularly astute in his classificationof those elements in the business community which would, and those which would not, support reform of the "merit" regulation philosophy. The "revised" statute of California did not, in his opinion, alter the basic "merit" approach which was the basis of the prior legislation in that state. He is un- enthusiastic about federal pre-emption of the securities field and again accurately assesses the political implications of this proposition, not the least important of which is the

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nature of appointment of the five members of the Securities and Exchange Commission. Mofsky’s call for revision of the basis of the "merit” regulatory philosophy is both eloquent and reasonable. It is, unfortunately, impossible to see that it will succeed.

203. Hueni, Application of Merit Requirements in State Securities Regulation. 15 Wayne L. Rev. 1417 (1968-69). Hueni, whoat the time of writing this article was the Director of Securities Bureau of the Michigan Department of Commerce, argued strongly for the retention of the "merit" philosophy (at 1445)

I am convinced that on balance, merit tests, reasonably and consistently applied, are definitely worth imposing. They afford much added investor protection and inspire greater investor confidence in the integrity of the securities market without unduly impeding the marketing of securities generally.

204. For a description of this legislation, see 1 L. Loss. supra note 2, at 107-111

205. See Gadsby, supra note 189 at 6; he points out, however, that between 1900 and 1914, every President recommended that Con­gress enact legislation to give the federal government control over those corporations which engaged in interstate commerce.

206. 1 L. Loss, supra note 2 at 112: this Committee was designed to "investigate, pass upon,and determine whether it is compatible with the national interest that there shouldbe sold or offered for sale or for subscription any issue" of securities whose aggregate par or face value, together with any other securities issues by the same person or corporation since the passage of the War Finance Corporation Act, exceeded one hundred thousand dollars ($100,000.00) 207 208 209 * * *

207. Id. at 118. For a detailed discussion of the initial movements to regulate the securities markets which occurred during this period, including an examination of the important role of the Investment Bankers’ Association,see Parrish, supra note 50, Chapters 1 and 2.

208. Parrish, supra note 50 at 20

209. 1 L. Loss, supra note 2 at 121. For an interesting althoughsomewhat lighthearted account of the economic condition ofthe United States at this crucial period, see J.K. Galbraith.The Great Crash. 1929. (1954)

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210. 1 L. Loss, supra note 2 at 127: the President’s message to Congress ran, in part, as follows

There is, however, an obligation upon us to insist that every issue of new securities to be sold in interstate commerce shall be accompanied by full publicity and information, and that no essentially important element attending the issue shall be concealed from the buying public.

This proposal adds to the ancient rule of caveat emptor, the further doctrine "let the seller also beware”. It puts the burden of telling the whole truth on the seller. It should give impetus to honest dealing in securities and thereby bring back public confidence.

The purpose of the legislation I suggest is to protect the public with the least possible inter­ference to honest business.

211. 1 L. Loss, supra note 2, at 128. Loss’ assessment is supported by L. Reinhoel, Basic Pattern and Coverage of the 1933 Act. 34 U. Mo. K.C.L. Rev. 172 (1966). Reinhoel argued that the Congressional intent in enacting the legislation ’’was as to require the complete disclosure of material facts to investors and to afford protection against fraud and misrepresentation in the sale of securities”.

212. James M. Landis, a former Chairman of the Securities and Exchange Commission (1935-1937), gives an interesting account of his personal reminiscences of the political background to this enactment in The Legislative History of the Securities Act of 1933. 28 Geo. Wash. L. Rev. 29 (1959-60). 213 214 215 216 217

213. See, for example, Douglas and Bates, The Federal Securities Act of 1933. 43 Yale L. J. 171 (1933). Professor Douglas, later to become Chairman of the Securities and Exchange Commission, expressed strong reservations in relation toto of these questions.

214. Knauss. supra note 133

215. Id. at 647-648

216. H.R. Doc. No. 95, 88th Cong., 1st Sess. (1963)

217. Id. Part 3 at 1.

218. Report of the Governor’s Committee on Speculation in Securities and Commodities (New York, 1909).

219. Report of the House Committee to Investigate the Concentration of Control of Money and Credit, by Mr. Pujo (1913).

220. For an examination of the historical background to the regulation of exchanges, see Tracey and MacChesney,The Securities Exchange Act of 1934, 32 Mich. L. Rev.1025 (1934). :

221. Stock Market Control. Twentieth Century Fund Inc. (1934).

222. Roper Report, New York Times, January, 28, 1934.

223. For details as to the enactment of this legislation, see II L. Loss, Securities Regulation 784 (1961) and Parrish, supra note 50. cnapter 5.

224. Tracy and MacChesney, supra note 220 at 1039.

225. The Commission also has advisory functions, in relation to corporate reorganizations, under Chapter X of the Bankruptcy Act.

226. Hearings on H.R. 13308, H.R. 1785, H.R. 18081, H.R.18109, and H.R. 18458. Before the Subcommittee on Commerce and Finance of the House Committee on Inter­state and Foreign Commerce, 91st Cong., 2d Sess. (1970)

227. Hearings on S. 2348, S. 3988 and S. 3989. Before the Sub-committee on Securities of the Senate Committee on Banking and Currency, 91st Cong., 2d Sess. (1970)

228. 26 Bus. Lawyer, 555 (1970). See also American Law Institute’s Federal Securities Code, Tentative Drafts No. 1 and No. 2.

229. For details of the Canadian experience in this regard, see The Australian Financial Review, May 25, 1971 at 2, cols.3-6 and at 3, cols. 1-2; May 26, 1971, at 2, cols. 3-6 and at 3, col. 1; May 27, 1971 at 2, cols. 3-6 and at3, col. 1; and May 28, 1971, at 2, cols. 3-6 and at 3, cols 1-2. 230

230 Canada’s initial regulatory legislation was influenced both by the English companies legislation and the United States blue sky enactments. Two federal statutes, the Canadian Joint Stock Companies Letters Patents Act of 1869 and the

II: 20

II: 21

Canada Joint Stock Companies Act of 1877, were followed by similar provincial legislation, the most important of which was the Ontario Companies Act of 1907. Ontario was even at this early stage establishing the predominance in securities regulatory legislation which it has maintained at the present day.

The initial legislation based upon the blue sky enactments was Manitoba's Sale of Sahres Act of 1912, replaced in 1926 by the Municipal and Public Utility Board Act, Part IV.Ontario became in 1928 the first province to enact a Security Frauds Prevention Act, and this formed the basis for the enactments adopted in many of the other provinces. Ontario again took the lead with its Securities of 1945, and its Broker-Dealers Act of 1947, the former statute again being followed in other provincial jurisdictions.

In 1966 Ontario introduced a new Securities Act which, as amended, remains perhaps the most enlightened securities legislation in Canada today.

While there were many developments in provincial securities legislation, important regulatory provisions were also introduced in the Dominion companies legislation of 1917,1934 and 1935. The current federal companies legislation, the Canada Corporations Act, was amended in 1965 in relation to its insider trading, financial disclosure and prospectus filing provisions.

For a detailed discussion of the historical development of securities legislation in Canada, see P. Williamson. Securities Regulation in Canada. Chapter I, Part A, (190U) and p.WTIHamson. Securities Regulation in Canada. 1-8 (Supp. 1966) 231 232 * * *

While this study will examine relevant Canadian federal legislation, it will be concerned in detail with the proviicial legislation of only Ontario and Quenbec. Apart from the obvious imposs­ibility of considering the legislation of all of the provinces, Ontario and Quebec have, by common consent, the most advanced securities enactments; Toronto and Montreal are the major finance and commercial centres, and contain the largest Canadian stock exchanges (the Toronto, Montreal and Canadian exchanges) and the Ontario and Quebec Securities Commissions are the leading securities regulatory bodies in Canada. See also the Business Corporations Act, R.S.O. 1970, C.53, as amended by 1971, C.26; 1972 C. 138;

231. Ontario, the Corporations Act, R.S.O. 1970, C.89; Quebec,Companies Act, R.S.Q. 1964, C. 271, as amended.

232. Ontario, The Securities Act, R.S.O. 1970, C. 426 as amended1971, C. 31; 1972; C.l; 1973, C.ll: Quebec, Securities Act,R.S.Q. 1964, C. 274 as amended 1967, C.82; 1971 C.77; 1973,Bill 6..

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233. Ontario, The Investment Contracts Act, R.S.O. 1970 C. 226.

234. Ontario, The Corporations Information Act, 1971, S.O. 1971,C. 27; as amended, 1972, C.l and 139: Quebec, CompaniesInformation Act, R.S.Q. 1964, C.273 as amended 1971, C.76; 1973, Bill 18, S.l

Other relevant provincial securities material includes the Policy Statements of the Ontario and Quebec Securities Commissions.

235. The constitutional basis of the federal government’s power to legislate for companies with interprovincial objects is discussed, Chapter 9, infra.

236. R.S.C. 1970, c. C-34.

Other relevant federal legislation includes the Investment Companies Act, S.C. 1970-71, c.33; the Bank Act, R.S.C. 1970,c. B-I, as amended S.C. 1970-71, c-1; the Loan Companies Act, R.S.C. 1970, c. L-12, as amended, R.S.C. 1970 (1st Supp.) c. 24: the Trust Companies Act, R.S.C. 1970, c. T-16 as amended R.S.C. 1970 (1st Supp). c. 47; and the Canada Deposit Insurance Corporation Act, R.S.C. 1970 c. C-3.

237. Interview with Member of Ontario Securities Commission, in Toronto, June, 1971, confirmed in interview with Member of Quebec Securities Commission, in Montreal, June, 1971

238. Williamson, supra note 230 at 44-45; also cited, in partin W.F. Dickson, A Dominion-Provincial Securities Commission for Canada, 1, April 15, 1966 (unpublished thesis in Harvard Law School Library).

239. The roles and functions of these provincial securities bodies are discussed, Chapter 9, infra.

240. Report of the Royal Commission on Banking and Finance, 345,(1964) (the Porter Report).

241. British North America Act, 1867 (as amended) section 92.

242. Id, Section 91.

243. Id. On the origins of the constitutions of Canada, Australia and the United States, see Johnston. The Effect of Judicial Review on Federal-State Relatjons~Th Australia. Canada and * 244the United States, ch. 1 (1969)

244. Report of the Committee to Study the Requirements and Sources of Capital and the Implications of Non-Resident Capital for the Canadian Securities Industry, (May, 1970).

245. Proposals for a New Business Corporations Law for Canada, (April, 1971).

246. Report of the Canadian Committee on Mutual Funds and Investment Contracts, Provincial and Federal Study,(1969).

247. Report of the Royal Commission Appointed to Inquire Into the Failure of Atlantic Acceptance Corporation Limited, (September 12, 1969).

248. Report of the Study Committee on Financial Institutions,(June, 1969).

249. Report of the Committee of the Ontario Securities Commission on the Problems of Disclosure Raised for Investors by Business Combinations and Private Placements, (February, 1970).

250. Interim Report of the Select Committee on Company Law, (1967).

251. Report of the Royal Commission to Investigate Tradingin the Shares of Windfall Oils and Mines Limited, (September, 1965).

252. Report of Commissioner D.S. Beatty on Matters Related to the Financing of Mining Exploration and Development Companies. (1967),

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253. Report of the Attorney-General's Committee on Securities Legislation in Ontario, (1965).

254. The relevance to Australia of the general Canadian experience was discussed in evidence given to the Senate Select Committee on Securities and Exchange on June 16, 1971, by Mr. J.F. McOuat of the firm of Watts, Griffis and McOuat (Aust.) Pty. Limited, consulting geologists and engineers:See The Australian Financial Review, June 17, 1971, at 7, cols. 1-4.

255. Comment, Regulating the One-Bank Holding Companies -- Precluding Zaibatsu, 46. St. John's L. Rev. 320 (1971): Henderson § Henderson, Will a "Zaibatsu" Control our Economy? 26 Fed. B.J. 187 (1966). 256 * * * *

256. This Committee was established by the Yukashoken noshobun no chosei tou ni kansuru horitsu (Law ConcerningCo-ordination of Liquidating Securities) Law No. 8, 1947.M. Tatsuta, Securities Regulation in Japan. 1970 at 2 note10. See also Makoto Yazawa, The Legal Structure for

II: 24

Corporate Enterprise: Shareholder-Management Relationsunder Japanese Law, in Law in Japan -- The Legal order in a Changing Society-,. 547, at 548~(A. von Mehren, ed.1963).

257. Comment, supra note 255 at 321.

258. See, The Australian Financial Review, Jan. 23, 1974 at 14, Cols. 3-6.

259. "Recent estimates by the Japan Economic Centre ... forecast an annual rate of growth of real GNP in Japan of 12.4 percent during 1970-75 and 10.8 percent during 1975-80. In 1980, Japna’s BNP will exceed that of the United States in 1969". Arndt, Economic Prospects for the 1980's. 25 Australian Outlook. 319,320 (1971), citing Hla Myint et al., Southeast Asia’s Economy in the 1970fs. ch. iv para. 33 (Asian Development Bank, 1970).

260. For statistices as at 1968, see M. Tatsuta. supra note 256, at 1.

261. Yazawa, supra note 256 at 562, note 72.

262. See, Shinichiro Michida, The Legal Structure forEconomic Enterprise: Some Aspects of Japanese CommercialLaw, in Law in Japan -- The Legal Order in a Changing Society, $07, £44 fA. von Mehren, ed. 1963). 263 264 265 266 267 * * * * * *

263. Law No. 25, April 13, 1948. An English translation of the text of the law as amended to date appears in 6 EHS Law Bulletin Series MA 1 (Fukio Nakane, ed. and trans. 1971).

264. Book II, Arts. 52-500 inclusive.

265. Tatsuta. supra note 256 at 16.

266. Law No. 163, May 10, 1950.

267. Law No. 5, March 3, 1971. The enactment of this legislationmay be seen as a step in the further internationalizingof the Japanese capital market: See "Securities Market.Internationalization of stock and bond markets in pro­gressing at swift tempo," in Industrial Review of Japan 1972 (Nihon Keizai Shimbun), at 15. See also Law onForeign Securities Firms, (Law No. 5 of 1971). Apreliminary Translation, Japan Securities Research

II: 25

Institute, July 1971, where the reason for proposing this legislation is stated to be ”In order to keep with the growing trend of internationalization of securities transaction and the capital ligeralization of securities business, and to contribute to a second devleopment of our country’s capital market, there is a need to open the way for foreign securities firms to engage in the securities business in this country, and at the same time to take measures for the purpose of exercising an appropriate control over their business activities from the standpoint of the public interest or the protection of the investors” (at 27).

268. Law Concerning Foreign Investment, Art. 11.

269. A foreign securities dealer is defined as "a person (excluding securities company) engaged in securities business in a foreign country in accordance with foreign laws”. (Art 2 (1)).

270. See The Australian Financial Review, Jan. 8, 1974at 21, cols. 1-6; and the Australian Financial Review Jan. 18, 1974 at 11, cols. 1-4.

271. Lintag, On Changing the Constitution: A Crisis inPerspective, 18 Far Eastern L. Rev. 1 (1970). For a brief recent assessment of the economy of the Philippinessee The Australian Finalcial Review, July 21, 1972, at 12 cols. 1-6.

272. Commonwealth Act No. 83 as amended.

273. Yabyabin, The Securities Act and Trading, 1 The SFC Bulletin 1,2 (No. 3, Oct. 1967) See also 3 A. Agbavani. Commercial Laws of the Philippines 604 (1970). 274 275 * *

274. Investor. 995 (September, 1970) reviewing Rozental. Finance and Development in Thailand (1970). Dr. Rozental1 sstudy of urban finance in Thailand, based upon an examination of 64,828 firms of which 901 were small retail establishments, revealed that 88% of initial capital was obtained by the entrepreneur from his own personal resources. See also Chongstitvathana, The Capital Market in Thailand. 12 Bangkok Bank Monthly Review No. 2 at 54 (February 19^1) where it is stated that ”as long as ten years ago, almost all financing needs were raised through personal and family sources.”

275. Address by Renoo Suvarnsit, then Secretary-General,National Economic Board and Chairman of Directors ofIndustrial Finance Corporation of Thailand Ltd. to the

II: 26

First Luncheon Meeting of the Bangkok Stock Exchange,June 18, 1971, reported under title, The Capital Market and the New Role of the IFCT in the Development of Thailand, at 2.

276. Established under a special act promulgated on October,6, 1959 and subsequently amended in 1962, 1963 and1967, it was introduced "to create a financial institution able to offer financing facilities on more attractive terns and conditions than those which could be obtained from other financial institutions, and thereby encourage private enterprise. The IFCT can be considered a kind of development finance company or development bank" ('Thai Investment Review, Jan, 1971, at 51).

277. Suvamsit, supra note 275 at 16. These amounted to 371 million baht as at the end of 1970.

278. Id. at 16-17. This assessment is supported by Chong - stitvathana supra note 274 at 56: "though contrary of its original intention it has made little or no contribution to the creation of the capital market.As a matter of fact, it has been reported that in the course of its history, the IFCT has made only one equity investment."

279. Suvamsit, supra note 275 at 17-18.

280. Thai Investment Review, 9 (1969)

281. Thai Investment Review, 21 (January, 1971).

282. Id. at 16. Particulars of the sixteen Thai commercial banks operating as at that time are published on this page.

283. Most of the investment banks are joint ventures of Thai and foreign interests and their contribution to the capital market has been described by Chongstitvathana (supra note, 274, at 56) as "quite considerable". 284 285 286

284. Chongstitvathana, supra note 274, at 55: "Thoughcommercial banks, due to their huge resources, appear to be most the logical institutions to contribute to the development of the capital market, they have up to now been channelling only a negligible portion of thier funds into the market".

285. Id.

286. Id.

II: 27

287. Chongstitvathana, supra note 274.

288. Suvamsit, supra note 275 at 8.

289. Thai Investment Review, supra note 281. at 7.

290. This report will be referred to throughout this study as "the Robbins Report."

291. Suvamsit, supra note 275 at 1: "The money market deals with short term, low risk transactions, the capital market with long term, higher risk transactions". The Robbins Report, at 4: "Traditionally the capital market is conceived of as a source for long term funds as distinguished from the money market, intended to provide short-term funds. Present-day thinking has largely abondoned this viewpoint." See also addressby Professor Robbins as part of the Bank of Korea 20th Anniversary Commemorative Lecture Series, In Seoul, Korea, May 5, 1970.

292. The Robbins Report, at 20.

293. K.S. Sharma. The Institutional Structure of CapitalMarket^Ji~Thdia 8 (1969). ..

294. Id. at 4-7; N. Nadda, Capital Market in India 3-6(1965); R. Datt and K. Sundharam. Indian Economy.127-50 (7'rev.' ed. 1971).

295. L.C. Gupta, The Changing Pattern of Share-ownership in India. 162 Capital. Mar. 6 1969 at 430; See also generally L.C. Gupta, The Changing Structure of Industrial Finance in India TheImpact of Institutional * 296 297 298Finance (1969)

296. K.P. Agarwal, Indian Stock Exchanges and Industrial Finance. 116 Modem Review. May 1964, at 339.

297. L.C. Gupta estimates that these bodies have increased their ownership of quoted equity shares from approximately 6% in 1957-1958 to about 15% in 1965, and of preference shares from approximately 11% or 12% to approximately 33%. L.C. Gupta, The Changing Pattern of Share-ownership in India. 162 Capital. Mar. 6, 1969, at 430, 431.

298. Id. at 432. Around 1958, 50% or 55% or equity shares were owned by individuals, whereas in 1965 the proportion was only 45% or 50%. In preference shares the decrease was from about 65% to around 50% or 51%.

II: 28

299.

300.

301.

302.

303.

304.

305.

306.

Mr. Dhirajlal Maganlal, President, Bombay Stock Exchange, estimated that there were about two and a half million book shareholders, more than 90% of which had a holding of less than Rs. 10,000. Sombre Saga of Stock Exchanges, 49 Eastern Economist. Oct 13, 1967, at 678-79. L.C. Gupta, supra note 297 (at 432) on the other hand, estimated that the number was o-ly 700,000 or 800,000.

The Bombay Securities Control Act, 1925, was passed after the Report of the Atlay Committee (1923) which had inquired into the working of the Bombay Stock Exchange.

The Stock Exchange, Bombay, took a very critical attitude toward this report. Its views were presented in a not easily accessible pamphlet entitled Views of The Stock Exchange, Bombay, on The Report of Dr. P.J. Thomas on "The Regulation of The Stock Market in India (Aug. 1948).

The framers of the Indian constitution, with admirable foresight, gave to the Central Government the power to control the securities industry uniformly throughout the country. India Const, union list, entry 48 (1950).Such a provision did not find a place in the Draft Constitution prepared by the Constitutional Advisor, but was included later (as entry 79) in the Draft Constitution prepared by the Drafting Committee following the recommendation of the Expert Committee on the Financial Provisions of the Constitution. The Expert Committee observed:

In view of the far-reaching effects on public credit and finance of stock exchange transactions, we consider that the Centre should have the power to legislate for the regulation of such transactions We accordingly recommend the entry in the Federal Legislative List of a new item "Stock exchanges and future markets ..."

3 B. Shiva Rao, The Framing of India fs Constitution -- Select Documents 269, 287, 665 (1967).

See Present Position of the Stock Market in India,Table X (The Stock Exchange, Bombay, 1971) citing Reserve Bank of India Shareownership Survey, R.B.I. Bulletin, February, 1968.

LL

LL

For a plea for greater consideration for the individual investor, see S. Narayanaswamy, Prospects for Investors, Commerce Annual Number. 1969, 264, 266, 268 and 270.

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Also see D.P. Sharma, Popularising Shares as a Medium of Investment, Capital Supplement, December 26, 1968, 163-166. In relation to the need for the furnishing of more investment advice to the investign public, see Stock Market Reform: Some Perfume for the Corpse,Editorial) in C.L. 11 (152) Capital, April, 16, 1964 577-578.

307. Hopkins, Preface to Hong Kong: The IndustrialColony at xi ( K. Hopkins e d . 1971).

308. Brown, The Hong Kong Economy: Achievements andProspects. in Hong Kone: The Industrial Colony1, 3 ( K. Hopkins ed. 1971), cites the 1966 census which indicated that two-fifths of the total Hong Kong labour force was engaged in manufacturing industries.

309. Id. at 8-13

310. The Companies Law Revision Committee. Report on the Protection of Investors 41 fFirst Report.June *2T,~1971) (hereinafter cited as Investor Protection Report).

311. Id.

312. Companies Ordinance appears in 2 Laws of Hong Kong cap. 32 (rev. ed. 1964).

313. See id.. sections 37-39 inclusive.

314. Companies (Amendment) Ordinance No. 24 of 1970 (published in Legal Supplement No. 1 to Government Gazette No. 9 of Feb. 27, 1970.)

315. Legal Supplement No. 2 to the Hong Kong Government Gazette No. 3, Vol. CXIII, Jan. 22, 1971.

316. See The Economist, London, Feb. 19, 1972.at 80. The London Stock Exchange and the Hong Kong Stock Exchange were the only exchanges in the world to come close to a fifty percent improvement in their capital value in the year 1971. 317 * * * *

317. For a timely call for an end to the then system of ourseparate exchanges (and the introduction of a newcompany law to protect investors) see Davies, MakingMillions, Far Eastern Economic Review, Hong Kong,July, 8, 1972 at 5,9 (Hong Kong Focus).

II: 30

318. Investor Protection Report, supra note 310 at vi-vii.

319. The Companies (Amendment) Bill, 1972, became an ordinance on December 14, 1972 and took effect from March of 1973.For a discussion of the law in respect of company flotation under the new ordinance, see Field, The Law Relating to the Flotation of Securities in Hong Kong 3 Hong Kong L.J. 147 (1973).

320. See, e.g., Goodstadt, Bull in a China Shop, Far Eastern Economic Review, Hong Kong, Oct 21, 1972 at 41-42.

321. The Australian Financial Review, Jan 16, 1973 at 16, cols 3-5. See also Far Eastern Economic Review, Hong Kong,Feb. 12, 1973 at 50, cols. 1-3.

322. Far Eastern Economic Review, Hong Kong May 14, 1973 at 52.

323. For an early projection of the deterioration in economic relations between Malaysia and Singapore, see The Australian Financial Review Dec. 18, 1971 at 32, cols 3-6

324. It has been estimated that the number of companies in Malaysia increased thirty per cent in the five years to 1967 (one hundred per cent if tin and rubber companies were not included): see J. Clinton. Investment in Austrlaia New Zealand and Asia 106 (1969). 325 326 327 328 329 330 331 332

325. See The Australian Financial Review, Nov. 13, 1972 at 29, col. 3.

326. Tan Sri Ghazali bin Shafie, Malaysian Minister with Special Functions and Minister of Information, in Far Eastern Economic Review, August 26, 1972 at 3 (Malaysia Focus).

327. Id. at 4.

328. See The Australian Financial Review, Nov. 22, 1971 (Special Survey Singapore, at 2, cols 1-6).

329. The Australian Financial Review, May 12, 1972 at 2,cols. 4-6. See also Manning. Fiscal Incentives for Investment in Singapore: The Economic ExpansionIncentives (Relief from Income Taxi Act of 1967and the 1970 Amendment to the Act. 13 Malaya L. Rev.1 (1971).

330. No. 79 of 1965.

331. No. 42 of 1967.

332. See Sections 37-97 inclusive.

II: 31

333. fi-M. Ferris Jr.. A-Sludy q £ the Securities.-Market, in Singapore and Malaysia (1970), hereinafter referred to as "The Ferris Report".

334. Id, at 1-2.

335. See id. at 10-14 for Mr. Ferris’ detailed recommendations in this respect.

336. id., at 4-10.

337. Id, at 15-18.

338. Id. at 15.

339. Id. at 24.

340. Id. at 23.

341. No 61 of 1970. This Act was passed by ParliamentOn December 30, 1970, and assented to by the President on January 25, 1971.

342. Id., sections 3-70 inclusive.

343. See Far Eastern Economic Review, Nov. 25, 1972 at 48.

344. See Far Eastern Economic Review, May 20, 1972 at31.

345. Id.

346. Malaysia, Securities Industry Act, 1973, Act 112; Singapore, The Securities Industry Act, 1973 (No. 17 of 1973). 347 348 349 350

347. For a brief description of the content of the bills, see Tan Pheng Theng, The Securities Industry Bills of Malaysia and Singapore. The Malayan Law Journalxvi (Feb. 1973).

348. The Straits Times, May 15, 1973 at 1, col. 3

349. The Straits Times, May 16, 1973 at 13, cols 6-9

350. The Straits Times, May 8, 1973. For a brief descriptionof the background to the currency split, see The Australian Financial Review, June 1, 1973 at 14 cols.3-6 and at 15, col 1.

Chapter 3

III: 1

1. See The Sydney Morning Herald, Mar.6, 1974, at 12, cols. 5-7.

2. Id.

3. See Menzies, A Constitutional Revolution. The Sydney Morning Herald, Mar. 30, 1974, at 8, cols. 3-7, and Whitlam, A Replyto Sir Robert Menzies: Arguments for Reform, The Sydney Morning Herald, Apr. 6, 1974, at 8, cols. 3-7.

4. See Chapter 2, supra.

5. The Australian, May 31, 1974, at 1, cols. 1-2.

6. Id.

7. See The Sydney Morning Herald, Sept. 5, 1973, at 1, cols. 1-3.

8. See The Australian. Financial Review, Aug. 20, 1973, at 2, cols. 3-6. These include "Additional powers that might be conferred to enable the Commonwealth to exercise adequate powers to manage the Australian economy," and the corporations power (Section 51(xx)).

9. B. Rauch. The History of the New Deal 1933-1938. 46 (1943, ed. 1963).

10. Id. at 192.

11. Lemer, The Supreme Court and American Capitalism. 42 Yale L.J.668, 698-99 (1932-33). Id. at 700-701: it was felt that thetrend of the Court's decisions could be altered through the influence of the varying contemporary economic, political and philosophical forces to which individual justices are exposed.

12. Boudin, Is Economic Planning Constitutional? A Re-examination of the Concept of Public Interest, 21 Geo. L.J. 253, 387 (1933). 13 * * *

13. Black, Socialism and the Constitution. 28 111. L. Rev. 313 (1933).For a review of the different approaches taken towards consti­tutional interpretation at the time, see Isaacs, The SecuritiesAct and the Constitution. 43 Yale L.J. 218 (1933).

Ill: 2

14. Ellingwood, The New Deal and the ConstitutionT 28 111. L. Rev.729 (1933). For a call, on a more general level, for "an orderly, planned participation of courts in the growing area of governmental regulation," see Arnold, Trial bv Combat and the New Deal. 47 Harv. L. Rev. 913, 937 (1933-34).

15. Manion, The Constitutionality of New Deal Measures. 9 Notre Dame Law. 381 (1934).

16. B. Rauch, supra note 9 at 193, citing Panama Refining Company v. Ryan, 293 U.S. 388 (1934).

17. Jd, at 194-95, citing Railroad Retirement Board v. Alton Railroad Company, 295 U.S. 330 (1934). For an early examination of the relationship between the commerce clause and the new deal legis­lation, see Black, The Commerce Clause and the New Deal. 20 Cornell L.O. 169 (1934).

18. See Recent Decisions Constitutional Law - Validity of Congressional Limitations on the President's Power of Removal,10 St. John’s L.Rev. 130 (1935).

19. See Comments, Constitutional Law - Due Process and the Frazier- Lemke Act. 35 Mich.L.Rev. 1130 (1936-37).

20. Schechter Poultry Corp. v. United States, United States v. Schechter Poultry Corp., 295 U.S. 495, 55 Sup. Ct. 837 (1935).See also Recent Decisions, Constitutional Law - Constitutionalitv of the National Industrial Recovery Act: 10 St. John’s L.Rev.119, 120 (1935).

21. B. Rauch, supra note 9 at 201.

22. U.S. v. Butler, 297 U.S. 1 (1935).

23. Ashwander v. Tennessee Valley Authority, 297 U.S. 288 (1936).See also Frankfurter § Fisher, The Business of the Supreme Court at the October Terms. 1935 and 1936. 51 Harv.L.Rev. 577, 627-32 (1937-38). 24

24. Carter v. Carter Coal Company, 298 U.S. 238 (1935). For an April 1936 prediction that this Act would be declared unconsti­tutional, see Vonderheit, Guffev-Snvder Coal Act, in The Constitutionality of New Deal Legislation. Hilton Prize Contest. 15 Oregon L.Rev. 323, 336 (1936). See also Frankfurter § Fisher, supra note 23 at 632-33.

Ill: 3

25. Morehead, Warden v. New York ex rel. Tipaldo, 298 U.S. 587 (1936). See also Frankfurter § Fisher, supra note 23 at 633-36.

26. See B. Rauch, supra note 9 at 218-21. For a contemporary general review of the constitutional decisions prior to the New York Minimum Wage Case, see Fraser,, Recent Constitutional Law in the Supreme Court. 21 Mass. LJX 3 (1936).

27. B. Rauch, supra note 9 at 271.

28. Id. at 276-79. For a December 1936 assessment of the validityof the labour relations legislation, see Notes - Constitutionalitv of the National Labor Relations Act. 4 U.Chi. L.Rev. 109 (1936).

29. See note 47 infra and accompanying text.

30. The Australian, Jan. 11, 1974, at 2, cols. 2-3.

31. Constitution, Section 71.

32. ldj_

33. Constitution, Section 72 (ii) and (iii).

34. Constitution, Section 75: "In all matters -

(i) Arising under any Treaty:

(ii) Affecting Consuls or other representatives of other countries:

(iii) In which the Commonwealth, or a person suing or being sued on behalf of the Commonwealth, is a party:

(iv) Between States, or between residents of different States, or between a State and a resident of another State:

(v) In which a writ of Mandamus or prohibition or an injunction is sought against an officer of the Commonwealth:"

35. Constitution, Section 76: matters arising under the Constitutionor involving its interpretation or arising under any laws made by Parliament: matters of admiralty and maritime jurisdiction;and matters relating to the same subject-matter claimed under the laws of different States.

Ill: 4

36. Constitution, Section 73.

37. Seg New South Wales v. The Commonwealth, 20 C.L.R. 54 (1915).

38. Constitution, Section 74.

39. Id.

40. Section 4,

41. P. Lane. The Australian Federal System with United States * 336Analogues 383 (1972).

42. IcL at 412.r

43. Id, at 411.

44. Id. at 412; i.e., where a non inter se question arose, before the Privy Council itself, in an otherwise purely state matter.

45. See Sawer, The British Connection, 47 Aust.L.J. 113 (1973).

46. For comments on the statute which Queensland has enacted seeking to preserve its direct access to the Privy Council, see Current Topics - Queensland and the Privy Council. 47 Aust.L.J. 496 (1973).

47. See Barwick, The Australian Judicial System: The Proposed NewFederal Superior Court. 1. Fed.L.Rev. 1 (1964); Bowen, Some Aspects of the Commonwealth Superior Court Proposal. 41 Aust.L.J.336 (1967); Else-Mitchell, Burying the Autochthonous Expedient?3 Fed.L.Rev. 187 (1969); Lane, The Commonwealth Superior Court,43 Aust.L.J. 148 (1969); P. Lane, supra note 41, at 969.

48. The Australian Financial Review, Dec. 13, 1973, at 5, cols. 1-3.

49. Id. The future of this bill remains at this stage unresolved.

50. Second Reading Speech by the Attorney-General, Senator L.K.Murphy, Q.C.

51. Id,

52. For an interesting, although at times inaccurate, examination of the High Court in this respect, see The National Times, Aug. 12-17, 1974 at 30-32.

Ill: 5

53. Brown v. Board of Education, 347 U.S. 483 (1954).

54. See C. Miller. The Supreme Court and the Uses of History (1969).

55. Id. at 28-38.

56. See, for example, Breen v. Sneddon, 106 C.L.R. 406 (1961).

57. See The National Times, Aug. 12-17, 1974 at 30-32,

58. See The Sydney Morning Herald, June 4, 1973 at 6, cols. 3-7.

59. See P. Lane, supra note 41, at 967: in examining latter-dayattitudes of the High Court, he states "Whatever reasons may seem to justify each case, the fact is that the end-product, the overall direction, favours the Commonwealth - and distorts the Federation of Commonwealth and States."

60. For two detailed jurimetric analyses of the High Court ofAustralia, see Schubert, Judicial Attitudes and Policy-Making in the Dixon Court, 7 Osgoode Hall L.J. 1 (1969), and Blackshield, Quantitative Analysis: The High Court of Australia, 1964-1969,3 Lawasia 1 (1972).

61. E. Neumann. The High Court of Australia - A Collective Portrait 1903-1970. at 53-54 (Occasional Monograph No. 5, Dept, of Government and Public Administration, University of Sydney, 1971).

62. Id, at 54.

63. S. Griffith. Notes on Australian Federation: Its Nature andProbable Effects (1896).

64. Id. at 5.

65. Id. at 6.

66. See notes 75-77 infra, and accompanying text.

67. E. Neumann, supra note 61, at 55.

68. Ld.69. E. Barton. The Godfathers of Federation (unpub. 1907), cited in

j. Reynolds, Edmund Barton 192 (1948). Id. at 190: it was infact Barton himself who, as Prime Minister, offered the Chief Justiceship to Griffith, whom he reportedly regarded as "the greatest lawyer in the Commonwealth".

Ill: 6

70. E. Neumann, supra note 61, at 55.

71. .1. Reynolds, supra note 69, at 7-8.

72. D’Emden v. Pedder, 1 C.L.R. 91 (1904).

73. 4 Wheaton 316 (1819).

74. D'Emden v. Pedder, 1 C.L.R. 91, 119 (1904).

75. The Federated Amalgamated Government Railway and Tramway Services Association v. The New South Wales Railway Traffic Employees Association, 4 C.L.R. 488 (1906).

76. Section 107 provides: "Every power of the Parliament of aColony which has become or becomes a State, shall, unless it is by this Constitution exclusively vested in the Parliament of the Commonwealth or withdrawn from the Parliament of the State, continue as at the establishment of the Commonwealth, or as at the admission or establishment of the State, as the case may be."

77. See Anderson, The States and Relations with the Commonwealth. 100-01, in Essays on the Australian Constitution (Else-Mitchell ed. 1961).

78. E. Neumann, supra note 61, at 56.

79. For details of Isaacs’ role in Victorian politics, see Z. Cowen. Isaac Isaacs Chapter 3 (1967).

80. See E. Neumann, supra note 61, at 56: Isaacs was defeated in hisattempt to join the Convention’s Drafting Committee.

81. For an examination of Isaacs' part in the Convention, see Z. Cowen. supra note 79, Ch. 4.

82. 6 C.L.R. 41 (1908).

83. 6 C.L.R. 469 (1908).

84. 8 C.L.R. 330 (1909).

85. G. Sawer. Australian Federalism in the Courts 128-29 (1967). See alsp Sackville, The Doctrine of Immunity of Instrumentalities in the United States and Australia: A Comparative Analysis. 7 Melb.U.L.Rev. 15, 38-39 (1969).

Ill: 7

86. Amalgamated Workers Union v. The Adelaide Milling Company, 26 C.L.R. 460 (1919). Although Isaacs J. concurred in this opinion, it has been suggested that this was because of "his overwhelming sense of the gravity of the war problem and his predisposition to give the defence powers a far-reaching and almost unlimited interpretation." See R.G. Menzies. Central Power in the Australian Commonwealth 36 (1967).

87. Amalgamated Society of Engineers v. Adelaide Steamship Co. Ltd., 28 C.L.R. 129 (1920).

88. For a detailed examination of this important judgment, see Sackville, supra note 85, at 39-44 and Sawer, supra note 85, at 129-32. For an interesting account of the conduct of the case by the successful counsel involved, see R.G. Menzies. supra note 86, at 37-42.

89. Zines, Sir Owen Dixon*s Theory of Federalism 1 Fed.L.Rev. 221, 224 (1964).

90. Australian Railways Union v. Victorian Railways Commissioners,44 C.L.R. 319 (1930).

91. Id_. at 390.

92. See New South Wales v. The Commonwealth No. 1, 46 C.L.R. 155 (1931) .

93. West. v. Commissioner of Taxation,56 C.L.R. 657 (1936-1937).

94. South Australia v. The Commonwealth, 65 C.L.R. 373 (1942).

95. See Sackville. supra note 85, at 50-53.

96. See Sawer. supra note 85, at 134.

97. Victoria v. The Commonwealth, 99 C.L.R. 575 (1957).

98. Essendon Corporation v. Criterion Theatres Limited, 74 C.L.R.1 (1947).

99. Melbourne Corporation v. The Commonwealth, 74 C.L.R. 31 (1947).

100. Bank of New South Wales v. The Commonwealth, 76 C.L.R. 1 (1948).

101. Sackville, supra note 85, at 59-60.

Ill: 8

102. The Commonwealth v. Cigamatic Pty. Ltd., 108 C.L.R. 372 (1962).

103. In re Richard Foreman and Sons Pty. Ltd. : Uther v. FederalCommissioner of Taxation, 74 C.L.R. 508 (1947).

104. Zines, supra note 89, at 241. For a detailed exposition of his views, see Lecture By The Honourable Owen Dixon, The Law and the Constitution, one of a Series of Five Centenary Lectures on "A Century of Development in Victoria”, Arranged by the University of Melbourne, Mar. 14, 1935 (Melbourne University Press, 1936).

105. C. Howard. Australian Federal Constitutional Law. 262 (2d. ed.1972).

106. IcL at 286. For a short account of Dixon's impact on consti­tutional interpretation, see Howard, Sir Owen Dixon and the Constitution. 9 Melb.U.L.Rev. 5 (1973).

107. G. Sawer. supra note 85, at 60.

108. E. Neumann, supra note 61, at 70.

109. Id. at 59.

110. Id. at 58.

111. G, Sawer. supra note 85, at 61. See also L.F. Crisp. Australian National Government 64 (1970 ed.). On the role of Evatt J., see L. Zines, Mr. Justice Evatt and the Constitution. 3 Fed.L.Rev.153 (1969). See also. H.V. Evatt, Constitutional Interpretation in Australia. 3 IJ.T.L.J. 1 (1939).

112. Although Mason J. was for a time Commonwealth Solicitor-General under a Liberal-Country Party government, this may be regarded as a non-political appointment.

113. See The Australian Financial Review, Jan. 24, 1974 at 7, cols. 1-4.

114. See G. Sawer, supra note 85, at 66-67, where it is argued that McTieman proved to be "much less of an idealogue than Evatt” and followed an independent middle-of-the-road course.

115. Fairfax and Others v. The Commissioner of Taxation of the Commonwealth of Australia, 114 C.L.R. 1 (1965); cited P. Lane. supra note 41, at 966.

116. Herald and Weekly Times Ltd. v. The Commonwealth, 115 C.L.R.418 (1966) cited id.

Ill: 9

117. Bonser v. La Macchia, 122 C.L.R. 177 (1969), cited id.

118. State of Western Australia v. Hammersley Iron Pty. Ltd. (No.l)120 C.L.R. 42 (1969), cited id.

119. Attorney-General (N.S.W.); ex rel. Maroubra Junction Hotel Pty. Ltd. v. Stocks and Holdings (Constructors) Pty. Ltd., 45 Aust. L.J.R. 9 (1971); Worthing v. Rowell and Muston Pty. Ltd.123 C.L.R. 89 (1970); both cited id.-

120. State of Victoria v. The Commonwealth, 122 C.L.R. 353 (1971).

121. Huddart Parker v. Moorehead, 8 C.L.R. 330 (1909).

122. See supra note 87, and accompanying text.

123. Strickland v. Rocla Concrete Pipes Ltd. 45 Aust.L.J.R. 485 (1971).

124. Znaty v. The Minister of State for Immigration and Another,46 Aust.L.J.R. 135 (1972).

125. Cominos v. Cominos, 46 Aust.L.J.R. 593 (1972).

126. Constitution, pi.51 (xxiv).

127. Ammann v. Wegener and Another; Robinson v. Wegener and Another,46 Aust .L.J.R. 638 (1972).

128 John Robertson and Co. Ltd. (In Liquidation) v. FergusonTransformers Pty. Ltd. and Others, 47 Aust. L.J.R. 381 (1973).

129. Dickenson’s Arcade Pty. Ltd. v. State of Tasmania and Another,2 A.L.R, 460 (1974).

130. See The Australian, Apr. 2, 1974 at 1, col. 1.

131. Anderson, supra note 77, at 122.

132. For other discussions of the constitutional issues involved, see Howard, The Constitutional Power of the Commonwealth to Regulate the Securities Market. 45 Aust. L.J. 388 (1971), (an article which was derived from written evidence submitted by Professor Howard to the Senate Select Committee on Securities and Exchange), and Address by Senator Rae, Seminar on The Companies Amendment Actr 1971. May 27, 1972, the constitutional aspectsof which were based on the evidence submitted by Professor Howard.

Ill: 10

133.

134.

135.

136.

137.

138.

139.

140.

141.

142.

143.

144.

145.

146.

147.

148.

149.

For a detailed discussion of this constitutional possibility, see Johnson, The Reference Power in the Australian Constitution. 9 Me lb. U.L.Rev. 42 (1973)’.

W. Wvnes. Legislative, Executive and Judicial Powers in Australia 161 (4th ed. 1970).

Id.

Id. at 162.

Chapter 2, supra.

See Constitution, Section 128.

Even if this were a possibility, however, it would be essentially a long-term, rather than a short-term, prospect.

Bank of N.S.W. v. The Commonwealth, 76 C.L.R. 1 at 186 (Chief Justice Latham). See also Taylor. The Corporations Power:Theory and Practice, 46 Aust. L.J. 5 at 7 (1972).

Taylor, supra note 140, at 9. See Lane, Corporations and Trade Practices: The Concrete Pipes Case, 45 Aust. L.J. 616, 625 (1971) for the argument that the power incidental to the corporations power may eventually extend to encompass the activities of stockbrokers.

For a brief discussion of the broad interpretation which may be given to this term in the future, see Lane, supra note 141, at 626.

Taylor, supra note 140, at 8.

Lane, supra note 141, at 626.

Id.

Section 51 (i).

Section 51 (xxxix).

Lane, supra note 141, at 626.

Official Report of the National Australasian Convention Debates. First Session, Adelaide, March 22 - May 5, 1897, at 793 (Sir George Turner), cited Taylor, supra note 140, at 8. See also Lane, supra note 141, at 627.

Ill: 11

150.

151.

152.

153.

154.

155.

156.

157.

158.

159.

160.

161.

162.

163.

164.

165.

166.

Huddart Parker v. Moorehead, 8 C.L.R. 330, at 393 (1909).

Taylor, supra note 140, at 8.

Id.; see also Lane, supra note 141, at 627.

See Taylor, supra note 140, at 8-9, and cases there cited.

Cited note 150 supra.

The former section prohibited agreements in restraint of trade and those encouraging unfair competition; the latter prohibited monopolization with intent to control the supply or price of goods.

Placitum 51(i) of the Constitution vests in the Commonwealth power with respect to "Trade and Commerce with other countries, and among the States:"

Huddart Parker v. IVfoorehead, cited note 150 supra, at 348.

Id. at 354.

Id. at 361.

Id. at 362-363.

Id. at 366.

Id. at 365. (Footnote references omitted).

Id. at 371.

Id. at 374.

Id. at 408: "I am unable to see why it is beyond the competencyof a Federal Parliament, under the powers expressly conferred upon it, to say that foreign corporations and Australian trading and financial corporations shall not, except under liability to penalties, overtly exercise their capacities so as designedly to injure the Australian people or crush Australian industries."

Id., at 394-395.

167. Id. at 395. See W. Wvnes. supra note 134, at 155, who arguesthat this view is untenable and that it was effectively answered by Justice Higgins in

Ill: 12

168. Id. at 416.

169. Id. at 412.

170. Id.

171. Id. at 414.

172. Bank of N.S.W. v. The Commonwealth, cited note 140 supra.

173. 45 Aust. L.J.R. 485 (1971).

174. Id. at 488.

175. Amalgamated Society of Engineers v. Adelaide Steamship Co., 28 C.L.R. 129 (1920).

176. See note 158 supra.

177. Concrete Pipes case, cited note 173 supra, at 488.

178. The other important decision referred to by the Chief Justice in which this question was considered was Victoria v. The Commonwealth, 45 Aust. L.J.R. 251 (1971).

179. Concrete Pipes case, cited note 173 supra, at 489.

180. Id, at 490.

181. L L

182. Id.

183. This holding was made after an examination of Section 7 of the Trade Practices Act and Section 15A of the Acts Interpretation Act. The former related the prohibitive provisions of the statute to acts, transactions or operations which were, inter alia, in the course of trade or commerce with other countries or among the States, and in a Territory, in respect of property in a Territory, or in the course of any trade or commerce of a Territory. The latter required the Court to disregard any portion of a statute which was invalid as exceeding the legislative powers of the Commonwealth.

184. Concrete Pipes case, cited note 173 supra, at 494.

Id.185.

III: 13

186. Id. at 497.

187. Id. at 499.

188. Id.

189. Id. at 495.

190. Id. at 499.

191. Id.

192. Id.

193. Id- at 500.

194. LL at 501.

195. Id,

196. Id. at 503.

197. Id. at 504.

198. Id. Justice Gibbs also cited the opinions of Justice Isaacs in Huddart Parker and Justice Starke in the Bank Nationalization case, both of which gave wide interpretations of the corporations power.

199. Id* at 506.

200. If this is so, then on the reasoning of Chief Justice Griffith in Huddart Parker, the power may be unlimited. See note 157 supra.

201. Taylor, supra note 140, at 9. In this author’s view this isnot a strong argument: see note 204 infra.

202. Concrete Pipes case, cited note 173 supra, at 490.

203. Id. at 497.

204. Id, at 499. See Lane, supra note 141, at 624-625, where avalid distinction is made between matters "preliminary to trading" such as invitations to prospective shareholders, and matters which are incidental to the corporation’s trading activities, for example, pollution and torts of nuisance or negligence committed

Ill: 14

by the corporation. He correctly argues that the latter would not be within the power and cites Justice Isaacs’ dissenting judgment in Huddart Parker. He does, however, conclude that the internal management of companies, their incorporation and winding up, are matters not within the Commonwealth power, and that a federal uniform companies act so far as it dealt with internal management and the rest, would not be possible on the basis of the corporations power.

205. Rae, supra note 132, at 66.

206. Id, at 66-67.

207. See note 182 supra.

208. See Lane, supra note 141, at 624.

209. id.

210. See notes 144-149 supra.

211. See Huddart Parker v. Moorehead, cited note 150 supra at 393: see also Taylor, supra note 140, at 8.

212. Section 51 (i): 'Trade and commerce with other countries, andamong the States." For an examination of the possible relevance of this power, s££ Tonking, Federal Competence to Legislate for the Control of the Securities Market. 47 Aust.L.J. 231, 237-38 (1973).

213. Cited note 140 supra.

214. Id. at 381-382.

215. 110 C.L.R. 194 at 213 (1964).

216. Id. at 222. See also Justice Owen, id. at 231-232.

217. See, for example, O ’Sullivan v. Noarlunga Meat Ltd., 92 C.L.R.565 (1954) ; and Airlines of New South Wales Pty. Ltd. v. New South Wales (No. 2) 113 C.L.R. 54 (1965).

218. Section 51(ii): "Taxation; but so as not to discriminate betweenStates or parts of States."

See The King v. Barger, 6 C.L.R. 41 (1908), and Fairfax and Others v. The Commissioner of Taxation of the Commonwealth of Australia, 114 C.L.R. 1 (1965).

219.

Ill: 15

220. The King v. Barger, cited note 219 supra at 78 (Chief Justice Griffith and Justices Barton and O ’Connor).

221. Section 55: "Laws imposing taxation shall deal only with theimposition of taxation, and any provision therein dealing with any other matter shall be of no effect."

222. For example, Justice Isaacs (The King v. Barger, cited note 219supra at 84) cited Chief Justice Marshall's statement in Gibbons v. Ogden, 9 Wheat., 1 at 196: "This power, like allothers vested in Congress, is complete in itself, may be exercised to its utmost extent, and acknowledges no limitations, other than are prescribed in the Constitution."

223. The King v. Barger, cited note 219 supra, at 94-95, citing Attorney-General for Canada v. Attorney-General for Ontario,£1898] A.C. 700 at 713.

224. The King v. Barger, cited note 219 supra. at 98.

225. Id. at 98-99. Id.: His Honour also cited Ellis v. United States(206 U.S. 246 at 256): "the fact that Congress has not general control over the conditions of labour does not make unconsti­tutional a law otherwise valid, because the purpose of the law is to secure to it certain advantages, so far as the law goes."

226. The King v. Barger, cited note 219 supra, at 119.

227. [194(0 A.C. 838; 63 C.L.R. 338 (1940).

228. 12 C.L.R. 321 (1911).

229. For the former, see the Fairfax case, cited note 219 supra. at 15, and for the latter, see note 134 supra, at 175. 230 231 232 233 *

230. The difficult question raised by these two cases is also discussedin J. Faipenbaum 8 P. Hanks. Australian Constitutional Law 592-93 (1972). —

231. 82 C.L.R. 547 (1951).

232. Id. at 560.

233. Id. at 563.

Cited note 219, supra.234.

Ill: 16

235. The Fairfax case, cited note 219 supra at 5.

236. Idi at 7: footnote references omitted.

237. Id. at 13, citing Justice Dixon (as he then was) in Melbourne Corporation v. The Commonwealth (74 C.L.R. 31 at 79):’’Speaking generally, once it appears that a federal law has an actual and immediate operation within a field assigned to the Commonwealth as a subject of legislative power, that is enough. It will be held to fall within the power unless some further reason appears for excluding it. That it discloses another purpose and that the purpose lies outside the area of federal power are considerations which will not in such a case suffice to invalidate the law.”

238. The Fairfax case, cited note 218 supra at 13.

239. Id., at 14: "But this Court has consistently maintained thatwhere a challenge is made to a statute on the ground that it is not a law with respect to a particular legislative subject matter it is irrelevant to consider the motives which led to its enactment or to examine the indirect consequences which may, ultimately, result from it; if it be, in substance, a law with respect to a particular subject matter the motives which influenced the legislature or the indirect consequences of the measure cannot operate to change its character."

240. Id. at 17-18.

241. Id. at 18.

242. IcL at 18-19.

243. Although a much more liberal interpretation of the power was given in the Fairfax case, the Barger case was not specifically overruled. 244 245

244. 17 C.L.R. 665 (1914).

245. Wynes, supra note 134.

246. R. v. Brislan; ex parte Williams, 54 C.L.R. 262 (1935).

Ill: 17

247.

248.

249.

250.

251.

252.

253.

254.

255.

256.

257.

258.

259.

260.

261.

262.

263.

264.

265.

266.

Jones v. The Commonwealth (No. 2), 112 C.L.R. 206 (1964-5).

115 C.L.R. 418 (1966).

Howard, supra note 132, at 391. He thus sees the Commonwealth achieving its purpose of securities market regulation through the use of a power granted to it for a quite different purpose, and cites the Fairfax case in support.

Id. at 392.

47 Aust. L.J.R. 504 (1973).

Id. at 508.

Id. at 511.

Id. at 511-513.

Id. at 513-514.

Section 51(xiii): "Banking other than State banking; also State banking extending beyond the limits of the State concerned, the incorporation of banks and the issue of paper money".

Bank of N.S.W. v. The Commonwealth, cited note 140 supra.

Id. at 196.

Id. at 194.

Id. at 191.

Id, at 257.

Id. at 302: "Subject to the Constitution, including thelimitation in the banking power itself, the banking power extends over the entire subject".

Id. at 333.

Id. at 334.

Id. at 334-335.

89 C.L.R. 78 (1953).

Ill: 18

267. Id. at 87. Wynes also argues for a wide interpretation of the power:

Legislation under this power would extend to and include provisions relating to dividends, publication of accounts, value of policies, standards of policies, prescribing investment, requiring deposits in money or in bonds, confining the business to corporations, preventing rate discrimination, limitation of risks, and any and all other regulative conditions.

See Wynes, supra note 134 at 146.

268. See note 141 supra.

269. See note 205 supra.

270. See notes 143-151 supra and accompanying text.

271. See note 214 supra.

272. See Rae, supra note 132 at 69.

273. See Lane, supra note 141 at 626.

274. See note 223 supra.

275. See note 167 supra.

276. See note 170 supra.

277. See note 182 supra.

278. Id,

279. Id.

280. See note 235 supra.

281. Section 51(iv).

282. 29 C.L.R. 1 (1920).

283. This section provided that "The interest derived from stock or Treasury bonds shall not be liable to income tax under any law of the Commonwealth or a State unless the interest is declared tobe so liable by the prospectus relating to the loan on which the interest is payable."

284. The Commonwealth v. The State of Queensland, cited note 282 supra. at 11.

285. Id, at 20-21.

286. See Rae, supra note 132 at 66-67 and also Wynes. supra note 134 297 298 299 300 * * *

Ill: 19

at 149.

287. 99 C.L..R. 575 (1957)

288. Id. at 612.

289. Id. at 624.

290. Id. at 630-631.

291. 14- at 644-647.

292. Id. at 658.

293. Id.

294. Id. at 659-660.

295. 59 C.L..R. 556 (1937-

296. Id. at 571.

297. Section 51(xxxix): "Matters incidental to the execution of anypower vested by this Constitution in the Parliament or in either House thereof, or in the Government of the Commonwealth, or in the Federal Judicature, or in any department or officer of the Commonwealth".

298. W. Wynes, supra note 134 at 346.

299. Cf. Howard, supra note 132 at 394-395.

300. Article 1, Section 8. For an examination of the influence ofthe United States Constitution on the framing of the AustralianConstitution, see E. Hunt, American Precedents in AustralianFederation (1930, AMS ed". 1968).

Ill: 20

301. As they are not directly within the ambit of this study, no examination will be made of the constitutional validity of the other regulatory statutes administered by the Securities and Exchange Commission, namely, the Public Utility Holding Company Act of 1935, the Trust Indenture Act of 1939, the Investment Company Act of 1940, the Investment Advisers Act of 1940 and Chapter X of the Bankruptcy Act.

302. Article 1, Section 8, Clause 7: "To establish Post Offices and post Roads."

303. Article 1, Section 8, Clause 3: "To regulate Commerce with foreign Nations, and among the several States, and with the Indian Tribes."

304. See Isaacs, The Securities Act and the Constitution. 43 Yale j*A. 218 (1933).

305. Hanna, The Securities Exchange Act of 1934, 23 Calif. L.Rev. 1 (1934-35). The reasons given by Congress for the enactment of the Securities Exchange Act of 1934 bear an extremely close resemblance to those advocated today by supporters of federal regulation of the Australian securities industry.

For a much wider interpretation of the mails power than that accorded by Hanna, see Weker, The Power to Exclude From the Mails. 10 Boston U. L.Rev. 346 (1930).

306. Hanna, supra note 305 at 28.

307. Norton, Constitutionality of Federal Regulation of Stock Exchanges. 24 Geo.L. J. 20 (1935).

308. Article 1, Section 8, Clause 1: "To lay and collect Taxes,Duties, Imposts and Excises ..."; and the sixteenth amendment: 'The Congress shall have power to lay and collect taxes on incomes, from whatever source derived, without apportionment among the several States, and without regard to any census or enumeration." 309

309. Norton, supra note 307 at 23, citing Bailey v. Drexel Furniture Co., 259 U.S. 20 (1922) and Hill v. Wallace, 259 U.S. 44 (1922). These decisions were considered at length by the Australian High Court when determining the scope of the taxation power in the Australian constitution.

Ill: 21

310. Article 1, Section 8, Clause 2: "To borrow Money on the credit of the United States."

311. Norton, supra note 307 at 30.

312. Norton, supra note 307, at 39, citing, inter alia. Alabama §New Orleans Transportation Co. v. Doyle, 210 Fed. 173 (E.D.Mich. 1914); Hall v. Geiger-Jones Co., 242 U.S. 539 (1917);Merrick v. Halsey § Co., 242 U.S. 568 (1917); Caldwell v. Sioux Falls Stockyards Co., 242 U.S. 568 (1917).

313. This view would seem to be in accord with the broad interpre­tation given to the Australian trade and commerce power in the Bank Nationalization case, note 213 supra.

314. Norton, supra note 307 at 66-67.

315. Id., at 54. Neither "organized" nor "unorganized" are here intended to include the over-the-counter market.

316. Id., at 63-64.

317. 9 Wheaton 1.

318. See 312 U.S. 100, and 317 U.S. Ill, respectively.

319• P. Benson Jr., The Supreme Court andTChe_Xommerce Clause. 1937-1970 100 (1970).

320. Feldman assumed that the Securities Act of 1933, based upon theCongressional power over interstate commerce and the mails, was, in almost all its provisions, well beyond constitutional interdict; Feldman, The New Federal, ..Securities Act, 14 Boston U. L. Rev. 1 (1934). Bane argued simply that power for the enactment of the 1933 act was to be found in the commerce clause and in the Congressional power over the mails; Bane, The Federal Securities Act of 1933. 14 Boston U. L. Rev. 35 (1934). Lippman assumed that, on the basis of earlier litigation (Stafford v. Wallace 258 U.S. 495, 42 Sup. Ct. 397 (1922) and Board of Trade v. Olsen 262 U.S.1, 43 Sup. Ct. 470 (1923)), Congress did have power to pass a law regulating practices on stock exchanges; Lippman, Constitutionalitv of the Securities Exchange Act of 1934, 9 St. John's L. Rev. 1 (1934). Tracy and MacChesney were of the opinion that in a constitutional test of the validity of the 1934 act, the Supreme Court would extend the principles established in the commodity

Ill: 22

cases of Olsen and Swift to the securities exchanges; Tracy and MacChesney, The Securities Exchange Act of 1954, 32 Mich. L.Rev. 1025 at 1037-38 (1934). Smith merely assumed the constitutionality of both the 1933 and 1934 acts; at the time of his writing, the former was in fact under challenge in Jones v. Securities and Exchange Commission ((U.S. 1936) 56 S. Ct. 654), but the Supreme Court had not at that stage given its decision; Smith, State "Blue-Sky*1 Laws and the Federal Securities Acts.34 Mich. L. Rev. 1135 at 1136, note 5 (1936). Hanna thought that the mails power might be upheld as a constitutional basis but that it would be of doubtful adequacy because of other available means of communication; that the tax power would be of use only if it could be based on the commerce power, and that the best constitutional base was the commerce power itself, as indicated by the decision in the Olsen case. In an accurate foreshadowing of the establishment of the Securities and Exchange Commission, Hanna argued that "The ideal solution would be regulation by a government body of the highest expertness, honour and responsibility entrusted with large discretion, which would supplement, rather than supplant, the control of the governors of the exchanges"; Hanna, The Federal Regulation of Stock Exchanges. 5 S. Cal. L. Rev. 9, 24 (1931). Rogers argued that, even after the wide interpretation of the mails power given in Lewis Publishing Company v. Morgan (229 U.S. 288, (June 10, 1913)), such power would not allow the federal government to regulate the activities of stock exchanges and corporations: "there must be no ’regulation of the private business of citizens in a manner beyond any express or implied power of Congress’ on the ground that such regulation ’ imposes as a penalty for disobedience a denial of an important federal privilege which Congress controls’ "; Rogers, The Extension of Federal Controls Through the Regulation of the Mails. 27 Harv. L. Rev. 27, 42-43 (1913). Rush saw the federal government’s powers of securities regulation extending to cover intrastate trading in securitites without the use of the mails, through use of the census and inquisitional powers of Congress; Rush, Expansion of Federal Supervision of Securities Through the Inquisitional and Census Powers of Congress -- A Suggestion: 36 Mich. L. Rev. 409 (1938).

321. 79 F. (2d) 617 (C.C.A. 2d. 1935).

322. hi. at 619. The Court here cited Badders v. United States,240 U.S. 391, 36 S. Ct. 367, 60 L. Ed. 706; Public Clearing House v. Coyne, 194 U.S. 497, 24 S. Ct. 789, 48 L. Ed. 1092; In re Rapier, 143 U.S. 110, 12 S. Ct. 374, 36 L. Ed. 93; and Ex parte Jackson, 96 U.S. 727, 24 L. Ed. 877.

Ill: 23

323.

324.

325.

326.

327.

328.

329.

330.

331.

332.

333.

334.

335.

Jones v. Securities and Exchange Commission, cited note 321 supra at 619. The Court in this case also held that due process of law was not violated by the registration requirements of the Securities Act, and that Section 19(a) of that act granting power to the Securities and Exchange Commission to make necessary rules and regulations was constitutional.

Id. at 620.

Jones v. Securities and Exchange Commission, 298 U.S. 1, at 28.In a subsequent case involving the same parties, Securities and Exchange Commission v. Jones, 85 F. (2d) 17 (C.C.A. 2d 1936), the same Circuit Court of Appeals referred to its earlier holding that the Securities Act of 1933 was constitutional. A petition for writ of certiorari was denied by the Supreme Court (299 U.S. 581).

91 F. (2d) 700 (C.C.A. 5th 1937).

100 F. (2d) 888 (C.C.A. 10th 1939).

93 F. (2d) 844 (C.C.A. 7th 1937) affirming 17 F. Supp. 164 (1936). The constitutionality of this provision was also upheld in Securities and Exchange Commission v. Payne, 35 F. Supp. 873 (1940).

15 F. Supp. 315 (D.C.N.Y. 1936), reversed on other grounds in87 F. (2d) 446 (C.C.A. 2d 1937).

88 F. (2d) 652 (C.C.A. 9th 1937), certiorari denied, 301 U.S.703, 81 L. Ed. 1357.

96 F. (2d) 734 (C.C.A. 6th 1938) affimiing 16 F. Supp. 407 (1936); certiorari denied 305 U.S. 608, 83 L. Ed. 387, (1938).

97 F. (2d) 258 (C.C.A. 9th 1938), certiorari denied,305 U.S. 614, 83 L. Ed. 391, (1938).

112 F. (2d) 89 (C.C.A. 2d. 1940).

Id.

Cited note 329 supra. The Court held specifically that the commerce power provided the necessary constitutional base for the section.

Ill: 24

336.

337.

338.

339.

340.

341.

342.

343.

344.

345.

346.

347.

348.

349.

350.

351.

352.

353.

16 F. Supp. 446 (1936), affirmed without discussion of this point 87 F. (2d) 377, 109 ALR 1445 (C.C.A. 2d. 1937); certiorari denied, 301 U.S. 684, 81 L. Ed. 1342, (1937).

Cited note 323 supra.

49 Stat. at L. 449, Chap. 372, 29 U.S.C. s.151.

National Labor RelationsBoard v. Jones § Laughlin Steel Corporation, 301 U.S. 1; National Labor Relations Board v.Fruehauf Trailer Co., 301 U.S. 49; National Labor Relations Board v. Friedman-Harry Marks Clothing Co. Inc., 301 U.S. 58;Washington, Virginia and Maryland Coach Co. v. National Labor Relations Board, 301 U.S. 142; Association Press v. National Labor Relations Board, 301 U.S. 103.

Rush, supra note 320, at 409, note 1.

National Labor Relations Board v. Jones, cited note 339 supra at 30.

Id. at 36.

Id. at 36-37

Id. at 37.

Id.

Id.

Id. citing the decisions in Olsen and Stafford, (both cited note 315 supra.).

See Lane, supra note 41 at 27-33, especially at 32, n.76.

Id. at 32, n.76

113 C.L.R. 54 (1964-65).

Id. at 77-78

Id. at 78.

Id.

354. Id. at 150.

Ill: 25

355. Se£ Dickson, A Dominion - Provincial Securities Commission for Canada. April 15, 1966 (unpublished thesis in Harvard Law School Library), where it is indicated that on December 29, 1965, the then Canadian Prime Minister suggested a meeting of represen­tatives of all the Canadian governments for the purpose of discussing securities regulation and seemed to indicate that the federal government was about to take an active role in the area. See also Langford and Johnston, The Case for a National Securities Commission. U. of T. Com. Jnl. (1968).

356. Brief to the Royal Commission on Banking and Finance, August 1962 at 92-94. In elaborating upon, this statement, the Brief continued:

The Provincial claim to jurisdiction is, of course, based upon Section 92 of the British North America Act as it relates to "Property and Civil Rights in the Province" and "All Matters of a Merely Local or Private Nature in the Province". Any federal regulation would be based, no doubt, upon those provisions of Section 91 relating to "the Peace, Order and Good Government of Canada" and "The Regulation of Trade and Commerce". It is not our intention to explore the juris­prudence which would either permit or prohibit federal legislation to establish a national securities commission. In our view the benefits offered by such a body may be largely accomplished within the provincial framework, given a spirit of cooperation and reciprocity, and without the concomitant dangers of centralization. It does not escape notice that some of our provinces have a strong aversion to any attempt on the part of the Federal Government to legislate in this field which has long been regarded as being exclusively in the provincial domain.

In this regard the Exchanges' submission concluded that:

It is obvious that the relatively small Canadian security market is being further restricted by barriers of our own legislative creation. Anything that can be done to establish uniform regulations on a national basis is obviously going to benefit the investment industry and the development of Canadian enterprises. In our opinion the establishment of a federal securities commission at this time would not be an appropriate solution. 357

357. The Toronto Stock Exchange. Brief to the Royal Commission onBanking and Finance. August 1962 at 87: "One hears in Canada

Ill: 26

occasionally the suggestion that we should have a federal law similar to the Securities Exchange Act, and the implication is that such a statute would render a great service to our investment industry. This, of course, is not necessarily so".

358. IcL at 88.

359. Report of the Royal Commission on Banking and Finance. 348 (1964).

360. Report of the Royal Commission to Investigate Trading in the Shares of Windfall Oils and Mines Limited, 102 (September, 1965). While the Government of Quebec’s 1969 Report of the Study Committee on Financial Institutions (the "Parizeau Report") did consider the question of federal-provincial constitutional relations, it was with an eye to determining the extent of Quebec's provincial power of regulation, rather than the extent of the federal government's power in the area. The Report concluded that the Quebec Government had adequate power to effect the recommendations made in the Report.

361. W. Wvnes, supra note 134 at 22-23.

362. IcL at 6: "Viewed generally, the Australian Constitution appears largely as a compromise between the Canadian and American models." On the Canadian Constitution generally, see Laskin, Reflectionson the Canadian Constitution After the First Century. 45 Can. Bar Rev. 395 (1967); Lyon, A Fresh Approach to Constitutional Law, id. at 555; Lysk, Annual Survey of Canadian Law, Part I, Constitutional Law. 5 Ottawa L. Rev. 124 (1971); Alexander, A Constitutional Strait Jacket for Canada. 43 Can. Bar Rev. 262 (1965).

363. Section 91.

364. On the question of federal and provincial powers, see Lederman, Some Forms and Limitations of Co-operative Federalism, 45Can. Bar Rev. 409 (1967); Johnson, Did Judah P. Beniamin Plant the "States' Rights" Doctrine in the Interpretation of the British North America Act?, id. at 454; Lysk, supra note 362 at 124-25.

365. Report of the Attorney-General's Committee on Securities Legislation in Ontario (1965).

366. Id, at 69-71.

Ill: 27

367. Dickson, supra note 355 at 6 states that "The Report recognized the constitutional limitations on the provincial sphere in this area and implied the existence of a federal jurisdiction."However, as it is unclear what "area" is being referred to, it is not possible to agree that this is a valid interpretation of Part IX of the Report.

368. Proposals for a New Business Corporations Law for Canada.(April, 1971).

369. Id. at 5.

370. P. Williamson. Securities Regulation in Canada 277 (Supp. 1966).For an interesting review of Williamson's book in the course of which review a strong plea for a federal Canadian securities actis made by then Chairman of the Saskatchewan Securities Commission, see Book Reviews,75 Harv. L. Rev. 248 at 252-253 (1961).

371. LL at 229-230.

372. B. Laskin, Canadian Constitutional Law (rev. 3d ed. 1969).

373. Id. at 431.

374. Gregory § Co. Inc. v. Quebec Securities Commission, £l96lj S.C.R. 584, 28 D.L.R. (2d) 721.

375. B. Laskin. supra note 372 at 432. See also A. Smith. The Commerce Power in Canada and the United States (1963). 376 377 378 379 380 381

376. §££ Stephen J. in Bradley v. The Commonwealth of Australia and Another, cited note 251 supra at 517. See also, however, Notes, Whither Goes the Wire? The Extent of Federal Competence to Regulate CATV. 18 McGill L.J. 615 (1972).

377. Dickson, supra note 355 at 12-18.

378. Id. at 26-27.

379. Id. at 40-41.

380. Id- at 43.

381. Id. at 57-58.

Ill: 28

382. This view is supported by discussions which this author held with two practising securities lawyers in Toronto and with a member of the Quebec Securities Commission in June, 1971, allof whom indicated that the provincial governments were extremely jealous of their powers in this regard.

383. Dickson, supra note 355 at 59.

384. Knauss, Securities Regulation in Great Britain: A Comparison with United States Practice. 5 Vand. J. Transt'l Law 47, 51 (1971).

385. See ch. 2 supra,386. The Robbins Report; see ch. 2 supra.

Chapter 4

IV: 1

1.

2 .

3.

4.

5.

6.

7 .

9.

10.11.12.

13.

14.

Although in the United States a distinction is made between "issue" and "distribution", for the purposes of this study no such distinction will be drawn and the terms will be used interchangeably.

A large number of the merchant banking institutions established in Australia over the last 5-10 years have made an issue of their shares for this reason. Amongst the most recent to foreshadow such a move was the Martin Corporation.

See Heath, The Underwriting and Floatation of a Public Issue, lecture for Committee for Postgraduate Studies in the Department of Law. University of Sydney, September 1970, 144 at 147-149.

See Companies Act, New South Wales, Part IV.

The United States procedure is discussed below.

The Securities Industry Acts impose only an indirect control on the distribution of securities, through the requirement that stock exchange rules must make satisfactory provision in relation to the conditions under which securities may be listed for trading; see, for example, section 7(b)(iii) of the New South Wales Securities Industry Act.

Companies Act, New South Wales, Section 37.

Id., Section 38 (1).

Id., Section 39(1)(a).

Id., Section 39(1) (b).

Id., Section 39(1)(c).

Id. , Section 39(1)(f).

Id. , Section 39(1)(g).

Id., Section 39(1) (i).

Id., Section 39(3).15.

IV: 2

16.

17.

18.

19.

20.

21.

22.

23.

Fifth Schedule, Part I. For details as to the Eggleston Committee’s proposed revision of the Fifth Schedule, see Company Law Advisory Committee, Report to the Standing Committee of Attorneys-General on the Control of Fund Raising, Share Capital and Debentures, Section D and Appendix A, (October 12, 1970).

Particular information is required where (i) there are and (ii) there are not, subsidiary companies of the company or guarantor corporation; where the prospectus relates to shares in or debentures of a borrowing corporation; where the proceeds of the issue or any part thereof are to be used in the purchase of any business; and where the proceeds of the issue or any part thereof are to be used to acquire the shares in a corporation, by reason of which acquisition that corporation becomes a subsidiary of the issuing company.

Fifth Schedule, Part II.

Id., Part III.

Id., Part IV. This includes, inter alia, information as to the security for the monies loaned to the corporation, and details as to the limitations on the corporation’s borrowing power and as to the amount of subscriptions currently being sought.

Companies Act, Section 42(1).

See Section 42(2).

In New South Wales in the decade 1962-1972, the number of prospectuses lodged was as follows:

The Eggleston Committee indicated that authorities charged with registering prospectuses should not be under a duty to investigate the truth of statements contained in those prospectuses, if that involved them in assuming the moral (not legal) responsibility of providing the public with some assurance that these statements

1962196319641965196619671968

120113169122107102131

1969197019711972

212321201189

IV: 3

were true. The Committee did not, however, recommend the cessation of the present system whereby issuers are required to explain or elaborate upon statements which appear to be deficient or doubtful. Company Law Advisory Committee, Report to the Standing Committee of Attorneys-General on The Control of Fund Raising, Share Capital and Debentures, at 16 (October 12, 1970).

24. See Information Bulletin published by the New South Wales Corporate Affairs Commission, after consultation with the Corporate Affairs Advisory Committee.

25. Companies Act, section 42 (2)(b).

26. Ryan, The Role and Practice of the Registrar of Companies, lecture for Committee for Post-Graduate Studies in the Department of Law, University of Sydney, September 1970, 260 at 264.

27. Kirby, The Preparation of a Prospectus, lecture for Committee for Post-Graduate"Studies" in the Department of Law, University of Sydney, September 1970, 25 at 43-44. See also Report of the Company Law Advisory Committee, cited note 23 supra, at para.47.

28. See the Companies (Further Amendment) Act, 1974, Schedule (New South Wales).

29. This term is now defined in Section 5(1) of the New South Wales Act as "a corporation incorporated under a declared law of a participating State or under a corresponding previous law of that State".

30. This term is also defined in Section 5(1) as a law of a parti­cipating State which has been declared to be a "declared law" for the purposes of the legislation.

31. Section 40(1). The introduction of this section was in accordance with the recommendations of the Company Law Advisory Committee, Report to the Standing Committee of Attorneys-General on the Control of Fund Raising, Share Capital and Debentures, (October 12,' 1970).

32. Section 40(2)(a) and (b).

33. Section 40(2) (c). These circulars, notices, or advertisements are permitted to contain some or all of the following information:

(i) the number and description of the shares in, or debentures of, the corporation to which the prospectus relates;

IV: 4

(ii) the name of that corporation, the date of its incorporation and the amount of its paid-up capital;

(iii) the general nature of the main business, or the proposed main business, of the corporation;

(iv) the name, addresses and occupations of the directors or proposed directors;

(v) the names and addresses of the brokers or under­writers to the issue and, where the prospectus relates to debentures, the name and address of the trustees for the debenture holders;

(vi) the name of the stock exchange of which the brokers or underwriters to the issue are members;

(vii) particulars of the period during which the offer is effective; or

(viii) particulars of the time and place at which copiesof the registered prospectus, and forms of applica­tion for the shares or debentures to which it re­lates, may be obtained.

34. Section 40(2)(d).

35. Section 40 (3).

36. Section 40(4) and (5).

37. See subsection 40(2).

38. Section 40 (6).

39. Section 40A(1).

40. See Company Law Advisory Committee, Report to the Standing Committee of Attorneys-General on The Control of Fund Raising, Share Capital and Debentures, at 8-9.

41. Section 40(2). Regulations 65 and 66, gazetted on September 29, 1972, detail this "prescribed” matter. They extend the scope of the information which may be published or broadcast in res­pect of a company’s affairs by allowing -

IV: 5

(a) bona fide comment on radio or television on a pros­pectus registered in a State or in a Territory of the Common­wealth, where no consideration or other benefit in respect thereof is received or receivable by the commentator or by the licensee of the radio or television station concerned from any person who has an interest in the success of the issue of shares or debentures to which the comment relates;

(b) a bona fide report on the whole or part of proceedings at a general meeting of shareholders howsoever issued, circul­ated, published, disseminated or distributed on the condition that where consideration is payable in respect of the issuing, circulating, publishing, disseminating or distributing of the report that consideration shall be only for an amount calculated in accordance with the usual scale of commercial rates applying from time to time in respect of advertisements on the particular media concerned;

(c) a report relating only to the internal affairs of a corporation that is issued, circulated, published, disseminated or distributed for or on behalf of the corporation or its directors on the condition that -

(i) no more than four such reports have been so issued, circulated, published, disseminated or distributed during the next preceding period of twelve months; and

(ii) where any consideration is payable in respect of the issuing, circulating, publishing, disseminating or distributing of the report that consideration shall be of the type referred to in paragraph (b);

(d) material relating to a corporation (other than material specified in this Regulation) that is issued, circulated, published, disseminated or distributed by or on behalf of the corporation or its directors on the condition that the material -

(i) does not contain any statement that is misleading in the form and context in which it is included; (ii)

(ii) does not contain information concerning any matter that materially affects the affairs of the corpora­tion other than information previously made available to the public by means of a prospectus registered in a State or in a Territory of the Commonwealth, a report authorised to be issued pursuant to the pro­visions of paragraph (b) or (c) or a statement auth­orised to be made to a stock exchange pursuant to sec. 40A(2) (c);

IV: 6

(iii) does not contain any reference whether express or implied to any invitation to the public to sub­scribe for share or debentures that is open or intended to be made at the time the material is issued, circulated, published, disseminated or distributed (other than where the principal business of the corporation involves the continuous borrowing of money, a reference to the principal business of the corporation); and

(iv) is not issued, circulated, published, disseminated or distributed together with a circular, notice or ad­vertisement to which sec. 40 does not apply and all reasonable measures to prevent the material from being issued, circulated, published, disseminated or dis­tributed in any form or manner in which the material might reasonably be associated with such a circular, notice or advertisement have been taken by the cor­poration or its directors; and

(e) material that is issued, circulated, published, dis­seminated or distributed by newspaper, radio or television and is a bona fide news report Whether or not that report includes comment) of -

(i) information contained in a registered prospectus; or

(ii) prescribed material referred to in sec. 40A(2)(b) or( c ) ,

where no consideration or other benefit is received by the owner or publisher of the newspaper or the licensee of the radio or television station concerned or any employee or agent of that person in respect of the; issue, circulation, publication, dis­semination or distribution of the material.

42. Company Law Advisory Committee, Report to the Standing Committee of Attorneys-General on the Control of Fund-Raising, Share Capital and Debentures, at 9.

The New South Wales Commissioner for Corporate Affairs hats in­dicated that he will not object to certain statements in relation to an offer or proposed offer of shars or debentures:

"I am prepared to consent under s.40A(2)(b) to an announcment with respect to an intended issue of shares or debentures which does not contain infor­mation or matter other than that permitted by

IV: 7

s.40(2)(c). I will raise no objection to the inclusion in the annual or other periodical report of a corpor­ation of a statement of its intention to make a fresh issue of share or debentures whether or not the intended issue is to be restricted to shareholders or debenture holders.

I will take no action in relation to any statement re­lating to the affairs of a corporation listed on a pre­scribed stock exchange which is made to that stock exchange and which, in addition to including material which the corporation should include in order to comply with the listing requirements of the exchange, draws attention to an offer or intended offer of shares or debentures.” Commissioner for Corporate Affairs, New South Wales, Release.

43. Companies Act, Section 44(1).

44. Id., Section 44(2).

45. Id., Section 48(1).

46. Id., Section 49.

47. Id., Section 50. Section 51 and the Sixth Schedule detail the required contents of the statement in lieu of prospectus. Both the Jenkins Committee (Report of the Company Law Committee, Cmnd. 1749, at paras. 247, 248”and 252, hereinafter referred to as "the Jenkins Report") and the Eggleston Committee(cited note1-6 supra, at 22-23) have recommended that the statement in lieu of prospectus be dispensed with.

00 Comp

49. id..,

50. Id.,

51. Id.,

52. Id.,

53. Id.,

54. Id.,

IV: 8

55. Ld., Section 43(2). The section also requires that the document making the offer contain material relating to the net amount of the consideration received in respect of the securities to which the offer relates, and to the place and time at which the con­tract under which the securities have been allotted may be in­spected (sub-section (4)).

56. Report of the Company Law Advisory Committee, cited note 16supra, at 16-17. ~

57. See id. at 6-7.

58. Companies Act, Section 82(1). The statement is required to contain the matters detailed in the Seventh Schedule. Also, section 81 restricts the capacity to issue interests to only companies and their authorised agents.

59. Id., Section 81(1).

60. See Sections 77 and 78 and Section 80.

61. Companies Act, Section 79.

62. Id., Section 89.

63. Id., Section 84.

64. Id., Section 85.

65. Australian Associated Stock Exchanges, Listing Manual, Section 1A. The guaranteeing of this "spread” of securities is one of the important functions of the underwriter of the issue.

66. Id.; the March, 1973 amendments to the AASE Listing Requirements imposed strict new conditions for mining companies; see id. Section 3F.

67. Id., at Section IB.

68. Id.

69. Id., Section 2A. They include special requirements in relation to mining companies and options to take up unissued shares.

70. I d . , Section 2B.

71. Id., Section 2C. There are also special requirements in this regard in relation to mining companies and loan securities.

IV: 9

72. Id., Section 2D.

73. Id., Section 2E. The AASE also imposes detailed conditions which must be complied with for retention of membership of the official list and the official quotation of securities.

74. The conduct of members of the exchanges and non-members intransactions between them (as, for example, where a member is the broker to the issue and the non-member is the underwriter of the issue) is governed by the Anglo-Australian Agreement. This Agreement imposes a number of obligations upon the non­member, included amongst which are the following: he may notbe named in the prospectus as a medium for the receipt of applications; he must make the public issue of securitiesin association with a member as the broker to the issue; and he may place the following maximum proportions of the issue firm with his institutional clients; 20 percent of ordinary shares, 25 percent of preference shares, and 30 percent of loan stock. The broker to the issue is, with certain excep­tions, prohibited from charging less than the prescribed rate of brokerage on the remainder of the issue. See Heath, note 3 supra, at 162-163.

75. See 1 L. Loss, Securities Regulation 161 (1961). This form of underwriting may also be utilized1-in relation to rights issues.

76. Id., at 171.

77. Specific recommendations to this effect are proposed later in this chapter.

78. L.C.B. Gower, Modern Company Law 285 (3d ed. 1969).

79. Id., at 285-286.

80. Id., at 286.

81. For a description of "introduction" as a separate method of issue,see Knauss, Securities Regulation in the United Kingdom: AComparison with United States Practice, 5 Vand. J. Transnational £aw 47 at 56-57(1971) and Brusasco, Legal Status or Securities"" IrTEnglish Law, in The Legal Status of Securities in Europe and the United States, 157 at 192 (University Libre de Bruxelles 1970).

IV: 10

82.

83.

84.

85.

86.

87.

88.

89.

90.

91.

92.

93.

94.

95.

L. Gower, supra note 78 at 286-287. In relation to companies which have securities already issued, of course, additional capital may be raised through rights and conversion issues.

Companies Act 1948, Section 37.

Id., Section 38 and Fourth Schedule

Id., Section 40.

Id., Section 41.

Id., Section 42.

Id., Sections 43 and 44.

Id., Section 45.

Id., Sections 47-52.

Id., Section 39(1) and (2). See L. Gower, supra note 78 at 299, note 82: the only prescribed”exchanges for the purposesof this provision were the London Stock Exchange, the Midlands and Western Stock Exchange Association, the Northern Stock Exchange Association and the Scottish Stock Exchange Association. Presumably the United Stock Exchange now fulfills this role.

Companies Act 1948, Section 38(5) (b).

Id., Section 50(1).

Id., Section 50(5) and (6). See L. Gower, supra note 78 at 302 and also the Jenkins Report, para. 239. The latter recommended that applications made on the basis of a prospectus issued generally should become immediately irrevocable and should remain so until the expiration of seven working days after the issue of the prospectus.

Sections 417-423.

96.

97.

98.

99.

100. 101.

Companies Bill 1973, Clauses 8 and 9.

Id., Clause 21. See also Clause 22.

Id., Clause 29.

Id., Clause 30.

Id., Clause 31.

See Chapter 9 infra.

IV: 11

102. Prevention of Fraud (Investments) Act, 1958, Sections 1-9.Under the power given by Section 7, the Board of Trade has promulgated the Licensed Dealers (Conduct of Business) Rules 1960 which stipulate, inter alia, the contents of all written offers made by a licensed dealer either to acquire or dispose of securities.

103. Id., Section 13.

104. Id., Section 14.

105. See L. Gower, supra note 78 at 306.

106. The Protection of Depositors (Contents of Advertisements) Regulations 1963 (S.I. NO.1397).

107. Protection of Depositors Act 1963, Sections 6-11.

108. Knauss, supra note 81 at 67, regards the London Stock Exchange as having played the dominant role in regulating the United Kingdom securities market.

109. The listing requirements of the London Stock Exchange were uni­formly adopted by the exchanges within the previously existing Federation. Entitled Admission of Securities to Quotation, Memoranda of Guidance and Requirements of the Federation of Stock Exchanges in Great Britain and Ireland, they were popularly known as "the Yellow Book". This was replaced in 1973 by "Admission of Securities to Listing", The Stock Exchange, here­inafter referred to "the Second Yellow Book".

110. That is, an introduction.

111. Second Yellow Book, Section A, Part I, para. I.

112. Id., para. 11(A).

113. Id., para. 11(B).

114. Id., paras. Ill and IV.

115. Id., para. Ill(a).

116. Companies Act, 1948; Section 51.

117. Section 1.

L. Gower, supra note 78 at 290, citing Control of Borrowing Order 1958 (S.R. § 0. No. 1208 as amended by S.I.s. No.445 of 1959 and No.69 of 1967).

118.

IV: 12

119. Exchange Control Act, 1947, Section 10.

120. I d ., Section 30(2).

121. Id., Section 8.

122. L. Gower, supra note 78 at 290.

123. This Tact is mentioned briefly in the Jenkins Report, supra note 47 at para. 225.

124. Issuing Houses Association, Rules (New rules adoptedJune 20, 1969). '

125. Jenkins Report, supra note 47 at para. 224.

126. Id., para. 227.

127. Id., para. 228.

128. Id., para. 234.

129. Id., para. 252(f).

130. Id., para. 248.

131. Id., para. 252(j).

132. Id., para. 252(1) and (m).

133. •Province of Ontario, Department of Financial and Commercial Affairs, Report of the Committee of the Ontario Securities Commission on the-Problems of Disclosure^aised for Investors, by Business Combinations and Private Placements, (February 1970) (hereinafter referred to as "the Merger Study").

134. Emerson, Towards An Integrated Disclosure System for Ontario Securities Legislation, 10 Osgoode Hall L.J. 1 at 11.

135. Id.

136. The Montreal and Canadian Stock Exchanges, Brief to the Royal Commission on Banking and Finance (August 1962) .

137. Id. at 87-88.

138. Id. at 88-89.

IV: 13

139.

140.

141.

142.

143.

144.

145.

146.

147.

148.

149.

150.

151.

152.

153.

154.

155.

Id., at 91.

Id., at 93.

The Toronto Stock Exchange, Brief to the Royal Commission on Banking and Finance (Aug. 1962).

Id., at 82-83.

Report of the Royal Commission on Banking and Finance (1964) (hereinafter referred to as "the-Pbrter Report").

Id., at 312.

Id., at 314.

Id., at 342.

Id., at 345.

Id., at 349.

Id. It further required financial statements accompanying the prospectus to comply with good auditing standards and to con­tain sales figures, and stated that Canadian prospectuses would be more comprehensible if they were prepared in the United States narrative form.

The Broker-Dealer’s Association of Ontario, Brief to the Attorney- General’s Committee on Securities Legislation,8(February 1964).

Id., at 10.

This recommendation was in accordance with the practice which is followed on the Tokyo Stock Exchange.

The Toronto Stock Exchange, Brief to the At tomey-General’s Committee on Securities Legislation, Province of Ontario, para. 4.01 (May 1964).

Id., at para 4.03. The type of information which the exchange envisaged being included in such a basic document included the number of shares to be sold and the amount to be raised by the offering; the recipients of the proceeds of the issue; details of property or assets recently acquired; the shareholdings and other interests of the officers, directors and major shareholders; and the record of the company’s earnings; ui., at para. 4.04.

Id., at para. 4.05.

IV: 14

156. March, 1965. This report is popularly known as the ’’Kimber Report:, after its Chairman, J.R. Kimber,

157. Id.,at 8. Id.: The Kimher Report in this respect stated that:

One of the strongest single forces in the complex process of raising capital is public confidence. The decision to invest is undertaken largely out of public confidence in the potential of the economy; public confidence in turn is largely based on the expectation of profits and knowledge of relevant facts necessary to permit the anticipation of such profits. The secondary market and its principal instrument, the stock exchange, apart from its daily function of the valuation of assets, acts as a barometer of the state of the economy. In turn, the secondary market cannot perform this function unless individuals have confidence in it. Consequently, every possible means should be taken to enhance the reputation of the secondary market and to establish it as a mature, respectable institution of the capital market.

A mature secondary market will have the effect of creating public confidence in the primary market. Only through public confidence in the institutions of both markets will capital be readily raised to finance the vital economic developments of the nation. At all times, it must be made clear that the risks that are being evaluated by the capital market are normal business risks of success or failure, and every effort must be made to ensure that the public understands those risks. This is not to suggest that the public must be protected against itself; rather, it is a matter of ensuring that the investing public has the fullest possible knowledge to enable it to distinguish the different types of investment activity available. In such circumstances, the public would have reasonable assurance that its losses are genuine economic losses, just as its gains are genuine economic gains. Such assurance is the best possible guarantee of active Canadian participation in the financing of the economic development in Canada.

158. Id.., at 28.

159. Id., at 30-34,

160. Id., at 34-38. Those related primarily to industrial, mining and investment companies and required the inclusion of infor­mation relating, inter alia, to statements of surplus; state­ments of earnings- for the last five completed financial years and certain unaudited financial statements.

161. Id., at 39.

162. Id.

IV; 15

163. Id., at 40. In respect of the United States requirements, the Report urged that prospectuses in Ontario also be in narrative form and thus avoid the practice of merely paraphrasing the relevant statutory provisions.

164. Id., at 41.

165. See pp. 445^455 infra.

166. Id., at 41-42.

167. Id., at 42-44.

168. Id., at 45-46. The Committee also recommended that the preliminary prospectus contain an identifying statement similar to that printed in SEC preliminary prospectuses; id., at 46-47.

169. Id. at 47. The Committee further recommended that the purchaser have the right to rescind where the prospectus which he receives contains, as at the date of delivery, "any untrue statement ofa material fact necessary in order to make the statements contained therein, in the light of the circumstances in which they were made, not misleading....” This right would have to be exercised by commencing action prior to the first of either of the following:(a) 30 days after the purchaser is aware of the fact that such infomation is misleading or (b) 60 days after he receives the prospectus: id. at 47-48.

170. S.O. 1966p. 142. The distribution provisions of this act are discussed immediately below.

171. See Emerson, supra note 134 at 14-15.172. Report of the Royal Commission to Investigate Trading in the

Shares of Windfall Oils and Mines Limited (1965), hereinafter referred to as ”the Kelly Report”.

173. See note 215 infra.

174. See Chapter 8, infra.

IV: 16

175.

176.

177.

178.

179.

180.

181.

182.

183.

184.

185.

The Kelly Report, v,vi.

Id., at 13-14.

Id., at 94-95.

Id., at 96-97.

Id., at 98-99.

Id., at 113.

Id.

Id.

Id., at 118-119.

Id., at 120-121.

R.S.O. 1970, c. 426 as amended 1971, c. 31, 1972, c. 1, 1973,c . 11.

186. Id. f Section 35(1).

187. Id., Section 36(1).

188. Id., Section 36(2)(a). Such communication must indicate the names and addresses of all persons and companies from whom a preliminary prospectus may be obtained.

189. Id., Section 36(2) (b) and (c). A record must be kept by thedistributor of securities to the public of the names anu addresses of all persons and companies to whom a preliminary prospectus has been forwarded: id., section 37.

190. Id., Section 38(1). For the form of the certificate required to be executed by the abovementioned categories of persons, see id., sections 52 and 53 respectively.

191. Id., Section 38(2).

192. Id., Section 39. This provision was inserted by the 1971 amend­ments to the act, c. 31, section 8.

193. Id., Section 40(1). The legislation also contains provision for amending the preliminary prospectus during the waiting period; id., Section 40(2) and (3).

IV: 17

194.

195.

196.

197.

198.

199.

200.

201.202.

203.

204.

205.

206.

207.

208.

209.

210.

Id., Section 41(1).

Id., Section 41(2). Sections 13-19 of the Regulations provide that there shall be particular forms for the prospectuses of finance, industrial, investment, mining, mining exploration, mutual fund and insurance companies, respectively.

Id., Section 41(3).

Id., Section 42.

Id., Sections 43, 44, 46, 47, 48 and 49.

Id., Section 50.

Id., Section 56. This section was also inserted as a result of the 1971 amending legislation, c. 31, section 11.

Id., Section 57.

Id., Section 61. The Commission is given power to order the cessation of all trading in the distribution to the public of particular securities, where it appears to it that, after the issue of a receipt, any of the circumstances detailed in Section 61 exist; id., Section 62(1).

Id., Section 64(1). This provision was also inserted as a re­sult of the 1971 amending legislation, c. 31, s.19.

Id., Section 65(1). This provision was also inserted by the 1971 amending legislation, c.31, s.20(l).

Id., Section 67 (1).

R.S.Q. 1964, c.274, as amended, 1967, c. 82; 1971, c. 77;1973, Bill 6.

Id., Section 14.

Id., Section 16.

This Section applies to offers, etc., made within the province to persons, etc., either inside or outside the province; Section 50.

Id.

211. Id.

IV: 18

212. Regulations Made Under an Act Respecting Securities .O.C. 222gazetted March 24, 1956; as amended, Order-in-Council No.714-72 gazetted March 11, 1972. These require that certificates ex­ecuted by directors and promoters, as well as underwriters, be contained in all prospectuses; that certain documents accompany prospectuses; and that particular detailed information be con­tained in prospectuses of corporations other than mining or in­vestment companies, investment companies and mining companies respectively: id., Part Three.

213. Section 53.

214. Sections 47 and 48.

215. Timmins Area Inquiry - Report on Certain Aspects of Toronto Stock * 216 217 218 219 220 221 222 223Exchange Trading Practices and Procedures and Report on Charact­eristics of Purchasers of Speculative Mining Securities. A Study Conducted by the Special Inquiry Section of the Ontario Securities Commission (1964-67) 12, hereinafter referred to as "the Timmins Area Inquiry".

216. Id., at 52. For the form of questionnaireadministered, see id., Appendix "C".

217. Id.

218. Ontario Secutities Commission, Report of Commissioner D.S. Beatty on Matters Related to the Financing of Mining Exploration and Development Companies (Sept. 1968), hereinafter referred to as "the Beatty Report".

219. Id., at 8.

220. Id., at 9.

221. Id., at 10-11.

222. Beatty Report, note 218 supra at 17. Id., where additional work was recommended, or there has been a previous filing within a 12 month period and another appeal for public funds is made, orwhere an issue exceeds$100,000, a full prospectus would be required.

223. Id., at 17-18. Id., at 19: such a document could also be used byunlisted companies where there is an active and independent market in their securities which is adequately supervised by a responsible regulatory body which reported regularly to, inter alia, the Ontario Securities Commission.

IV: 19

224.

225.

226.

227.

228.

229.

230.

231.

232.

233.

234.

235.

236.

237.

238.

239.

240.

241.

242.

Id., at 21. See also id., at 21-22: the recommendation didpropose that the Ontario Securities Commission could approve the use of other promotional literature.

Id., at 23-26.

Report of the Canadian Committee on Mutual Funds and Investment Contracts, Provincial and Federal Study (1969).

Id., at 532.

Id., at 533-534 and 540. This recommendation would exclude generally circulated advertising material not specifically designed for the purchaser or delivered to him from the category of "written documents delivered to him."

Id., at 531.

Id., at 534. The consultants who comprised this sub-committee were a former securities administrator, an officer of a mutual fund, and two lawyers.

Id. These recommendations were adopted by the Committee itself.

Id., at 535.

Id.

Id., at 540-541.

Report of the Royal Commission Appointed to Inquire Into the "Failure of Atlantic Acceptance Corporation Limited (September1969). For details as to the background to this failure, see id., Vol.l.

Id., at 1555.

The Merger Study, cited note 133 supra, at 7.

Id., at 9.

Ld., at 10.

Id., at 26.

I d., at 28.

Id., at 26 and 28. Companies which filed reports pursuant to the proposed continuous disclosure system were to be known as "report­ing companies": id. at 27.

IV: 20

243.

244.

245.

246.

247.

248.

249.

250.

251.

252.

253.

254.

255.

256.

257.

258.

259.

260.

261.

Id., at 27.

Id., at 27.

Id., at 35.

This concept is contained in the Act in section 1(1)16 ii definition of "primary distribution to the public", viz., "trades in previously issued securities for the purpose of distributing such securities to the public where the sec­urities form all or a part of or are derived from the holdings of any person, company or any combination of persons or com­panies holding a sufficient number of any of the securities of a company to materially affect the control of such com­pany. ..."

Id.

Merger Study, note 133 supra, at 57.

Id., at 58.

Id., at 60.

Id., at 61.

Id., at 68-69.

Id., at 69.

Id., at 70. These are: (i) the issuer must be a reportingcompany; (ii) it must file a timely amendment with the Com­mission disclosing details of the issue not later than ten days after receipt of the subscription; and (iii) it must file with the Commission at or before the time of sale a revised Form 8 signed by the purchaser setting out details of the purchase.

Id., at 71-72.

Sections 58(1) and 19(1)6,

Merger Study, note 133 supra, at 111.

Sections 58(1) and 19(1)8.

Merger Study, note 133 supra, at 111.

Sections 58(1) and 19(10).

Merger Study, note 133 supra, at 111.

IV: 21

262. Id., at 111-112.

263. Id., at 112.

264. See Bill 75 - The Securities Act, 1974, Part XIII.

265. Bill 154, section 59.

266. Id., section 64(1) (b).

267. Id., section 69(a).

268. See Emerson supra note 134 at 13. For a superficially critical assessment of the Merger Study, see Gower, Book Review, 23 Admin. L. Rev. 309 (1971).

269. Bill 154, section 67.

270. Id., sections 98 to 100.

271. Id., section 1(1)10.

272. Id. section 69. For a more detailed discussion of the provisions of the proposed legislation in this respect, see Emerson, supra note 134 at 35-38.

273. Bill 154, sections 93(1) and 94(1).

274. For a detailed assessment of the proposed effect of the provisions of Bill 154 in this regard, see Emerson, supra note 134 at 42-45.

275. Bill 154, section 93(1)(k) and 93(4).

276. Emerson, supra note 134 at 45.

277. Bill 154, section 94(l)(c).

278. For another important development in Ontario legislation in thisarea, see the Business CorporationsAct, 1970, R.S.O. 1970, c.53 as amended by 1971, c.26; 1972, c.38. Although for reasons ofspace it is not possible to discuss this statute at this stage, reference should be made to D. Johnston, Public Offering Companies and Non-Public Offering Companies Under the Ontario Business CorporationsAct, 1970, 5 Ottawa L. Rev. 1(1971-72), and to F. Iacobucci, The Business Corporations Act, 1970: Creation andFinancing of a Corporation, 21 U.T.L.J. 416 (1971) and The Busi­ness Corporations~AcF, 1970: Management and Control of a Cor­poration, 21 U.T.L.J. 543 (197157"^

IV: 22

279. Sections 74-84.

280. Section 76(1).

281. Section 79.

282. Section 80.

283. For a detailed, although rather dated, examination of the federalprovisions^ see P. Williamson, Securities Regulation in Canada (supp. 1966). ~

284. Proposals for a New Business Corporations Law for Canada. Volume 1} at 126. See also Bill C-213, Part XV.

285. Id., at 140.

286. Id., at 128.

287. Id., at 139-140.

288. See. K. Sharma. The Institutional Structure of Capital Marketin India. 7 (1969): "OneTmescapable~lmdTTndisputabIe con-clusion seems to be that capital market is an integral part of a developing economy and should be encouraged, developed and strengthened so as to channel the savings of the community in the most desirable productive employments." See generally id.,Chapter 1.

289. See Chapter 2 supra. For a detailed account of the structure of the new issues market in India and in particular of the roleof institutional underwriters, see L. Gupta, The Changing Structure of Industrial Finance in India, Chapter VIII (1969). 290 291 292 293

290. For a thorough examination of the various classes of owners of industrial securities in India, see L. Gupta, supra note 289, Chapter IX.

291. See The Companies Act, 1956, as amended, Sections 55, 56, 58-65,6769-73 and 75. For descriptions of these prospectus provisions, see V . Kulshreshtha. ChangingDimensions of Company Law in India, Chapter 4 (1971) and Avtar Singh, Indian Company Law, Chapter 5 (3d ed. 1971). ' .^

292. The Companies Act, 1956, as amended, Section 57.

293. Jd., Section 66.

IV: 23

294. Id., Sections 68 and 68A. Section 68 is based upon the pattern of Section 13 of the United Kingdom Prevention of Frauds (Investment) Act, 1958.

295. Id., Section 74.

296. See Securities Contracts (Regulation) Act, 1956, Section 21, which is entitled "Power to compel listing of securities by public companies."

297. Id.; the company is allowed the opportunity of being heard before an order is made under the section.

298. Id., Section 22.

299. See Chapter 2, supra.

300. See Chapter 2, supra.

301. In 1971 the CIC approved 11 new issues having a total capitalof $94 million while the MAS approved 3 with a total capital of $28 million. In 1972 the former body approved 7 new issues with a total capital of $67.1 million; the latter approved only 2 new issues with a total issued and paid-up capital of $20 million: see Far Eastern Economic Review, Feb. 5, 1973,at 36, cols. 2-3.

302. See Chapters 5-8 infra.

303. No.79 of 1965.

304. No.42 of 1967.

305. The draft of what was to become the Malaysian Companies Act, 1965, was prepared by a Mr. J.C. Finemore, the draftsman of the Australian Companies legislation. For a detailed examin­ation of the history of this draft legislation and its con­tents, see V. Venturini. Company Law Reform in Malaysia (1964). Forabackground series of recommendations for companies legis­lation, in particular for Afro-Asian countries, see Gower, Company Law Reform, 4 Malaya L. Rev. 36 (1962).

306. G. Ferris, A Study of the Securities Market in Singapore and * 307ifaaysia (1970).

307. Id., at 15. The exchangesTs then current rules and regulations including listing standards, were based upon those of the Sydney Stock Exchange Limited.

IV: 24

308. See Chapter 7, infra.

309. The Ferris Report, note 306 supra, at 16. His recommendations in respect of greater disclosure also required the publication of decisions of a listed company affecting shareholders and the public, and the reporting of changes of share ownership by directors, their families and companies controlled by them, and changes of holdings in excess of 10 percent of the company’s shares: id. at 17.

310. The Ferris Report, note 306 supra, at 18.

311. See The Australian Financial Review, Dec. 13, 1972 at 28, cols. 4-6.

312. The Australian Financial Review, Feb. 14, 1972 at 46, cols, 5-6: the Hang Seng index climbed to 200 points in 1970 and exceeded the 400 barrier before retreating; in 1971 it broke this barrier again and continued to rise and by Friday, February 9, 1972, it closed at 1,449.91, having gained in excess of 350 points in one week. For a detailed examination of the speculative mania which gripped Hong Kong's securities market, see M. Higgins, A History of the Crisis in the Hong Kong Stock Market and the Development of Hong Kong Securities Regulation Law 1965-74, May 1, 1974 (un­published thesis in Harvard Law School Library).

313. Davies, "Making Millions", Far Eastern Economic Review. July 8, 1972 (Hong Kong Focus 5 at 8).

314. The Australian Financial Review, Sept. 18, 1972 at 1, cols. 4-5 and 5, cols. 1-2.

315. H. at 5, col. 1; 27 companies had been listed on the fourexchanges between January and September, 1972.

316. First Report of The Companies Law Revision Committee - The Pro­tection of Investors. June 24, 1971 (hereinafter cited as the "first Investor Protection Report"). JEd. at V: its terms ofreference were "to consider and make recommendations as to the revision of the Company Legislation of Hong Kong, and in part­icular to recommend as soon as possible whether legislation for prevention of fraud in relation to investments is required and if so, the form which it should take".

IV: 25

317.

318.

319.

320.

321.

322.

323.

324.

325.

326.

327.

328.

329.

330.

Id., at 112-116. See also id., at 116: the committee furtherrecommended that abridged prospectuses not be permitted, and that advertisements referring to published prospectuses con­tain information only as to notification of the publication and where copies may be obtained.

Id., at 116-117.

Id., at 117-119.

Id., at 120.

Id., at 120: this proposal is based on Rule 1(b) of the UnitedKingdom’s Licensed Dealers (Conduct of Business) Rules, 1960.

Id., at 120-121: This is a wise measure, particularly in viewof the inflated value of land in Hong Kong. Of the 27 new com­panies listed during the period January-September 1972, fifteen were associated with real estate; see The Australian Financial Review, >Sept. 18, 1972 at 5, col. 1.

This is in accordance with the Jenkins Committee's recommendations.

The first Investor Protection Report, note 316 supra, at 123-124.

Id., at 124.

Id., at 124-125.

Id., at 125-127.

Id., at 127-130.

Id ., at 130-132.

For a discussion of the enforcement provisions of the legislation, see Higgins, supra note 312 at 67-79. For a discussion of the law in respect of company floatation under the new ordinance, which rather optimistically concluded that ’’Hong Kong’s law relating to the floatation of securities now offers comprehensive and sophisticated protection to the investor in the new issue market", see Field, The Law Relating to the Floatation of Securities in Hong Kong, 3 Hong Kong L.J. 147 (1973).

IV: 26

331. Although a distinction is made in the United States between the issue (that is, the actual issuance of various forms of securities by the directors of companies to shareholders) and the distribution (that is, the process of those secur­ities reaching the investing public) of securities, the terms will be used interchangeably in this study and emphasis will be place upon what is, under this distinction, categorized as "distribution” .

332. Knauss, supra note 81 at 67.

333 „ Or while such registration statement is the subject of a refusal order, stop order or public proceeding or examination under Section 8.

334. P. Nash, $ .Denny, and A. Connelly, The Regulation of the Issuance and Distribution of Corporate Securities in.the United States, in The Legal History of Securities in Europe and the United States. 1 kt' 57 (1970).

335. Section 6(a). This requirement means in effect that where there is no control relationship between a seller and an issuer and where.there is no "underwriter" status involved, registration of the distribution of securities by a non-issuer is not re­quired. Thus large secondary distributions of securities maybe effected without registration. For examples of this pheno­menon, see M. Cohen, "Truth in Securities" Revisited, 79 Harv.L. Rev. 1340 at n.21 (1966). For the SEC’s attempt to deal with the problems associated with new issues of securities which are subject to rapid price increases, see Securities and Exchange Commission, Securities Act of 1933 Release No.5274, Securities Exchange Act of 1934 Release No. 9670, (July 26, 1972).

336. Section 6(b).

337. Section 6(d).

338. See 1 L. Loss, Securities Regulation 268-269 (1961) for a brief discussion of Congressf feasdh~fof~including a "cooling-off" period in the legislation; and id., at 272 for a descriptionof the methods used to examine registration statements. See also Woodside, Development of S.E.C. Practices in Processing Registration Statements and Proxy Statements, 24 Bus. Law, 375-388 (1969). 339 * * *

339. Section 8(b). A stop order may also be made where the registrationstatement contains untrue statements of material facts or omits tostate material facts required to be stated or necessary to renderstatements not misleading (Section 8(d)).

IV: 27

340. Section 8(a).

341. Section 8(b).

342. This allows the issuer and underwriter to avoid having to fix an issue price perhaps some twenty days before the securities are actually issued, thus incurring the risk of substantial market fluctuations occurring during that time.

343. 1 L. Loss, supra note 338 at 277-278. See id., for an examination of the sanction which the Commission has through its power to deny acceleration.

344. 36 S.E.C. Ann. Rep. 28-29 (1970). This figure does not include 272 amendments to existing registration statements filed by investmeht'companies under Section 24(e) of the Investment Com­pany Act of 1940.

345. Id., at 29.

346. See the Investment Company Act of 1940.

347. Section 7. The Commission is given the power to waive the in­clusion of information or documents if it finds it or them inapplicable to a particular class of issuers or securities, and that there is otherwise adequate disclosure in the registration statement for the protection of investors. It may also require such other information or documents to be included in the reg­istration statement as it deems necessary or appropriate in the public interest or for the protection of investors.

348. Id. There would seem to be no requirement such as that found in Section 45 (1)(b) of the Australian State companies legislation that the prospectus contain a statement that the expert has given and has not withdrawn his consent.

349. The most common form of registration statement is the Commission’sForm S-l, although there are at present eighteen forms in use.See 1 L. Loss, supra note 338 at 319-323. The Securities Act also contains a general provision (Section 19) which give the Sec­urities and Exchange Commission special powers to make rules and regulations respecting registration statements and prospectuses for various classes of securities and issuers and defining ac­counting, technical and trade terns used in the act. 350

350. A similar requirement appears in Section 2C (6)(a) of the A.A.S.E, Listing Manual.

IV: 28

351. The schedule imposes different disclosure requirements where,first, the issuing company has no subsidiaries, and, secondly, where the issuing company does have subsidiaries: see sub-paragraph (2) and (3) of paragraph 20 of Part II.

352. The Fifth Schedule imposes additional similar requirements wherethe proceeds of an issue are used to acquire shares in any other corporation and the result of that acquisition is that the corporation becomes a subsidiary of the issuer: see paragraph22 of Part II of the Fifth Schedule.

353. Paragraph 15 of Part I of the Fifth Schedule.354. Section 10(a)(1).

355. There is a discretion in the Commission to allow the omission from the prospectus of such information as it by rule or regulation deems not necessary or appropriate in the public interest or for the protection of investors; see Section 10 (a)(4). For a critical assessment of the role played by the prospectus in the United States securities markets, see Kripke,The SEC, The Accountants, Some Myths and Some Realities. 45 N.Y.U.L. Rev. 1151 (1970).

356. Section 10(a)(3).

357. Section 10(b). Such a prospectus must be filed as part of the registration statement.

358. On the wide interpretation given to the term "or otherwise", see United States v. Hughes, 195 F. Supp. 795, 799 (S.D.N.Y.1961) and United States v. Greenberg, 30 F.R.D. 164, 166-67 (S.D.N.Y. 1962), cited in IV L. Loss. Securities Regulation 2316-2317 (1969 Supp.). '

359. Section 2(3). See 1 L. Loss, supra note 338 at 212.

360. 1 L. Loss,supra note 338 at 213. For the argument that such an offer to buy is in any event exempted by the Section 4(1) exclusion of a transaction "by any person other than an issuer, underwriter, or dealer", see IV L. Loss, supra note 358 at 2317.

361. See 1 L. Loss, supra note 338 at 216, 218-219 and IV L. Loss , supra note 358 at 2318-2319.

362. For examples of the Commission's rulings in this difficult area, see Securities and Exchange Commission, Securities Act Release No.3844 (1957) (cited 1 L. Loss, supra note 338 at 218). See also IV Lg__ Loss, supra note 358 at 2318-2320.

363. Section 40(1)(a) and (b).

IV: 29

364. 1 L. Loss, supra note 338 at 226.

365. Section 2(10)(b).

366. Id. Rule 134 details the infomation which may be included in the "tombstone ad." as well as the information which must be so included. For a detailed examination of this Rule, see 1 Loss, supra note 338 at 228-232.

367. Section 10(a)(4); Section 10(c) and (d).

368. See Rule 433.

369. Rule 433, cited 1 L. Loss, supra note 338 at 232-234.

370. As to which;see 1 L. Loss, supra note 338 at 187-193.

371. The terminology approved by the Commission is: A registrationstatement relating to these securities has been filed with the Securities and Exchange Commission, but has not yet become effectiv Information contained herein is subject to completion or amend­ment. These securities may not be sold nor may offers to buybe accepted prior to the time the registration statement becomes effective. This prospectus shall not constitute an offer to sell or the solicitation of an offer to buy nor shall there be any sale of these securities in any State in which such offer, solicitation or sale would be unlawful prior to registration or qualification under the securities laws of any such State.

372. Rule 424 (a),(e).

373. Sec.Act Rel. 4936 (1968).

374. See Section 10(b).

375. 1 L. Loss, supra note 338 at 237. See id. at 237-238 for an exaMnafion of the similarities between these two rules.

376. 1 L. Loss, supra note 338 at 238-9.

377. If used in this period it must contain the red ink legend required on all preliminary prospectuses and be headed "Preliminary Summary Prospectus"; see id.. at 239.

IV: 30

378.

379.

380.

381.

382.

383.

384.

385.

386.

387.

388.

Id., at 239,

IV L. Loss, supra note 358 at 2324. See also Heller, "Integration" of the Dissemination of Information Under the Securities Act of 1933 and the Securities Exchange Act of 1934, 29 Law and Contemp. Prob. 749 at 752-753 (1964), where it is argued that thepossTBIe reasons for the fact that the summary prospectus has not been widely used, are, first, that it must be followed by the actual prospectus; secondly, the possibility of civil liability under Section 12 (2); and thirdly, that it does not provide investors with adequate information to enable a meaningful assessment of the part­icular security to be made.

Section 5(b)(2).

1 L. Loss, supra note 338 at 246; Rules 433, 434 and 434 a apply specifically only "for the purpose of Section 5(b) (1)".In addition, under the broad definition of "prospectus" in Section 2 (10), a confirmation of a sale by a seller (prior to delivery of the security) by use of the mails or the facilities of interstate commerce, must be preceded or accompanied by a full Section 10(a) prospectus.

Id., at 248.

See Section 2(10)(a). For a detailed examination of this question see 1 L. Loss, supra note 338 at 249-251.

Section 4(3) (A).

Section 4(3). Rule 174, adopted by the Commission in 1964, does allow waiving of the time periods where the issuer has a security listed and registered under the Securities Exchange Act of 1934; in the case of "shelf" registrations; and where registration is effected on Forms S-7, S-8, S-9, S-12 or S-13 (Securities Act Re­lease 4729, cited IV L. Loss, supra note 358 at 2329).

Section 11 (a)(1)-(5), Certain defences, if established, will de­feat such £n action; see Section 11(b)(1)-(3).

Section 11(f).

Section 11(e). For a detailed discussion of this provision see H I L. Loss. Securities Regulation, 1721-1740 (1961) and VI L. Loss, Securities RegurafionT3M2-3856 (1969 Supp.).

IV: 31

389. Section 46(1).

390. Id.

391. Section 12(1) and (2). For a detailed discussion of this pro­vision, see III L. Loss, supra note 388 at 1692-1721 and VI L. Loss, supra note 388 at 3827-3842.

392. Section 17 (a)(1).

393. Section 17 (a)(2). This provision is similar to the criminal liability provision in the Australian companies legislation, viz., Section 47.

394. Section 17(a)(3).

395. Section 17(b).

396. For a detailed examination of these regulatory provisions see 1 L . Loss. supra note 338 at 374-427 and IV L. Loss, supra note 358 at 2414-2459.

397. Heller, supra note 379 at 760. Heller, id. at 776, concluded generally that "... experience teaches that neither the industry nor the Commission particularly would or should tolerate short- form information which omits material and important categoriesof disclosure necessary in the light of the nature of the security and the purpose of the offering. The fact that information is on file concerning companies should not provide a reason for el­iminating elements of information deemed vital by law for disclosure to investors. The essential goal of the securities law - to place in the hands of investors offered securities a compendium of in­formation necessary to enable them to make an adequate security analysis without the necessity of further inquiry or examination or information stored elsewhere - should not be sacrificed on the altar of short-form expediency."

398. Cohen, supra note 335.

399. Id., at 1350-1351; for example, the fact that orders may be accepted before the delivery of the prospectus, it being re­quired only to accompany or precede delivery of the security to the customer after sale (this does not take preliminary pros­pectuses into account); and the fact that the prospectus provisions operate most efficiently where they are least needed, that is, in rights offerings and exchanges of securities (where there is remuneration for soliciting and thus the Section 3(a)(9) exemption is inapplicable.)

IV: 32

400.

401.

402.

403.

404.

405.

406.

407.

Id. at 1355. The latter may have severe repercussions not only for the particular issue involved, but for the registrant itself, and may lead to the use by the Commission of the civil liability provisions if securities have been sold,

Support for this author’s view in this respect is to be found in Sowards, The Wheat Report and Reform of Federal Securities Reg­ulation, 23 Vand. L. Rev. 495 at 499-502(1970).

Schneider, An Administrative Program for Reforming the Federal Securities Laws, 23 Bus. Law. 737 at 738 f1968T (Edited Trans- cript of the Meeting of the Committee on Federal Regulation of Securities of the Section on Corporation, Banking and Business Law of the American Bar Association at the Annual Meeting in Honolulu, Hawaii, August 1967).

Schneider agrees in this respect with Cohen’s ’’all-or-nothing” criticism.

Schneider, supra note 402 at 741.

Id., at 743-744.

Discussion, 23 Bus. Law., note 402 supra, 748 at 749-750.

Disclosure to Investors, A Reappraisal of Federal Administrative Policies under the ’33 and *34 Acts, (1969) (hereinafter referred to as "the Wheat Report”). This report was prepared by a Com­mission Study Committee which was created in 1967 to study the operation of the disclosure provisions of the 1933 and 1934 Acts and the rules and regulations thereunder. Concerned rather with changes which could be effected administratively (that is,through the Commission’s rule-making power) than through statutory amend­ment or codification, the study examined the steps which could be taken to enhance the degree of co-ordination between the disclosure requirements of the two acts; to provide greater certainty and predictability; and to develop a consistent interpretative pattern which would ensure that appropriate disclosures were made prior to the creation of interstate capital markets in the securities of issuers.

Id. at 47, citing New York Stock Exchange estimates of the following increases:

1952 6,490,0001959 8,630,0001962 17,010,0001965 20,120,0001967 25,000,0001968 26,400,000

408.

IV: 33

409. Id., at 47-48.

410. Id., at 60-61. The Report concluded that ’’The time is ripe for a re-examination of disclosure policy, for a careful evaluation of present disclosure tools, and for an inquiry into the pract­icability of achieving greater co-ordination between the ’33 and ’34 Acts”; id., at 64.

411. Id., at 67.

412. The Report in this respect discussed Commission Forms S-l, S-2,S-3, S-8, S-9, S-14, and S-7, indicating in particular that its investigations led it to conclude that what use there had been of the shortened S-7 prospectus was generally successful: id.,at 70-77. Cf. Sowards, supra note 401 at 534-536.

413. Id., at 77-80.

414. Id., at 80-96.

415. Id., at 87. The Report indicated that a prospectus would come within this category if its text (exclusive of the list of under­writers) exceeded 10 pages. This suggestion arose out of a consideration of the merits of "summary" prospectuses, which it­self followed the concern felt by State securities administrators that in the normal underwritten distribution of securities, in­vestors generally received no disclosure document until the final prospectus was mailed to them with confirmations of sale.

416. Id., at 89-95. These were, sales and earnings of separate portions of diversified businesses; details as to the proposed source and application of the funds of the distribution; adjusted earningsof life insurance companies to conform with the practice adopted by other organizations in the business community; and additional information as to the business background and experience of the issuer's management personnel. 417 418 419 420

417. Id., at 95-96. Recently, however, the Commission itself has in­dicated that it may require details of such projections; see also Sowards, supra note 401 at 537-538 for a brief discussion of the arguments for permitting the use of "controlled" projections.

418. Id., at 96-98.

419. Id., at 98-101.

420. Id., at 107-111.

IV: 34

421. Id., at 111-113.

422. Id,, at 113-118. The Report proposed that this be effected through the revision of the existing Rule 460 and the intro­duction of a proposed Rule 15c2-8 under the 1934 act.

423. Id., at 121-124.

424. The Report at page 129 cited the standard of conduct for issuers laid down in the Arvida case (Carl M. Loeb, Rhoads. $ Co., 38S.E.C. 843-848 (1959)).

425. S.E.C. v. Texas Gulph Sulphur Co., 401 F. 2d 833 (C.A. 2, 1968). For detailed examination of the case, and of the problem of insider trading generally, see Chapter 8, infra.

426. The Wheat Report, at 133.

427. Cf. Sowards, supra note 401 at 523.

428. Id., at 139-140.

429. Id., at 140-141.

430. I_d., at 142-143.

431. Id., at 143-145.

432. Id., at 145-146.

433. Id., at 146-148.

434. Id., at 160-163.

435. Id., at 164-166.

436. I_d., at 166-170.

437. Id., at 172-174. For a critical examination of "fungibility", see Samet, The Concept of Fungibility in Securities Laws, 27 Bus, Law. 383 (1972).

438. Id., at 171-172.

439. For a brief discussion of these proposed rules, "The 160 Series", see Sowards, supra note 401 at 507-517.

IV; 35

440. The Wheat Report, at 189-190. Id., at 190-199; ’’ordinary trading” is to he interpreted objectively, and on the basis of the Com­mission’s Rule 154. Factors to be considered are a quantity lim­itation on the number of securities which may be sold, based ona dual test of trading volume and percentage of outstanding sec­urities; the fact that securities may in some circumstances be sold ”on behalf of the same person” (where "person” is limited only to members of a carefully defined family group); a widening of the Rule 154 restriction on solicitations by brokers and the appearances of brokers in the "sheets” and a limitation on the amount of permissable commission charges.

441. Id.,at 199-201. Id., at 201-2; to prevent "rolling distributions,” proposed Rule 16"2Xb) utilising the fungibility concept, prohibits the purchaser from purchasing any additional restricted securities of the same issuer during the holding period.

442. Id., at 202-203. The Rule provides that restricted securities lose that status after 5 years provided that the issuer has had for the last four years gross revenues of at least $250,000 from the conduct of its business in the ordinary course.

443. Id., at 202.

444. The Wheat Report, at 205-206.

445. Id.., at 206; this list would be maintained at the Commission and its principal regional offices. For details as to the pro­posed criterion for inclusion in the list, see id. at 207-215.

446. Id., at 215-217.

447. Id., at 220-226.

448. Id., Appendix VI-1 at p.7; these were, a person who, when the issuer is a corporation, (i) is neither an executive officer nor a director of such corporation; (ii) does not perform the functions of either of those positions; (iii) is not a person owning beneficially, or possessing voting rights in respect of, securities representing in excess of 10% of the voting of such corporation; (iv) is neither the father, mother, child, brother, sister or unseparated spouse of an individual referred to in catergories (i) to (iii) above, or (v) is not a creditor of such corporation whose consent is or may be required to changes in the management of the corporation or other corporate transactions (apart from payment of dividends, increase in or extension of indebtedness, etc.). Id. at 247; the Report was careful to point out that no inference was intended that a person who did possess one of the specified relationships was necessarily to be deemed to be in control.

IV: 36

449.

450.

451.

452.

453.

454.

455.

456.

457.

458.

459.

Id., at 226-244.

The Report also examined the efficiency of the then existing regulation of business combinations (id,, at 251-296); a detailed discussion of this examination is, however, beyond the scope of this study. See, however, Sowards, supra note 401 at 517-522.

The Wheat Report, at 301.

Id., at 303-304.

Id., at 304.

Id., at 304-306.

Id., at 306-307.

Id., at 308-310.

Id., at 310-311.

Gadsby, The Securities Exchange Commission, XI B.C. Ind. § Com. L. Rev. 833 at 845 (1970). For the initial and favourable re- action of the Federal Regulation of Securities Committee of the Section of Corporation, Banking and Business Law of the American Bar Association, see Throop, Federal Regulation of Securities Committee Comments on the Wheat Report, 25 Bus. Law. 39 (1969).

Securities Act of 1933 Release No. 4997. This Release indicated that the rules were designed "to inhibit the creation of public markets in securities of issuers which do not disclose infor­mation to the public in appropriate filings with the Commission" and that they were related to and dependent upon the expanded reporting requirements which were proposed simultaneously: id.at 1. See Holland, Public Sale of Control Stock and Private Investment Stock: The S.E.C.*s Proposed New Rules, 25 Bus. Law1027 (1970) for a generally favourable review of these rules as they were then proposed. See also Chalmers, Grist from Wheat - The New S.E.C. Ground Rules for Venture Capital, 25 Bus. Law. 1001(1970). In February and April, 1970, the Section of Corporation, Banking and Business Law of the American Bar Association called on the Commissioners of the S.E.C. to rapidly implement the pro­posals of the Wheat Report: see 25 Bus. Law.1267 (1970).

460. Securities Act of 1933 Release No. 5087.

IV: 37

461. Halloran, The Public Disposition of Restricted Securities and of Securities Held by Controlling Persons t The Wheat Report,SEC Proposed Rule 144 and the Search for Certainty, 45St. John’s L. Rev.665 at 697 (1971), called for either a major revision of the proposed Rule in order to provide the requisite certainty in its administration, or its abandonment in favour of the more certain concepts of the Wheat Report proposals and the ”160 Series". Morrow, after examining the deficiencies of the proposed Rule 144, concluded that the Wheat Report and its "160 Series" was a far better approach, and called for a revision of the proposed Rule 144 which would meet the objections raised by the Commission; see Morrow, The Investment Letter Dilemma and Proposed Rule 144; A Retreat to Confusion,11 Santa Clara Lawyer, 37 at 52( 19701. See also Posner, Developments in Federal Securities Regulation, 26 Bus. Law.1677 at 1682 (1971) and Clark, SEC Regulation of Resale of Securities by Controlling Persons of Non-Reporting Issuers:The Ghost of Ira Haupt Reads the ’Wheat Report’ and Rule 144, * 462 463 464 465 466 467 468 469 47020 Drake L. Rev. 576 119711.

462. Securities Act of 1933 Release No.5187 (September 15, 1971).

463. Securities Act of 1933 Release 5223.

464. Allen, Dissemination of Information Under the Securities Act of 1935 and Under State Blue Sky Laws - A Shotgun Wedding, 18 Bus. Law. 763 at 764 (1962-63). On blue sky legislation generally,see L. Loss and E. Cowett, Blue Sky Law (1958).

465. Section 301.

466. Section 302(a)(1).

467. In this case excluding certificates of interest or participationin an oil, gas or mining title or lease or in payments out of production under such title or lease; Section 302 (a)(2).

468. Id.

469. Section 302(a)(2)(b). Section 302(c) provides that unless there isa stop order in effect or there are pending proceedings under Section 306 of the Act, a registration statement becomes effective at3.00 p.m. in the afternoon of the second full business day after the filing of the registration statement or the last amendment, or earlier if the administrator allows.

470. See Section 414(g).

471. Section 303(a).

IV: 38

472.

473.

474.

475.

476.

477.

478.

479.

480.

481.

482.

483.

484.

485.

486.

487.

With the exception of delaying amendments.

See Section 303(c).

Section 304(a).

Section 304 (b)(1) to (17).

Section 304(c).

Section 304(d).

Official Code Comment tQ Section 304.

On the California blue sky law generally, see H. Marsh and R. Volk. Practice Under the California Corporate Securities Law of 1968. (1969lT~ On the securities qualification provisons, see id.,Chapter 6.

California Corporate Securities Law of 1968, Section 25111(a).This procedure is available in either issuer or non-issuer transactions.

Illinois Securities Law of 1953, Section 5. A number of conditions must be satisfied before this procedure becomes available. See id., sub-sections (a), (b) and (c).

Section 25112(a).

Section 5B.

Section 25113. This is the same procedure as was applied under the old California Corporate Securities Law.

Section 5C.

Section 5C(1)(a)-(b).

See Levy, Securities Regulation in New York, 35 N.Y. St. B.J. 256 (1963): id., at 261; "Securities registration is woefully in­adequate and often fails to protect the investing public. Except for real estate syndications, new issues can be sold in New York without any review by the State authorities. As the State’s ex­perience with real estate syndications has demonstrated, the new issues seldom provide the information the public needs to evaluate the offering".

IV: 39

488. For details as to the background to the introduction of this legislation, see Public Hearings by the Attorney General of New York State into the Intra-State Offering of Securities (October 30, 1967). On this legislation generally, see Hochman and Abbe, Intra-State Financing Act of 1968 and other New York Blue Sky Laws, Securities Law Review. 755 at 758-760 (1969).

489. Section 3(a) (11).

490. Hochman and Abbe, supra note 488 at 761. Also, of course, in this situation the 1933 Act's Section 3(a)(11) exemption would cease to be available.

491. See Hochman and Abbe, supra note 488 at 765. See also Uhlick, Comments - Blue Sky Laws in the Empire State and the Uniform Securities Act, 22 Syracuse L. Rev. 925 at 943 (1971).

492. See Chapter 5 infra.

493. M. Tatsuta, Securities Regulation in Japan 23-24 (1970).

494. For a description of purchase-underwriting, and the system of underwriting secured, long-term debt securities, see id., at 35-40.

495. Id., at 43. See also id., at 43-44: because of the unitarylegislative system in Japan, this prohibition is not limited, as in the United States, to interstate commerce or the mails, but covers all types of offers or solicitations, including oral offers and advertisements. For another account of the registration process, see Puno, Securities Regulation in Japan and the Philippines: A Comparative Analysis of RegistrationSystems, May 8, 1974 (unpublished thesis in Harvard Law School Library).

496. M. Tatsuta. supra note 493 at 44. Id. \ there are also in Japan similar problems to those encountered in other juris­dictions in respect of doubtful publicity given to an impending issue by, for example, company managements. 497 * *

497. See Securities and Exchange Law. See also Yazawa, A Synopsis ofSecurities Regulations, Past and Future, in Japan 11-12 (un­published, 1973).

IV: 40

498. Securities Exchange Law, Article 4(1). This applies even in the case of a secondary distribution; the registration state­ment is thus not filed by the shareholder, and should the issuer decline to file the required statement, the shareholder is precluded from proceeding with the secondary distribution.

449. Securities Exchange Law, Article 15, para. 2; Registration Rule, Article 9.

500. Id.,Articles 9 and 10(1). For a description of the Ministry's pre-August 1965 practice of reviewing a draft of the regis­tration statement with the issuer prior to its being settled in final form, and the problems which led to the abandonment of the practice, see M. Tatsuta, supra note 493 at 46-47.

501. Securities Exchange Law, Article 8, para. 1. The filing of a voluntary amendment will have the effect of re-commencing that period (Article 8, para.2) but where the Minister orders the filing of an amendment, he has the power to stipulate the date on which the statement will become effective (Article 9, para.2 ; Article 10, para 2; and Article 11).

502. Id., Article 10, para. 1.

503. Securities Exchange Law, Article 15, para. 2.

504. Id.., Article 5,para. 1. See also Registration Rule, Articles9 and 12 and Form II thereunder. For a full list of the required information, see M. Tatsuta, supra note 493 at 51-52.

505. Securities Exchange Law, Article 13, paras. 3 and 4.

506. M. Tatsuta. supra note 493 at 53.

507. Id. at 53-54.

508. Id., at 54. Id.; these documents, usually containing information respecting recent company activities and achievements, are required by Article 281 item 3 of the Commercial Code to be subject to shareholders1approval.

509. For an examination of the requirements in respect of this form of report, see Chapter 7, infra.

510. The advent of this Second Section has resulted in the virtual abolition of the over-the-counter market in Japan. 511

511. See the listing requirements of these three exchanges for details of the different standards required by each of the Sections.

IV: 41

512.

513.

514.

515.

516.

517.

518.

519.

520.

521.

522.

523.

524.

525.

526.

527.

528.

529.

530.

531.

532.

The Securities Act, Com. Act. No.83, as amended, Section 4. Id; where rights are to be issued, registration of the securities is deemed to include registration of the rights to subscribe to such securities.

This body maintains a Register of Securities which is available for public inspection.

The Securities Act, Section 7 (a).

Id.

Id., Section 7(b).

Id., Section 7(c).

Id., Section 9

Id., Section 10.

Id., Section 11.

Id., Section 8.

Id.

Id., Section 12.

SEC, Rules and Regulations Governing Securities Exchanges and their Members. Brokers. Dealers. Salesmen and Customers, 7 (1973).

Section 1196.

Section 1103.

Section 1223.

Section 1232.

S. Robbins, Capital Market in Thailand 194-195 (1970) (hereinafter referred to as "the Robbins Report”).

Id., at 198.

Id., at 31-37.

Id., at 37-39.

IV: 42

533. Id., at 39-41.

534. Id., at 42.

535. Id., at 94. Professor Robbins also recommended the regis­tration of securities traded in the over-the-counter market to ensure that the public received adequate informationon them: id., at 44-45.

536. Id., at 192.

537. Id., at 199-200. This would apply also to a re-distribution of securities effected by a control person.

538. Id., at 288-289: this would include such information as;(a) a description of the company’s business; (b) the organization and financial structure of the issuer; (c) the terms, position, rights, and privileges of the different classes of securities outstanding; (d) the terms and purposes of all public offerings; (e) the names of the directors, officers, underwriters, and principal stockholders, their stock interests in the corporation, and any material contracts with the corporation; (f) bonus and profit-sharing arrangements;(g) management and service contracts; (h) options; (i) fin­ancial statements for the past five years; (j) articles of association and bylaws; and, (k) underwriting agreements in­cluding expenses involved.

539. Id., at 289. Id.;Professor Robbins indicated that ’’This information summarizes or parallels that called for in the Securities Act of 1933 and the Securities Exchange Act of 1934”.

540. Id.

541. The Robbins Report, note 529 supra, at 268.

542. Securities Exchange of Thailand Act, B.E. 2517.

543. This recommendation does, of course, assume that such an actis within Commonwealth power: see Chapter 3 supra.

544. See, e.g., the Canadian provinces, the United States, Malaysia, Singapore and the Philippines. 545

545. See note 532 supra, and accompanying text.

IV: 43

546. See note 178 supra, and accompanying text.

547. See note 407 supra, and following text,

548. See note 238 supra, and following text.

549. The problem of whether the facilities of exchanges should be used at all in connection with new issues, which was the subject of recommendations to the Porter Commission and the Kimber Committee, and was the subject of comments in the Porter Report and the Kelly Report, does not arise directly in Australia.

550. See Chapter 5 infra.

551. See note 541 supra, and accompanying text.

552. See note 151 supra, and accompanying text.

553. See note 221 supra, and accompanying text.

554. See notes 510 - 511 supra, and accompanying text. A somewhatstricter approach to the problem is taken in the Philippines where licences are required to deal in speculative securities and exchanges are prohibited from listing exploration companies unless adequate development work has been carried out: see notes 518 and 524 supra, and accompanying texts.

555. See note 405 supra, and accompanying text.

556. See note 406 supra, and accompanying text.

557. See notes 248-249 supra, and accompanying texts.

558. See notes 275-277 supra, and accompanying texts.

559. Companies Act, New South Wales, Section 374H.

560. These companies would approximate to Cohen’s ’’continuous registrants” and the Kimber Report and Merger Study’s ’’reporting companies".

561. See note 223 supra, and accompanying text.

562. See note 346 supra, and accompanying text.

563. See note 240 supra, and accompanying text.

564. See note 265 supra, and accompanying text.

565. See note 532 supra, and accompanying text.

566. See note 401 supra, and accompanying text.

IV: 44

567. See note 164 supra, and accompanying text.

568. See notes 413-415 supra, and accompanying text.

569. See note 166 supra, and accompanying text.

570. See note 195 supra, and accompanying text.

571. See notes 359-360 supra, and accompanying text.

572. See note 168 supra, and accompanying text. It is unclear whether the Report’s recommendations in this regard were intended to allow the making of unsolicited offers to buy during this period.

573. See note 496 supra, and accompanying text.

574. See note 362 supra, and accompanying text.

575. See note 364 supra, and accompanying text.

576. See note 189 supra, and accompanying text.

577. See note 33 supra, and accompanying text,

578. See note 366 supra, and accompanying text.

579. See note 145 supra, and accompanying text. They were therereferred to as draft or "red herring" prospectuses.

580. See notes 186-188 supra, and accompanying text.

581. See note 368 supra, and accompanying text.

582. See note 497 supra, and accompanying text.

583. See note 168 supra, and accompanying text.

584. See note 190 supra, and accompanying text.

585. See notes 369-373 supra, and accompanying text.

586. See notes 153-155 supra, and accompanying text.

587. See notes 222-224 supra, and accompanying text.

588. See notes 230-233 supra, and accompanying text.

589. See notes 374-379 supra, and accompanying text.

IV: 45

590. In respect of delays with the United States S.E.C., see notes 344-345 supra, and accompanying text.

591. See note 227 supra, and accompanying text.

592. See note 203 supra, and accompanying text.

593. See notes 382-385 supra, and accompanying text.

594. See note 423 supra, and accompanying text.

595. See text immediately following note 523 supra.

596. See note 529 and accompanying text, and text immediatelyfollowing note 537 supra. 597

597. See notes 204-205 supra, and accompanying text. Similar pro­visions as to confirmation are contained in the Quebec Sec­urities Act; see note 214 supra, and accompanying text.

Chapter 5

V: 1

1. Disclosure to Investors - A Reappraisal of Federal Administrative Policies under the *55 and ’34 Acts, 58-59 (1969). This report is hereinafter cited as the "Wheat Report".

2. Id., at 59-61.

3. Id., at 11.

4. Report of the Committee of the Ontario Securities Commission on the Problems of Disclosure Raised for Investors by Business Combinations and Private Placements. (Feb. 1970). This report is hereinafter cited as the ’'Merger Study".

5. Id., at 25-36.

6. For a detailed discussion of the historical background to the creation of stock exchanges see E. Morgan and W. Thomas,The Stock Exchange. Its History and Functions (2d ed. 1969), and G. Cooper and R. Cridlan. Law and Procedure of the Stock Exchange. 1-7 (1971). See also A. Jenkins, The Stock Exchange Story (1973).

7. For an examination of the functions of securities markets, seeG. Cooper and R. Cridlan. supra note 6 at 7-11, and W. Eiteman,C. Dice and D. Eiteman, The Stock Market Chapter 1 (4th ed. 1966). 8 9 10 11 12 * *

8. In some exchanges, particularly in Japan, different sections of trading floors are used to denote the status of particular securities.

9. See D . Butcher, The Early Years of the Sydney Stock Exchange, in The Sydney Stock Exchange Limited Centenary Supplement(1971).

10. This company was incorporated on May 18, 1937.

11. Those of Sydney, Melbourne, Brisbane, Perth, Hobart, Adelaide, Ballarat, Bendigo and Newcastle.

12. Compared with a number of the other jurisdictions examined inthis study, Australia is thus seen to have a large number of stockexchanges for a relatively small population.

V; 2

13. P.J. Rose, Australian Securities Markets 31 (1969), Id.; in the period January to December 1965, off^change sales accounted for 16 per cent of all sales reported to the Melbourne Stock Exchange.

14. Id., at 32. For a brief discussion of commission rates in respect of such transactions, see The Australian Financial Review, Oct. 10, 1972 at 19, cols. 1-2.

15. Id., at 34-35.

16. Id., at 37.

17. See By-Laws, Sydney Stock Exchange Limited, By-law 54.

18. For an interpretation of the term "official meeting" of a stock exchange, appearing in Melbourne’s Regulation 98, (and in Sydney’s By-Law 54) see The Leviathan Case, Attorney-Generalv. Walsh’s Holdings Ltd. and Anon., October 13, 1972.1 CCH Aust. Corporate Affairs Reporter Jf 40-046, at p. 27, 362, where Justice Gowans indicated that, for there to be an official meeting, "... there must be a passing of the property interest by force of a contract being concluded on the trading floor of the Exchange." Whether this interpretation will have the effect of limiting off-'change activities in Melbourne remains to be seen.

19. By-Law 54.

20. P.J. Rose, supra note 13 at 62, 63.

21. Id., at 114, 115.

22. For a detailed discussion of the role of these authorised dealers, see id., Chapter 7. 23 24 25 26 27

23. New South Wales Parliamentary Debates, Mar. 10, 1970,Hansard, p. 4 010.

24. Mar. 17, 1970; Hansard, p. 4362.

25. Id.

26. Id., at 4363.

27. Id.., at 4364. Mr. Freudenstein also gave some details in respect of the provisions relating to Stock Exchange fidelity funds: these will be discussed later in this Chapter.

V: 3

28. Id-, at 4368.

29. Id.

30. Id., at 4369.

31. Id., at 4371.

32. Id.

33. Id. , at 4372. In a statement which successfully avoided most of the substantive issues raised by the legislation, Mr. Mannix said: "If a person buys Poseidon shares and sticks with them, hewill make a quid; but if he buys Tasminex shares and sticks with them, he will lose a quid. Can anyone blame the stock exchange, the broker, or what he has read in the newspapers, whmhe makes a wrong decision?" (Id.)

34. Id., at 4375.

35. Id., at 4379.

36. Mr. Waddy, Aug. 19, 1970: Hansard, p. 5263-4.

37. Mr. McCaw, Hansard, p. 5266.

38. Mr. Waddy, Hansard, p. 5730.

39. Id., at 5731.

40. See Queensland's Securities Industry Act, 1971: Western Australia'sSecurities Industry Act, 1970; and Victoria's Securities Industry Act, 1970.

41. Hansard at 5736-5737.

42. New South Wales Securities Industry Act, Section 6.

43. Id., Section 4(1).

44. Id.

45. New South Wales Securities Industry Act, Section 7.

46. Id., Section 7(a).

V: 4

47. Although the legislation defines "member firm" as a "firm which carries on a business of dealing in securities and is recognized as a member firm by a stock exchange’' (Id,, Section 4(1)), Section 7 uses only the term "members of the body [corporate]". It will be assumed in this study that in Section 7 "member” refers to "member firm", as individual members in partnershipin or employed by member firms would not be in competition with one another for the purposes of the legislation.

48. As at March 31, 1973 these were E.N. Allen; T.O. Barron;J.H. Clack and Co,. ; Frank Cox § co.; N.R.F. Macmillan § Co.;F.S. Scorer § Co.; W.M. Shedden § Son; J.M. Tonkin § Co.;H.H. Walls § Co.; P.C. Wyatt § Co. Committee members of the exchange as at April 19, 1973 were as follows: Chairman, J.G.Alexander; Vice-Chairman, J.M. Tonkin; Secretary, F.S. Scorer Assistant Secretary, W.M. Alexander; Treasurer, J.M. Tonkin Jr Recorder, H.W. Miller. The Stock Exchange of Newcastle Limited was incorporated as a company limited by guarantee on February 7, 1972. The Minister’s approval of the body corporate as a stock exchange was given as early as February 16, 1972; the Corporate Affairs Commission file in respect of the grantingof approval to the Newcastle Stock Exchange is, however, not a matter of public record,

49. New South Wales Securities Industry Act, Section 7(b) (i)-(vi).

50. Hansard, p. 4363.

51. Indeed, the rules of the Sydney Stock Exchange do make specificprovision for each of these situations: see Articles 65(2);57-62, 73, 75 and 78: A.A.S.E. Listing Requirements; By-laws52, 51, 24, 27(6) and Article 85; Memorandum Clause 3(6).

52. Interview with F.S. Scorer, Secretary, Newcastle Stock Exchange, in Newcastle, Apr. 19, 1973.

53. Article 65(2).

54. Articles 57-62; 73, 75 and 78.

55. Article 91.

56. Article 98.

57. Interview with F.S. Scorer, Secretary, Newcastle Stock Exchange, in Newcastle, Apr. 19, 1973.

V: 5

58. This author was informed by the secretary of the Newcastle Stock Exchange that that exchange meets daily, generally between 1.3Q p,m. and 2.00 p.m, in the call room, Howard Smith Building, 14 Watt Street, Newcastle. At that time, the Recorder calls through the official list and members present indicate whether they have buy or sell orders in respect of any particular security. If no member is able to satisfy a buy or sell order held by another member,the latter member apparently contacts his Sydney agent and arranges for the order to be executed by that agent through the Sydney Stock Exchange. This author was informed that no figures for annual turnover are available in respect of the Newcastle Stock Exchange.

59. Section 7(c).

60. New South Wales, Section 8(1) and (2).

61. Li., Section 8(3).

62. New South Wales, Part VII. For parliamentary discussion as to the introduction of these funds, see Hansard,pp. 4366, 4376 and 4380.

63. New South Wales, Section 48.

64. Interview with F.S. Scorer, Secretary, Newcastle Stock Exchange, in Newcastle, Apr. 19, 1973. Article 41 of that Exchange's Articles of Association provides only that "The Exchange shall maintain a Fidelity Guarantee Fund in accordance with the Securities Industry Act."

65. New South Wales Securities Industry Act, Section 55.

66. Id. Section 56.

67. See generally Id.,Sections 58-69.

68. As to which see Australian Stock Exchange Journal, Vol. 1.No. 10, (Dec. 1972) at p.45.

69. Report No. 1, Oct. 25, 1972.

70. Sunday Telegraph, Feb. 25, 1973 at 80, cols. 1-4;The Australian, Feb. 27, 1973 at 12, cols. 1-2.

71. The Economist, Apr. 7, 1973 at 109-110.

72. The Australian Financial Review, Mar. 23, 1972, at 28, cols. 1-6.

73. The Australian Financial Review, Feb. 29, 1972, at 30, cols. 4-6. For a detailed discussion of the NASDAQ system see notes 288-291 infra and accompanying text.

74. R, Knauss, Securities Regulation in Great Britain: A Comparisonwith United States Practice. 5 Vand. J. TransnTtl Law 49 at 51f19711.

75. For a discussion of the regulatory role performed by the Stock Exchange, see id., at 110-116.

V: 6

76. For a brief background to this question, see, P. Ferris. The City. 40-46 (4th imp. 1961).

77. Interview with representatives of Cazenove § Co., in London, July 6, 1971.

78. Companies Act, Section 38 (5) (b).

79. Id., Section 39 (1) (b).

80. L.C.B. Gower. The Principles of Modem Company Law. 299, notes 82, 83 (3d. ed. 1969).

81. Prevention of Fraud (Investments) Act, 1958, Section 15. "Recognized stock exchange" is defined in Section 26(1) of the Act as "the Stock Exchange, London, or a body of persons declared by an order of the Board of Trade for the time being in force to be recognized stock exchange for the purposesof this act."

82. Id., Section 15 (2). Id.: any order by which a body ceasesto be a recognized stock exchange does not take effect until three months after the date of the making of the order.

83. Id.., Section 15(3).

84. Id., Section 15(4).

85. See Department of Trade and Industry. Particulars of Dealersin Securities and of Unit Trusts. 1971.

86. Knauss, supra note 74 at 108.

87. Id.. , citing testimony given by the Board before the Jenkins Committee.

88. Report of the Company Law Committee, Cmnd, 1749, para. 256 (1962), hereinafter referred to as the "Jenkins Report".

V; 7

89.

90.

91.

92.

93.

94.

95.

96.

97.

98.

99.

100. 101. 102.103.

104.

105.

Id. ?paras. 256 and 257.

Prospectus of the Federation of Stock Exchanges in Great Britain and Ireland, (i)•

Id., at (ii).

Id., at 2 .

Id., Appendix C.

Id., Appendix D. These related to, inter alia, requirements Tor membership; partnerships of member firms; member firms accounts and capital requirements; member firms's companies; and dealing arrangements.

Detailed Scheme for the Amalgamation of the Federated Stock Exchanges into a Single Organization, November 18, 1971.For a favourable initial review of the proposal see The Economist, Nov. 20, 1971, at 106, col. 3 and 107, col. 1.

Id., at 3.

Id., at 8: these Units would be London, Belfast, Irish,Midlands and Western, Northern, Provincial, and Scottish.

Id., at 7.

Id., at 10-14.

Id., at 13.

Id., at 15-18.

Id., at 19-20.

Id., at 23-24.

Id., at 25-26.

For details as to the historical development of the Canadian exchanges, see P. Williamson, Securities Regulation in Canada 281-283 (Supp. 1966). Re the Montreal and Canadian exchanges, see Brief to the Royal Commission on Banking and Finance, submitted by the Montreal Stock Exchange August 1962, and Brief to the Royal Commission on Banking and Finance,submitted by The Toronto Stock Exchange (August 1962) at 1-2. This study will not deal with the Canadian O.T.C. market, for the reasons detailed below in relation to the United States.

V:

106. See Brief to the Royal Commission on Banking and Finance, cited note 105 supra at 6.

107. Id., at 8; This was, it was argued, because the existence oT numerous trading places leads, inter alia, to thinner markets, greater transaction costs and increased costs of electronic equipment.

108. Id., at 8-9

109. Hereinafter cited as the "Porter Report".

110. Id., at 337-338.

111. Id., at 339-343.

112. Id., at 344.

113. See, for example, The Australian, July 18, 1973 at 8, col. 9; The Sun-Herald, July 7, 1974 at 95, col. 3.

114. See Part XII of this Chapter.

115. The Porter Report, at 344.

116. Id.

117. Id., at 347.

118. Report of the Royal Commission to Investigate Trading in the Shares of Windfall Oils and Mines Limited, 98-99 (Sept.1965), hereinafter referred to as the "Kelly Report."

119. Id., at 100: These included the failure of exchange rule-making to keep pace with the ingenuity of those concerned to exploit the deficiencies in those rules; the widespread departure from strict observance of the spirit of the rules; and lack of effective surveillance to ensure adherence to the rules.

120. Id., at 101.

121. For a pre-Kelly Report call for the Ontario Securities Commission to be given direct responsibility for the control and supervision of the Toronto Stock Exchange, see Baillie, The Protectionof the Investor in Ontario, 8 Can J. Pub. Admin. 413 (1965).For a critical reply to Baillie, see Cleland, Correspondence,The Protection of the Investor in Ontario,Can. J. Publ Admin. 261-266, Id., at 266; "It is probably appropriate and

V; 9

121 contd.

advantageous that the Ontario Securities Commission is required by law to satisfy itself that Exchange regulations are demonstrably in the public interest. Yet, where the long- range best interests of the Toronto Stock Exchange are as obviously and closely identified, as they are today, with those of the public, the ability of the Exchange to act with the relative freedom of a private club should be retained”. It seems to this author inconceivable that as late as 1965 a call should be made for the retention of the ’'private club” status of a stock exchange.

122. Securities Act, 1966. C.142, Section 139.

123. This author’s view in this respect is supported by P. Williamson,supra note 105 at 279: ”It may be that too much has been leftto the securities industry in Canada: not just because theindustry is not capable of self-regulation (although this may be true to some extent) but because the organizations within the industry are forced into an awkward dilemma. This is particularly true of the stock exchanges, and specifically of the Toronto Stock Exchange, which usually sets the standards for the others. The primary function of a stock exchange is to furnish a market place, to provide facilities for buyers and sellers to come together quickly and easily. To a large extent, regulation is the antithesis of this function.”

124. Story of Indian Stock Exchanges, The Stock Exchange, Bombay,3-5. Id. at 15; in the period 1863-65, in Bombay, there were 131 new company flotations comprising 25 banks, 69 financial associations, 7 land reclamation companies and 30 miscellaneous companies.

125. Stock Exchanges in India: Their Organization and Operations.The Stock Exchange. Bombay 2 (1968). Stock exchanges were established in Bombay in 1875; Calcutta in 1908 (incorporated in 1923); Madras in 1937 (re-organized in 1957); Ahmedabad in 1894; Delhi in 1947; Hyderabad in 1943; Indore (Madya Pradesh) in 1930 and Bangalore in 1957. For details as to the establish­ment of these exchanges, and the rival exchanges which appeared from time to time, see Story of Indian Stock Exchanges.note 124 supra.

126. For details as to the growth of these markets, see Profile of the Indian Stock Market. The Stock Exchange, Bombay (1968): and Profile of Stock Exchange Activity in India. The Stock Exchange, Bombay (1970).

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127. Act XXVIII of 1865 was passed to deal with the share "boom"of 1860-1865 described briefly above: see The Stock Marketin India, The Stock Exchange, Bombay (1970)

128. The problems in respect of forward markets, which were not resolved by this legislation, were attacked in the Bombay Forward Contracts Control Act, 1947 which, although it did not extend to stocks and shares as a result of representations made by the Bombay Stock Exchange, provided a valuable precedentfor the subsequent Union legislation: The Stock Market in India,note 127 supra,See also Ghia et.al., Organized Markets 112 (1962).

129. The Stock Market in India, note 127 supra.

130. Views of the Stock Exchange. Bombay, on the Report of Dr. P.J. Thomas on "The Regulation of the Stock Market in India"(August 1948). The Government received reports from two departmental committees before any further substantial action was taken.

131. 3 B. Shiva Rao. The Framing of India's Constitution - Select Documents, 269, 287, 665 (1967).

132. Government of India, Ministry of Finance, Economic Affairs Department Resolution. New Delhi, June 23, 1951.

133. Report of the Committee on Proposed legislation for the Regulation of Stock Exchanges and Contracts in Securities,July 14, 1951 (hereinafter referred to as the "Gorwala Report" after its Chairman, Mr. A.D. Gorwala).

134. Id. , at 1.135. Id. , at 2-3

136. Id., at 4.

137. Id.

138. Id. , at 5.

139. Id., at 6.

140. Id., at 11-12

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141. The Stock Market in India, note 127 supra; the initial bill,based upon the Gorwala Report, was presented in the Lok Sabha on December 24, 1954: on November 28, 1955 and December 5,1955, the Lok Sabha and the Rajya Sabha referred the bill to a Joint Committee which presented its own report on February 29,1956. The initial bill, as amended by the Joint Committee, was passed, again with some amendments, by the Lok Sabha on July 16, 1956 and the Rajya Sabha on August 6, 1956. It was assented to by the President and published in the Gazette of India on September 4, 1956, and by a notice published in the Gazette on February 16,1957, the Act came into force on February 20th, 1957.

142. The act defines "stock exchange" as "any body of individuals, whether incorporated or not, constituted for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities" (Section 2(j)).

143. Section 19(1).

144. Section 3(1).

145. Section 3(2).

146. Section 3(2). Section 4(5) prohibits the amendment of anyrules of a recognized stock exchange relating to any of these matters except with the approval of the Central Government.

146. Section 4(2) provides that these may include, inter alia, conditions relating to qualifications for membership; the entering into and enforcement of contracts between members; the representation of the Central Government on the exchanges; and the maintenance and audit of members’ accounts.

148. Section 4(1) (a).

149. Section 4(1) (b): the Central Government in this situationmakes its decision in respect of other conditions after consultations with the particular exchange's governing body and having regard to the area served by the exchange, its standing, and the nature of the securities with which it deals.

150. Section 4(c). Applications for recognition cannot be refusedwithout a hearing being afforded to the exchange: Section4(4).

151. Section 5.

152. Sections 6(1) and 7.

153. Section 6(2); Rules 14 and 15,

154. Section 6(3) (a),

155. Section 6(3) (b).

156. See note 146 supra and accompanying text.

157. Section 8(1) and (2). Similar power exists (section 10)to make or amend by-laws. There is power in the recognized exchanges to make rules restricting voting rights, regulating the use of proxies etc., and to make by-laws for the regulation and control of contracts, provided that in both instances the approval of the Central Government is obtained: See Sections 7 A and 9 and Rule 18.

V: 12

158. Section 11(1). Where this step is taken, the government may appoint other persons to perform the powers and duties of the governing body.

159. Section 12. Id.; there can be no extension of the suspension without the governing body of the exchange concerned being given the opportunity of being heard.

160. Bombay, Calcutta, Madras, Ahmedabad, Delhi, Hyderabad,Indore and Bangalore. Bombay was granted permanent recognition while each of the other exchanges was granted recognition for a period of five years.

161. For the relevant statistics, asatDecember 31, 1970, see Present Position of the Stock Market in India, The Stock Exchange, Bombay, (1971).

162. For an excellent assessment of the then present and future role of the stock exchanges in India, see K. Ishwarlal, Stock Exchanges Play a Vital Role - Watchdog of Investors* Interest, Commerce 77-78 (Annual Number, Dec. 1966). For a general description of the role of the stock exchange in a mixed economy such as that of India, see A.K. Mukherjee, The Role of the Stock Exchange in the Development of Indian Economy, The Management Accountant 264-65 (May, 1969). For a series of recommend­ations for improvements in the Indian exchanges, made in 1962, a number of which have since that time been implemented, seeK. Doodha, Stock Exchanges in a Developing Economy 150-60 (1962). For a brief account of the present position of the stock exchanges in India, see Joy Savarkar, Changing Colour in India, Far Eastern Economic Review, June 3, 1972, p.41.

V; 13

163.

164.

165.

166.

167.

168.

169

170.

171.

172.

173.

174.

175.

176.

177.

178.

179.

180.

K,S. Sharma, The Institutional Structure of Capital Market in India 255^56 (1969).

G. Ferris. A Study of the Securities Market in Singapore and Malaysia (1970), hereinafter cited as the "Ferris Report.”

Id., at 1-2.

For detailed recommendations in this respect, see id., at 10-14.

Id., at 4-10.

Id., at 15-18.

Id., at 15.

Id., at 24.

Id., at 23.

No. 61 of 1970. This act was passed by Parliament on December 30, 1970, and assented to by the President on January 25, 1971.

Sections 3-5.

See Far Eastern Economic Review, Nov. 25, 1972 at 48.

See Far Eastern Economic Review. May 20, 1972, at 31.

Malaysia, Act No. 112 of 1973; Singapore. Act No. 17 of 1973. For an early discussion of the provisions of the two bills, see Tan PhengTheng, The Securities Industry Bills of Malaysia anil Singapore, Malaysian Law Journal. XVI-XVIII (February. 1973).

Section 98.

See The Straits Times, May 15, 1973 at 1, col. 3.

It appears that despite the registration provisions, the Government of Singapore has emphasised the self-regulatory role to be played by the Stock Exchange - See 2 The Singapore Stock Exchange Journal 10-11 (August, 1974).

First Report of the Companies Law Revision Committee - The Protection of Investors. 41 (June 24, 1971) (hereinafter cited as the "Investor Protection Report"). For details as to the background to the haphazard market activity of the 1960’s and early 1970’s, see Higgins, A History of the Crisis in the Hong Kong Stock Market and the Development of Hong Kong Securities Regulation Law 1965-1974, May 1, 1974 (unpublished thesis in Harvard Law School Library).

V: 14

181. Chapter 32,

182. These were the Hong Kong, Kara. Ngan, Far Eastern and Kowloon Exchanges.

183. Companies (Amendment) Ordinance No,24 of 1970, published in Legal Supplement No, 1 to Government Gazette No, 9 of February 27, 1970.

184. Legal Supplement No. 2 to the Government Gazette No. 3 Friday, January 22, 1971.

185. For an additional indication of the conditions which the Government required to be met, see Letter from J.J, Cowperthwaite (Financial Secretary) to The Chairman, the Hong Kong Stock Exchange Limited, October 1, 1970.

186. Investor Protection Report, at 90-91.

187. Investor Protection Report, at 93.

188. Securities Ordinance, No. 12 of 1974, Section 20.

189. M . , Section 22.

190. Td. , Section 23.

191. As well as that giving to the Commissioner of Securities the power to apply to a magistrate for an order closing premises in which an offence against Section 20 has been committed; see Section 24.

192. Securities Ordinance, Section 25.

193. Id., Section 26(1). See also Section 27, which gives the Commissioner power to order the closure of exchanges in the event of an emergency such as a natural disaster or on economic or financial crisis.

194. Securities Ordinance, Section 29.

195. Id., Part IV. For details of the Compensation Fund created by the Ordinance, see id., Part X.

196. Id., Section 37(3) and (7).

V: 15

197. Tracy and MacChesney, The Securities Exchange Act of 1954,52 Mich. L. Rev. 1025 at 1033 (1933-34). For a description of a number of these practices, see id,, at 1027*1033;and G. Leffler and L. Farwell, The' Stock Market 445^461 (3d ed. 1963].

198. Report of Governor Hughes’ Committee on Speculation in Securities and Commodities, June 7, 1909,

199. Report of the House Committee to Investigate the Concentration of Control of Money and Credit, by Mr. Pujo (1913).

200. Stock Market Control. Twentieth Century Fund, Inc., (1934)=(the "Filene Report”), ===

201. The Roper Report, New York Times, Jan. 28, 1934,

202. Tracy and MacChesney, supra note 197, note 22. For a briefdiscussion of the background to the introduction of the legislation, see Jennings, Self-Regulation in the Securities industry : The Role of the Securities and Exchange Commission,29 Law § Contemp. Prob. 663 (1964).

203. ’'Facility" is defined in Section 3(a) (2) as, (when used with respect to an exchange) including "its premises, tangible or intangible property whether on the premises or not, any right to the use of such premises or property or any service thereof for the purpose of effecting or reporting a transaction on an exchange (including, among other things, any systemof communication to or from the exchange, by ticker or otherwise, maintained by or with the consent of the exchange), and any right of the exchange to the use of any property or service."This definition does not, however, include private connections between members and non-members; Silver v. New York Stock Exchange, 196 F. Supp. 209, 221, n. 6 (S.D.N.Y. 1961), reversed on other grounds, 302 F. 2d 714 (2d Cir. 1962), reversed on other grounds, 373 U.S. 341 (1963). 204

204. "Exchange" is defined in Section 3(a) (1) as meaning "any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market facilities maintained by such exchange."

V: 16

205. Section 5,

206. V. L. Loss, Securities Regulation 3128 (1969 Supp.);these are the American Stock Exchange, the Boston, Cincinnati, Detroit, Midwest, New York, Pacific Coast, Philadelphia - Baltimore - Washington, Pittsburgh, Salt Lake and Spokane Stock Exchanges, the Chicago Board of Trade and the National Stock Exchange in New York City, In respect of the Midwest Stock Exchange, see 4 SEC, Report of Special Study of Securities Markets, H.R. Doc. No, 96, 88th Cong., 1st Sess. (1963), c.12D, and Halsted, Rules and Regulations of the Midwest Stock Exchange |1961] U. 111. L. Forum 257. In respect of the Pacific Coast Stock' Exchange, see 4 Special Study, supra, c. 12E, and Pacific Coast Stock Exchange, Constitution and Rules (June, 1971).

207. V. L. Loss, supra note 206 at 3128: these are the Honolulu,International (formerly Colorado Springs) and Richmond Stock Exchanges.

208. Section 6(a)(1) - (4).

209. 196 F. Supp. 209 (S.D.N.Y. 1961), reversed on other grounds,302 F. 2d 714 (2d Cir. 1962), reversed on other grounds,373 U.S. 341 (1963).

210 196 F. Supp. 209 at 221 (S.D.N.Y. 1961).

211. Id.

212. Securities Exchange Act, Section 6(b). The United States Court of Appeals, Second Circuit, in Silver v. New York Stock Exchange,302 F. 2d 714 at 719 (1962), adopted the Statement of Judge Clark in Baird v. Franklin, 141 F. 2d 238, 244 (2d Cir.),cert, denied, 323 U.S. 737, 65 S. Ct. 38, 89 L. Ed. 591 (1944):’’There can be no doubt that § 6(b) places a duty upon the Stock Exchange to enforce the rules and regulations prescribed by that section. Any other construction would render the provision meaningless." The court went on to state that "The structure of the Securities Exchange Act of 1934 and its legislative history disclose that the Act was designed to require that the Securities and Exchange Commission share with the exchanges themselves the governance of those matters which the Act regulates. The Constitution and rules of the New York Stock Exchange are filed with the Commission. It is reasonably to be presumed that those regulations have the approval of the Commission since it has not taken the action which it is empowered by the statute to take to bring about their amendment. The Exchange is required by virtue of the statute to enforce its rules."

V: 17

213. Id.., Section 6(c),

214. Id,, Section 6(d),

215. Rule 6A-1.

216. Rule 6A-2.

217. Rule 6A-3. Included amongst this material is a report detailing the securities sold during each calendar month, which must be filed within 15 days of the end of each calendar month.

218. The term ’'member” is broadly defined in Section 3(a) (3)of the act as "any person who is permitted either to effect transactions on the exchange without the services of another person acting as broker, or to make use of the facilities of an exchange for transactions thereon without payment of a commission or fee or with the payment of a commission or fee which is less than that charged the general public, and includes any firm transacting a business as broker or dealer of which a member is a partner, and any partner of such firm.” For a discussion of the various forms of membership of United States exchanges see II L. Loss, Securities Regulation 1172, n.8, (1961) and V L. Loss, supra note 206 at 3122-3136.

219. Section 19(a) (1).

220. V L. Loss, supra note 206 at 3130-3131. Id..; the Commission'sactions were affirmed by the Ninth Circuit Court of Appeals, which held, inter alia, that it was not necessary, when makinga withdrawal order, to establish that there had been a monetary loss to investors : San Francisco Mining Exchange v. SEC, 378F. 2d 162 at 167 (9th Cir. 1967).

221. Section 19(a) (3).

222. See note 218 supra.

223. II L. Loss, supra note 218 at 1172.

224. V L. Loss, supra note 206 at 3131. Id*; generally, suchpersons also operate in the United States over-the-counter market, in which case they are required to be registered with the Commission, 225

225. II L. Loss, supra note 218 at 1173,

226. For details as to these proceedings see id., 1173*1175 and V L, Loss, supra note 206 at 3136-3138.

227. II L. Loss, supra note 218 at 1175-1178 and V L, Loss, supra note 206 at 3138-3143.

228. Section 19(b).

229. Id.

230. II L. Loss, supra note 218 at 1182. For details as to the manner in which the New York and American Stock Exchanges have attempted to maintain their self-regulatory powers, and as to the influence of the Commission’s Special Study of the Securities Markets, see id. 1180-1183 and V L. Loss, supra note 206 at 3143-3149.

231. 373 U.S. 341, 10 L. Ed. 2d 389, 83 S. Ct. 1246.

232. Id., at 352.

233. V L. Loss supra note 206 at 3142 citing 4 SEC Report of Special Study of Securities Markets, H.R. Doc. No. 95, * 234 235 236 237 238 239 240 241 242 243 24488th Cong., 1st Sess. (1963) ix.

234. See Chapter 9, infra.

V; 18

235. V L. Loss, supra note 206 at 3152.

236. Rule 17(a) - 8(d).

237. Note 209 supra.

238. V L. Loss, supra note 206 at 3152.

239. Jennings, supra note 202 at 678.

240. Id., at 679-681, citing the Supreme Courts statement in the Silver case that "Some form of review of exchange self-policing, whether by administrative agency or by the courts, is therefore not at all inconpatible with the fulfilment of the aims ofthe Securities Exchange Act,"

241. Id., at 682-684.

242. Id., at 684.

243. Jennings, supra note 202 at 687,

244. For information on this question, see V L, Loss, supra note 206 at 3153-3186 and sources cited therein. See also Jennings, supra note 202.

V: 19

245.

246

247.

248.

249.

250.

251.

252.

253.

254.

255.

256.

257.

258.

259.

260.

261.

262.

263.

264.

265.

Gates, The Securities Investor Protection Act of 1970;A New Federal Role in Investor Protection. 4 Securities Law Review 706, 707-'8' 119721. ~

The amount of such funds held by member firms of the New York Stock Exchange totalled approximately three billion dollars in 1970; id., at 708.

Id., at 709. See also II L. Loss, supra note 218 at 1187.

Gates, supra note 245 at 711.

Rules 8c - 1 and 15c2 - 1. See II L. Loss supra note 218 at 1192 - 1200 and V L. Loss, supra note 206 at 3202-3205.

See note 249 supra.

Gates, supra note 245 at 715.

As to which see Chapter 6 infra.

For details as to these incidents see Gates, supra note 245 at 722-723 and V L. Loss, supra note 206 at 3197-3201.

Hearings on H.R. 13308, H.R. 17585, H.R. 18081, H.R.18109 and H.R. 18458. Before the Subcommittee on Commerce and Finance of the House Committee on Interstate and Foreign Commerce, 91st Cong. 2d Sess. (1970).

Id., at 150-151.

Id., at 152.

Id., at 154 and 157.

Id., at 182-196.

Id., at 188.

Id., at 199, 211.

Id., at 202.

Id., at 211.

Id., at 217.

Id., at 220.

Id., at 229.

V; 20

266.

267

268.

269.

270.

271.

272.

273.

274.

275.

276.

277.

278.

279.

280.

Id., at 231.

3 at 239-252, Plans Randolph Reinisch, President, National Shareholders Association; 253-307, Richard Ney, Ney § Associates; 308-314, Robert L. Augenblick, President, Investment Company Institute.,

The Commission cited the survey carried out by the Midwest Service Corporation which found that 94.5% of cash and margin accounts would be covered by the $50,000 figure; id., at 340.

Id., at 328.

Id., at 329.

Id.

Id., at 336.

Id., at 344-352,

Id., at 353-4, He stated specifically: MI believe thatthe draft bill presented to-day will maintain public confidence in the securities markets and provide vital protection to customers of the securities industry."Id at 359-382.

Id., at 386-387.

Id., at 390.

Id., at 393-394.

Pub. L. No. 91-598, (Dec. 30, 1970). The bill was passed by the House on December 1, 1970 and by the Senate (with amendments) on December 10, 1970, It then went to a Conference Committee which issued a report (H. Rept. No. 91-1788) on December 18, 1970. The Conference version of the bill was passed by the House on December 21, 1970 and by the Senate on December 22,1970 (SEC 36th Annual Report 1970, at 3). For a detailed examination of the legislation, see Greenberg. An Analysis of the Securities Investor Protection Act of 1970,16 Howard L.J. 907 (1971^

This liquidation procedure is a modified version of the Bankruptcy ActTs Section 6Oestockbroker bankruptcy procedure. see Gates, supra note 245 at 730-731,

V: 21

281. Securities Exchange Act, Section 11: see II LJ^oss supranote 218 at 1201-1223 and V L. Loss supra note 206 at 3206-3253,

282. Rule 10b-2: see II L, Loss supra note 218 at 1235-1239 andV L. Loss, supra note 206 at 3256-3259.

283. See II L. Loss, supra note 218 at 1224-1235 and V L. Loss supra note 206 at 3253-3256,

284. See II L. Loss, supra note 218 at 1239-1276 and V L. Loss, supra note 206 at 3260-3312.

285. For information as to the operations of the market, however, see II L. Loss, supra note 218, Chapter 8 and V L. Loss,supra note 206 at 3313-3525; see also G, Leffler and R. Farwell, supra note 197, Chapter 24, and Booz7~Allen § Hamilton, Inc., Over-the-Counter Markets Study (1966). 286 287 288 289 290 291

286. See V L. Loss supra note 206 at 3343-3347 and sources there cited.

287. See id., 3347; see also 3 Securities L. Rev, xii, note 7 (19717.

288. ’’Registered representatives" are defined in Section 1 of Article XV of the NASD By-Laws as:

1. every officer of a member;2. every partner of a member;3. every employee of a member who is employed

in the managing, supervision, solicitation, trading, handling or sale of listed or unlisted securities;

4. every employee engaged in the solicitation ofsubscriptions to investment advisory or to investment management services furnished on a fee basis;

5. one to whom has been delegated general supervisionover foreign business. For further details as to the qualifications needed for registration as a registered representative see NASD Manual.

289. See NASD Manual.

290. Speech of President Macklin to ASEF, September 9, 1971, at 6~7.

291. Id., at 7-8.

V: 22

292.

293.

294.

295.

296.

297.

298.

299.

300.

301.

302

303

304.

305.

306.

307.

308.

309.

310.

311.

W, Martin, The Securities Markets, 1, submitted to the Hoard ofGovemors of the New York Stock Exchange,August 5, 1971 (hereinafter referred to as the "Martin Report").

Id., at 1-2

Id., at 3.

Id., at 5,

Id., at 5-6.

Id., at 6.

Id., at 6-10. Id., at 10-12; he also made specific recommendations in respect of member firms and the transfer of the shares of the exchange.

The Economist, June 10, 1972, at 61, col. 3.

The Martin Report, at 12-13.

Id. at

Id., at 13-14.

Id., at 14-16.

Id., at 16.

Id., at 17. For an examination of the impact of institutional investors on the market, see West, Institutional Trading and the Changing Stock Market. 27 Financial Analysts Journal 17 (May-June, 1971).

The Martin Report, at 17-18.

Id., at 18-19.

Id., at 19-20,

Id., at 20-21.

Id., at 21.

Id., at 21-23. For an examination of the constitutional and policy implications of such a proposal, see Steadman,The Certificateless Society and the Constitution, 46 St. JohnTs L. Rev, 36 (1971),

312. The Martin Report, at 23.

V: 23

313. Id.., at 24 ; "In the future, modem communications will permitaccess to an exchange market for securities regardless of geographical location. Access to the communication system will become synonymous with access to the Exchange. NASDAQ suggests the possibilities. It challenges the New York Stock Exchange to improve on what has gone before,"

314. See Folk, Introductory Survey, 3 Securities L. Rev.ix, at lv, note 41 (1971), citing Wall Street Journal, August 6,1971, at p.l, col, 6, and editorials in the Wall Street Journal, August 6, 1971, and New York Times, August 9, 1971.

315. Folk,, Restructuring the Securities Markets - The MartinReport : A Critique, 57 Va. L. Rev. 1315 f19711.

316. Id., at 1325.

317. Id., at 1333-1347.

318. Id., at 1351-1354.

319. Id., at 1355-6.

320. Id., at 1355.

321. Id., at 1359-1362.

322. Id., at 1365 : he suggested that a study be undertaken, through the SEC, of the "mingling of money management and brokerage in the N.Y.S.E. and all brokerage firms."

323. Id., at 1366-1371.

324. Id., at 1371-1373.

325. Id., at 1373-1374.

326. id., at 1373.

327. Id., at 1374-1375.

328. Statement of the American Stock Exchange Inc,, submitted to the Securities and Exchange Commission, 4 (October,1971), hereinafter referred to as ’’the Amex Statement.”Id., at 3-4 : the Amex Statement saw as the major defects in the then current exchange markets the inequality of regulation; the lack of information as to which exchange has the best market for a particular security; the absence of a central co-ordinating agency; the confusion in respect of the exchanges’ anti-trust liability; and the access problems caused by differing time zones.

V: 24

329, Id., at 6-7

330. Id., at 7-8; id,, at 8; it rejected the suggestion that the SEC should actually administer the system.

331. Id., at 8,

332, Id. : The Amex Statement indicated that if this concept were adopted, the NASD and all registered broker-dealers (including non-exchange members) would be represented, and that the industry-wide self-regulatory organization "would not only have a broad enough base to deal effectively with problems affecting all segments of the securities industry, but would also be able to develop standards applicable to all broker-dealers on such important matters as requirements for entry into the business, financial responsibility, and procedures in disciplinary matters."

333. Id. > at 9-12.

334. Id. j at 12-13.

335. Id. > at 13-14.

336. Id. » at 14.

337. Id. 9 at 15.

338. Id. 9 at 16.

339. Statement of the Securities and Exchange Commission on the Future Structure of the Securities Markets,(Feb. 2, 1972]in * 244 Securities L. Rev. 473 (1972).

340. Id., at 4/6-484. Id., at 477 : the Commission also noted its satisfaction with- the manner in which NASDAQ had been operating.See also Feuerstein, Toward a National System of Securities Exchanges, 28 Financial Analysts Journal 28 [May-June 1972) , and for an examination of the possible inclusion of the third and fourth markets, see Feuerstein, Toward a National System of Securities Exchanges ; The Third and Fourth Markets, Financial Analysts Journal 57 (July-August. 1972). See also- Black,Toward a Fully Automatic Exchange, 27 Financial Analysts Journal 29 (July-August 1971) and 27 Financial Analysts Journal24 (November-December 1971); Bleakley, Is NASDAQ Really the Answer? The Institutional Investor. (July 1971); Mendelson, Nostalgia vsT The Computer ; The Issue of Stock Market Reform, Wharton Quarterly (Fall 1971) cited in 4 Securities L. Rev. 505 (1972),

V: 25

341. Securities and Exchange Commission, Policy Statement on the Structure of a Central Market System (Mar. 29, 19731.

342. Id,,

343. Securities Industry Study Report, Subcommittee on Securities of the Senate Committee on Banking, Housing and Urban Affairs, (S. Doc. No. 93-13, 93d Cong,, 1st Sess. 1973).

344. National Securities Market System Act of 1974; see 2CCH Fed. Sec. L. Rep.. Special Report No. 536, May 30, 1974.

345. SEC Statement on Future Structure of Securities Markets, note 339 supra at 493-498.

346. Id.-, at 497. Id..: although the Commission stated that itwould regard "predominant" as meaning more than half, it indicated that it would seek the advice of the self-regulatory bodies and other interested persons and that the question should receive the attention of Congress. Id., at 500-503 : Commissioner Owens dissented on the question of institutional membership.

347. See CCH Fed. Sec. L. Rep., Special Report No. 484, June 20, 1973.

348. Makoto Yazawa, The Legal Structure for Corporate Enterprise: Shareholder-Management Relations under Japanese Law, inLaw in Japan - The Legal Order in a Changing Society 507, 544 (A. von Mehren, ed. 1963).

349. See Chapter 6, infra.

350. Those of Tokyo, Osaka, Nagoya, Kyoto, Fukuoka, Hiroshima, Niigata and Sapporo. For an examination of the operations of the Tokyo Stock Exchange, see T. Adams and I. Hoshii,A Financial History of the New Japan, 179-194 (1972). 351 * * * * * * * *

351. Securities Exchange Law, Article 81(2). Article 82: theapplication must contain information as to title, locationof office and securities market and names or titles of officersand members, and be accompanied by the articles ofassociation, business regulations, entrustment contractregulations and such other documents as are prescribed byMinistry of Finance Ordinance. Also, licences as securitiesexchange will be granted only to securities companies;Article 81(1).

V: 26352. Article 83(1)(1),

353. Article 83(1)(2).

354. Article 83(1) (3).

355. Article 83(2)(1). There is power in the Minister of Finance, if he finds that a securities exchange, at the time when the licence for incorporation was granted, came within any of the provisions of Article 83(2), to cancel the licence after giving the exchange notice and opportunity to be heard (Article 85).

356. Article 83(2) (2).

357. Article 83(2) (3).

358. Article 83(2)(4).

359 Article 90.

360. M. Tatsuta, Securities Regulation in Japan 81 (1970). 361 362 363 364 365 366 367 368 369 370 371 * *

361. Article 85-2.

362. Article 156.

363. Article 154.

364. Article 155. M. Tatsuta, supra note 360 at 82, note 8, points out that as a result of a report by the Securities Counselling Commission on July 10, 1967 entitled "On the Improvement of Facilities for Stock Trading", a number of management reforms were carried out by licensed exchanges.

365. Article 86(1).

366. Article 86(2).

367. Article 87.

368. Article 191.

369. Tokyo Stock Exchange. History, Organization. Operation. 10 Tokyo Stock Exchange (August/ 1970)

370. Article 97.

371. Article 98. If these provisions are not properly enforced,the Minister may move to revoke or suspend the licence of thatexchange.

V: 27

372. Articles 100-106,

373. Article 110; see M, Tatsuta, supra note 360 at 84-85,

374. Articles 82(2), 85(2) (1) and 108; see M, Tatsuta,supra note 360 at 86-87,

375. Sections 16, 17.

376. Securities and Exchange Commission, SEC Rules and Regulations Governing Securities Exchanges and Their Members, Brokers, Dealers, Salesmen and Customers"

377. Thai Finance: A Leap Into the 70 *s, The Investor, 1013 at1019 (December, 1969J.

378. S. Robbins, A Capital Market in Thailand 323-325 (Dec. 1970), (hereinafter cited as the "Robbins Report").

379. Id., at 290.

380. Id., at 253.

381. Id., at 256.

382. Id., at 281-282.

383. Guidelines for The Securities Exchange Formation Committee,Working Group on Capital Market Development, Bank of Thailand,(Oct. 19, 1970).

384. Securities Exchange Formation Committee, Minutes of Meeting * 385 386 387 388 * * 391 392No. 1., Dec. 4, 1970 at the Industrial Finance Corporation of Thailand.

385. Securities Exchange of Thailand Act, B.E. 2517, Sections 5 and 9. For a recent account of the move to create the new exchange,see Far Eastern Economic Review, Nov. 8, 1974, at 65.

386. Securities. Exchange of Thailand Act, Section 11.

387. Id., Section 18.

388. Id., Section 32.

389 Id.

390 Securities Exchange of Thailand Act, Section 35.

391. Id.

392. Id.

Chapter 6

VI: 1

1. E. Morgan and W. Thomas. The Stock Exchange. Its History and Functions 23 (2d ed. 19691.

2. Id., at 24.

3. Id. Id., at 26-7; this act was extended in 1700 for a further seven years, but was allowed to lapse in 1707.

4. See, in this respect, E. Morgan and W. Thomas, supra note 1, Chapters 3, 4, 9, 10, 14 and 16.

5. For a detailed examination of this question, see G. Cooper andR. Cridlan. Law and Procedure of the Stock Exchange. 102-105 (1971). For a recent description of the operation of the jobbing system, see Knauss, Securities Regulation in the United Kingdom: A Comparison with United States Practice,5 Vand. Jnl. Transn'tl. Law 47 at 99-104.

6. The Stock Exchange of Melbourne Limited. Its History and Development. The Stock Exchange of Melbourne. Limited.

7. Id.

8. Hall, The Stock Exchange of Melbourne and the Victorian Economy 1862-1900 (1968).

9. Id., at 11.

10. Id., at 46.

11. Id., at 191-192.

12. Tomlinson, A Short History of Stock Exchanges in Western Australia, The Stock Exchange of Perth Official Record,(May-June 1967).

13. The Hobart Stock Exchange, being notes supplied to this author by the Secretary/Manager of the Hobart Stock Exchange by letter dated April 30, 1973. 14

14. See Hall, supra note 8.

VI: 2

15. The Sydney Stock Exchange Limited, Memorandum and Articles of Association, By-Laws and Regulations, Article 65(1).

16. Id., Article 65(2). The Exchange defines '’member” as "a member o¥ the Exchange” (Article 1) and "member firm” as "the partner­ship constituted by a member carrying on business with another member and/or a non-member partner or in the case of a member carrying on business as a sole trader such member” (Article 1).

17. Article 65(3), (4) and (5).

18. Article 66(4).

19. Articles 69, 69A, and 88.

20. Article 70.

21. Article 73.

22. Articles 75 and 76.

23. Article 89.

24. Article 89(1)(a). All member firms are required to promptly notify the Committee if their liquid capital is at any time less than this minimum amount; Article 89(1) (c). In addition, the firm's auditor must report that at the date to which the Balance Sheet of the firm is made up, the liquid capital as disclosed therein is not less than the prescribed minimum amount; Article 89(6)(b). Also, the Exchange Committee may authorise the Exchange Accountant to conduct a random inspection of any member firm to determine whether any oneor more of the provisions of Article 89 is being complied with; Article 89(10). "Aggregate indebtedness" is defined in Article 89(2)(a) as "the total liabilities of a member firm calculated according to the provisions of the Fourth Schedule but excluding the following:(i) Money borrowed on securities or other assets owned by a member or any of the partners of a member firm but only to the extent that the money borrowed does not exceed the market value from time to time of such securities or other assets.(ii) Amounts due to or received from clients and held in Trust Bank Accounts pursuant to Article 95."

25. Article 89(1)(b).

26. See, for example, The Australian Financial Review, Apr.27, 1973 at 18, cols. 3-6.

27. New South Wales, Securities Industry Act, Part IV.

28. New South Wales Parliamentary Debates, March 10, 1970, at 4011.

29. New South Wales Parliamentary Debates, March 17, 1970, at 4304.

30. Id.

31. Id.

32. New South Wales Parliamentary Debates, March 17, 1970,at4365.

VI: 3

33. Id., at 4370.

34. Id., at 4377.

35. Id., at 4387.

36. New South Wales Parliamentary Debates, August 19, 1970, at 5265.

37. New South Wales Parliamentary Debates, September 9, 1970, at 5735.

38. New South Wales Parliamentary Debates, September 16, 1970, at 5974-76.

39. Id., at 5978-80.

40. Securities Industry Act, Section 4(1).

41. Id.

42. Other than an "exempt agreement", as to which see note 45infra and accompanying text.

43. Securities Industry Act, Section 4(1).

44. But excluding investment companies.

45. Securities Industry Act, Section 4(1).

46. Id.

47. Id-

48. Id.

49. Id.

50. Id.

51. New South Wales, Securities Industry Act, Section 10.

52. Id.., Section 11.

53. Id., Section 12(a) and (b).

54. New South Wales Securities Industry Regulations, Second Schedule, Form 2.

55. New South Wales Securities Industry Act, Section 13(1).

56. Id., Section 13(2).

57. Id., Section 13(3). Section 20 provides that any person who is aggrieved by such a decision may within 30 days appeal, by way of re-hearing, to the District Court.

58. Id.., Section 14(a) (i).

59. Id., Section 14(a)(ii).

60. Id., Section 14(b).

61. Id., Section 16(1). The Section also provides (Section 16(1A)) that the regulations may prescribe conditions or restrictions applicable to and in respect of a specified class of licence which relate to the holding of a policy of indemnity insurance in a specified amount, or the terms upon which specified services will be rendered.

62. Id., Section 17(1).

63. Id., Section 18(1).

VI: 4

VI: 5

64. Of which body this author was a member during the period 1972-73.

65. These policies are detailed in the Commission’s paper Policies .Applied in the Administration of the Licensing Provisionsof the Securities Industry Act, dated August 4, 1972, (herein - after referred to as "CAC Licensing Provisions Paper”).

66. CAC Licensing Provisions Paper at 2.

67. Id.

68. CAC Licensing Provisions Paper at 3. The Commission has, however, insisted that there be no exemption from the capital requirement, and that there be no use of the discretionary power available under Article 89(2)(c).

69. CAC Licensing Provisions Paper at 4.

70. Id.

71. Id.

72. CAC Licensing Provisions Paper at 5. Individuals are required, however, to be able to demonstrate solvency in their private situation.

73. Id.

74. CAC Licensing Provisions Paper at 5-6. A partner in a memberfirm has the condition imposed that during the currency ofthe licence he will not, without the consent of the Commission, deal in securities otherwise than as a partner of a specified firm.

75. Id. at 7.

76. Id.

77. The Commission was in August, 1972, still enquiring from theNewcastle Stock Exchange Limited the extent to which that body took into account experience in the securities industry in considering applications for membership: id*, at 9.

78. Id. at 8.

79. Id.

80. Id.

81. CAC Licensing Provisions Paper at 9.

82. Id.

83. CAC Licensing Provisions Paper at 6.

84. CAC Licensing Provisions Paper at 9-10.

85. New South Wales, Securities Industry Act, Section 13.

86. Id., Section 16.

87. Id., Section 18.

88. Id., Section 20.

89. Id., Section 15.

90. CAC Licensing Provisions Paper at 11.

91. New South Wales Securities Industry Regulations, Form 6.

92. New South Wales Securities Industry Act, Section 19(1).

93. Id., Section 19(2).

94. Id., Section 20(1).

95. Id., Sections 20A-20G.

96. Id., Sections 20H-20L. These sections contain an important provision (Section 20K) prohibiting dealers dealing as principal in securities with any person who is not the holder of a dealer's licence without first informing that person that he is acting in the transaction as principal and notas agent.

97. Id., Sections 21-38, and 39-45.

VI: 6

VI: 7

98.

99.

100.

101.

102.

103.

104.

105.

106.

107.

108.

In respect of this difficult conflict of interest problem, see Hewson v. Sydney Stock Exchange Ltd., 87 W.N. Pt.l (N.S.W.)422 at 425 (1967), where Street J. stated:’’The primary function of a sharebroker is to advise clients and to act on their behalf in the purchase and sale of shares.He occupies a position which inposes on him important obligations toward his client. This is recognized by the stock exchange itself, within whose articles and by-laws are provisions directed towards requiring proper standards of integrity to be observed by brokers. A fundamental principle of commercial morality will be gravely compromised if brokers are permitted to enter the market and to trade not for their clients but in competition with them.”

6 and 7 Eliz. 2, ch.45.

Id., Section

Id., Section

Id., Section

Id., Section

1(1) (a).

K D (b).

26(1).

3(1) and (2).

Id., Section 4(1) and (2). There is power in the Board to waive this requirement; see sub-sections (4) and (5).

Or any person employed by or associated with such persons for the purpose of their business.

Prevention of Fraud (Investments) Act, 1958, Section 5(1) and(2). Id., subsection (2): the Board may revoke a principal’s licence at any time if the licencee is not carrying on the business of dealing in securities in Great Britain.

Id., Section 6(1)(a). This tribunal consists of a chairman and one other person (being lawyers) appointed by the Lord Chancellor and one person (being experienced in matters of finance or accountancy) appointed by the Treasury;Section 6(2). It has wide powers of investigation, may by summons require persons to attend to give evidence or produce documents, and may take evidence on oath.

Id., Section 6(1)(b).

VI: 8

109. For this author’s detailed recommendations in this area, see Chapter 9, infra.

110. Prevention of Fraud (Investments) Act, 1958, Section 7.

111. Id., Section 9.

112. Id., Section 2(1)(a).

113. Id.., Section 2(1) (b).

114. Id., Section 2(l)(c).

115. Id., Section 2(2) (a).

116. Id.., Section 2(2) (b).

117. Id., Section 2(2) (d).

118. Id., Section 2(2).

119. Id.., Section 16(1) (a) (i).

120. Id., Section 16(1)(a)(ii). Section 16(2) provides that these particular ways include, inter alia, issuing any prospectus within the meaning of the Companies Act, 1948, and inviting persons to subscribe for securities, or to purchase securities on the first sale thereof.

121. Id., Section 16(1)(b)(i), (ii) and (iii).

122. Id., Section 16(1)(b)(iv).

123. Id., Section 16(1)(b)(v).

124. Id., Section 16(3)(a) and (b).

125. Dean of the Vanderbilt University School of Law.

126. See Knauss, supra note 5.

127. Id., at 107.

128. Id.

VI: 9

129.

130.

131.

132.

133.

134.

135.

136.

137.

138.

139.

140.

141.

142.

143.

Knauss, supra note 5 at 109. Id.; he found also that, as a matter of practice, the Bank of England advised the Board on all applications for exemptions.

Id., at 110.

Id., at 109.

Id., at 110. The self-regulatory role of industry bodies such as the Issuing Houses Association and the Accepting Houses Association, is of less importance than that of the Stock Exchange, and will not be examined in this study.

Rules and Regulations of the Stock Exchange; Rule 31 (1)(a) and (b).

Id., Rule 33(1) (c).

Id., Rule 31(2)(a).

Id., Rule 31(4).

Id., Rule 32. Every election is for a period of one year only; Rule 21(1).

Id., Rule 34. Membership applicants must have earlier obtained iP’seat" or "nomination” (see Rules 25 and 26). Knauss, supra note 5 at 111, indicates that the price of this nomination has ranged from 2,000 pounds to 20 pounds in the last few years.

Id., Rule 79a (1).

Id., Rule 79a(2). The particular details which are required o? partnerships, unlimited or limited corporate members, are detailed in Rules 79a(5), (6) and (7) respectively.

Id., Rule 79a(13).

Id., Rule 79a(15).

Id., Rule 79a(17).

VI: 10

144. Id.., Rule 79a(ll): these are defined by Rule 79a(8) to includeinter alia, certain moneys receivable in the ordinary course of stock exchange business; payments for or towards the purchase of securities for which a quotation is pending;Treasury Bills, National Development Bonds, etc.; and such other assets of the firm as may be agreed with the Council.

145. Id., Rule 79a(ll): these are defined by Rule 79A(9) to include,inter alia, certain amounts due to bankers; certain secured liabilities; the aggregate amount due to certain overseas organizations; a provision for taxation; the amount of accumulated losses of any service or other company owned or controlled by the firm; and the amount of any foreseeable losses from bad or doubtful debts or from any other causes.

146. Id., Rule 79a(ll). Id.; special provision is made that in the case of any jobber firm or in the case of a broker firm engaged on arbitrage business on joint account or conducting option business as option dealers, the margin shall not be less than 15,000 pounds, and in the case of a member, with Council’s permission, continuing to carry on business as a sole trader, the margin shall not be less than 10,000 pounds.

147. Id., Rule 79a(ll).

148. Id., Rule 79a(12).

149. Knauss, supra note 5 at 116.

150. Id., at 113.

151. Report of the Company Law Committee. June 1962, Cmnd. 1749, para.253 (hereinafter cited as ’’the Jenkins Report").

152. Id., paras. 256 and 257.

153. Id., para.258.

154. Id.

155. Id.

156. The Jenkins Report, para.259.

157. Id., para.262.

Id., para.263.158.

11VI:

159. Report of the Committee to Study the Requirements and Sources of Capital and the Implications of Non-Resident Capital for the Canadian Securities Industry. 21 fMav. 19701. Hereinafter referred to as nthe Moore Report".

160. Brief to the Royal Commission on Banking and Finance, submitted by the Toronto Stock Exchange (August 1962) at 34.

161. Id., at 34-37.

162. Brief to the Royal Commission on Banking and Finance, submitted August 1962 by the Montreal Stock Exchange and the Canadian Stock Exchange.

163. Report of the Royal Commission on Banking and Finance .1964 (hereinafter referred to as "the Porter Report".

164. Id., at 331.

165. Id., at 339.

166. Id.

167. For a strong pre-1966 plea for the complete segregation of the functions of the broker and the dealer, see Report of the Royal Commission to Investigate Trading in the Shares of Windfall = Oils and Mines Limited. 109 (September 1965).

168. P. Williamson. Securities Regulation in Canada 16 (Supp. 1966).

169. For a brief discussion of the basis of the categorization, seeP. Williamson. Securities Regulation in Canada 48 (1960).

170. C.116, S.l 1968-9, proclaimed in force as at July 2, 1970.

VI: 12

171. ’’Dealer" is defined as ”a person or company who trades insecurities in the capacity of principal or agent”; Section 1 (1)5. The Regulations to the legislation do provide, however, that every registrant who is a dealer is to be classified into one or more of the following sub-categories: (a) broker - thatis, a person or company who trades as an agent and who is a member of a recognized stock exchange in Ontario; (b) broker- dealer - a person or company that is a member of the Broker- Dealers’ Association of Ontario and which trades as agent or principal; (c) investment dealer - a person or company that is a member of the Ontario District of the Investment Dealers’ Association of Canada and which trades as agent or principal; (d) mutual fund dealer; (e) scholarship plan dealer; (f) secur­ities dealer - a person or company registered for trading in securities which trades as agent or principal; and (g) security issuer - a person or company registered for trading in securities which engages in the distribution to the public of securities exclusively of his or its own issue: Regulations,Section 2(1) 1-7. The Regulations specifically provide that registrations granted under the old system of categorization prior to July 2, 1970, shall continue subject to the regulations; Section 2(4). The Regulations also provide that persons or companies granted registration in the categories of broker-dealer, investment dealer or securities dealer are deemed to have been granted registration as an underwriter: Regulation 2(3).

172. "Salesman" is defined as "an individual who is employed by a dealer for the purpose of making trades in securities on behalf of such dealer"; section 1(1)21. An educational qualification for securities salesmen was the subject of anO.S.C. Policy Statement; see 1 CCH Can.Sec.L.Rep.. at p.1117.

VI: 13

173. "Adviser” is defined as ”a person or company engaging in or holding itself out as engaging in the business of advising others as to the advisability of investing in or buying or selling securities"; Section 1(1)1. The Regulations to the Act provide that all "advisers" are to be classified into one of two categories: (a) investment counsel - that is, a person or company which is engaged in the business of advising others as to the advisability of investing in or purchasing or selling specific securities, or which is primarily engaged in giving continuous advice as to the investment of funds on the basisof the individual needs of each client; and (b) securities advisers - that is, a person or company which engages in the business of advising others, either directly or through publications or writings, as to the advisability of investing in or purchasing or selling specific securities: Regulation 2 (2) 1-2.Exemption from registration as an adviser is granted to (a) banks, loan, trust and insurance companies; (b) lawyers, accountants, engineers and teachers when performance of counselling or advisory services is solely incidental to the practice of their profession; (c) persons or companies registered for trading in securities, or partners, officers or employees thereof when performance of such services is solely incidental to the business; (d) publishers of any bona fide newspaper, news magazine or business or financial publication of general and regular paid circulation distributed only to subscribers thereto for value or to purchasers thereof, who give advice as an adviser only through such publication and have no interest either directly or indirectly in any of the securities upon which the advice is given and receive no commission or other consideration for giving the advice and who give the advice as solely incidental to the conduct of their business as publishers, and(e) such other persons or companies as are designated by regulation: (Section 18).

174. The Securities Act, Section 6(1)(a).

175.

176.

177.

178.

179.

Id., Section 6(1)(b) and (c).

Id., Section 6 (l)(d).

Id., Section 6(1) (e).

Id., Section 7 (1).

Id., Section 7 (2).

VI: 14

180.

181.

182.

183.

184.

185.

186.

187.

188.

189.

190.

191.

192.

193.

194.

Id., Section 7 (3).

Criticism of the vagueness of the grounds for granting or rejecting an application was expressed in the McRuer Report (Ch.126, p .2079) and a call was there made for the appropriate standards to be set out in the Act.

Regulation

Regulation

Regulation

Regulation

Regulation

Regulation

Regulation

Regulation

Regulation

Regulation

Regulation

6a.

6 (1) (a).

6 (1) (b).

6 (1) (c).

6 ( 2) .

6(3) (a).

6(3) (b).

6(3) (c).

6(4).

6(5) and (6).

4.

Ontario Securities Act, Section 8(1). There is also a statutory provision for interim suspension where the delay involved in granting a full hearing would, in the opinion of the Commission, be contrary to the public interest (Section 8(2)). The registrant must be notified of the interim suspension, and a hearing must be held within fifteen days of the date of the suspension. The McRuer Report was again critical of the vagueness of this statutory standard, on the same basis as it was critical of the registration and cancellation standard (Chapter 126, p.2079).

Ontario Securities Act, Section 29(1).

[1951] 4 D.L.R. 117 (Qnt.C.A.), cited 1 CCH Can.Sec.L.Rep, at p.1016.

195.

VI: 15

196. Adelaide Securities Limited (O.S.C. Bulletin March, 1968), cited id.

197. Southern Brokerage and Holding Co. Inc., (O.S.C. Bulletin, February 1967; June 1967), cited 1 CCH Can.Sec.L.Rep, at p.1017.

198. Re the Securities Act and Morton [1946] O.W.N. 554 (Qnt.C.A.), cited id.

199. Quebec Securities Act, Section 15.

200. Id., Section 22.

201. Id., Section 24.

202. Regulations, Section 2.

203. Quebec Securities Act, Section 31.

204. Story of Indian Stock Exchanges. 9 The Stock Exchange. Bombay (1968).

205. See id.

206. Views of The Stock Exchange. Bombay, on The Report ofDr. P.J. Thomas on "The Regulation of the Stock Market in Indian (August, 1948).

207. Id., at 32.

208. Report of the Committee on Proposed Legislation for the Regulation of Stock Exchanges and Contracts in Securities (July 16, 1951).

209. Id., at 10.

210. Id., at 11.

211. Section 17(1). The interest of the trade or the public interestare the determining factors for the government in this respect;Section 17(2).

212. Rule 8(2)(a)-(c).

VI: 16

213. Rule 8(3).

214. Rule 15(1) and (2).

215. Which includes the power to enquire into the affairs of any of the members of a stock exchange in relation to the stock exchange.

216. For the purposes of this section of this study, it is desirable to treat Malaysia and Singapore together, as it was only in May of 1973 that the Stock Exchange of Malaysia and Singapore, which had previously served as the exchange for both countries, was split into two separate entities.

217. G. Ferris. A Study of the Securities Market in Singapore and Malaysia 1 (1970), hereinafter referred to as ’’the Ferris Report” .

218. Id.

219. Id., at 2 .

220. Id., at 2 .

221. Id., at 3.

222. Id., at 6-7.

223. Id., at 7-8.

224. Id., at 10.

225. Id., at 20-21.

226. Id., at 11.

227. Ferris also made a recommendation in respect of the enforcement of a minimum cover for time bargains (id., at 11-12) but, as this is essentially a matter of stock exchange procedure, it is not strictly relevant to this study.

228. Id., at 12-13.

VI: 17

229. Which stood at $1,000,000, and provided for $100,000 cover for a defaulting partnership or unlimited liability corporation and $50,000 for a defaulting proprietorship.

230. The Ferris Report, note 217 supra at 13-14.

231. Id., at 14.

232. Id.

233. Id. Id.; he also wisely suggested that it would be appropriate to have a 'grandfather' clause in this respect.

234. Singapore, Act No.17 of 1973, assented to on March 28, 1973;Malaysia, Act No.112 of 1973, assented to on June 15, 1973.

235. Malaysia, Sections 23 and 24; Singapore, Sections 23 and 24.

236. See 2 The Singapore Stock Exchange Journal 6 (August, 1974).See also P. Pillai, Current Developments in Corporate and Securities Law in Singapore and Malaysia. 16 Malaya L.Rev. * 237 238 239 240 241 242 243 *107 (1974).

237. First Report of the Companies Law Revision Committee - The Protection of Investors 41 (June 24, 1971), hereinafter cited as the "Investor Protection Report".

238. Conditions for Recognition of a Stock Exchange under sub­section (1) of Section Ik of Chapter 32 (annexure to letter of Financial Secretary dated October 1, 1970).

239. Investor Protection Report, note 237 supra at 72.

240. Id.

241. Investor Protection Report, note 237 supra at 76.

242. Id., at 77. The Conduct of Business Rules referred to here are the United Kingdom Licensed Dealers (Conduct of Business) Rules, 1960, which the Committee recommended be enacted, with appropriate modifications, in Hong Kong.

243. Id.., at 81.

Id., at 101-106.244.

VI: 18

245. The term "investment adviser" was to be defined substantiallyin accordance with the definition contained in Section 202(a)(11) of the United States Investment Advisers Act of 1940, and would include "portfolio manager".

246. Investor Protection Report, note 237 supra at 106-7.

247. Id., at 108. In this case, a reduction of 501 in the fee for an investment adviser’s licence was proposed by the Committee.

248. Securities Ordinance, 1974, Part VI.

249. Id., Section 53.

250. Id., Section 55.

251. Id., Section 56.

252. Id., Section 58.

253. Id., Section 59.

254. Id., Sections 60 and 61.

255. For a relatively recent and a comprehensive examination of the operations of brokers and dealers within the United States, see SEC Study of Unsafe and Unsound Practices of Brokers andDealers (Dec. 1971).

256. Section 15.

257. ’Broker’ is defined as "any person engaged in the business of effecting transactions in securities for the account of others, but does not include a bank" (Section 3(a)(4)). 258 * * * * * * * *

258. 'Dealer’ is defined as "any person engaged in the business ofbuying and selling securities for his own account, through abroker or otherwise, but does not include a bank, or anyperson insofar as he buys or sells securities for his ownaccount, either individually or in some fiduciary capacity, butnot as a part of a regular business" (Section 3(a)(5). For adetailed discussion of the definitions of ’broker’ and’dealer’, see II L.Loss, Securities Regulation , 1295-1299,(1961) and V L.Loss. Securities Regulation. 3355-3357 (1969).

VI: 19

259. Section 15(a)(1).

260. Id.

261. Rule 15a-1.

262. Rule 15a-2.

263. Rule 15a-3. For details of particular instances of the application of the registration and exemption provisions, see 2 CCH Fed.Sec.L.Rep. 7/ 25009. For a brief examination of the exemption provisions, see II L.Loss supra note 258 at 1299-1301, and V L.Loss supra note 258 at 3357-3359.

264. Section 15(b) 1. This is form BD, which requires the supplying of information relating to, inter alia, name and address of proprietors, partners, etc.; name and organization of business; history of securities business associations of proprietors, partners, etc.; control of other broker-dealers or investment advisers and the nature of any other business to be conducted:See II L.Loss supra note 258 at 1290-1291 and V L.Loss supra note 258 at 3350-3351.

265. Rule 15b 1-2.

266. Rule 15b 1-5.

267. Rule 15b 1-2(a): id., any securities which such broker or dealerowns or in which he~~holds an interest are required to be listed in a separate schedule and, where a ready market exists for them, valued at the market price with an indication of the market on which the valuation is made.

268. Rule 15b 1-2: id.; where the broker or dealer is a sole proprietorship7 ~his present assets are required to be included in the calculation of his net worth, aggregate indebtedness and net capital in detraining his compliance with his net capital requirements under the applicable capital rule. 269

269. Rule 15b l-2(c) (l)-(3). Id., Rule 15b l-2(e)(2); provision is made for the Commission to grant exemption from the provisions of the rule, conditionally or unconditionally, where it deems such action necessary or appropriate in the public interest or for the protection of investors.

VI: 20

270. See II L.Loss supra note 258 at 1294 and V L.Loss supra note 258 at 3355.

271. Securities Exchange Act, Section 15(b)(2): see Ren. ?/ 25025.

2 CCH Fed.Sec.L.

272. Securities Exchange Act, Section 15(b)(3): see Rep. ?/ 25,033.

2 CCH Fed.Sec.L.

273. Securities Exchange Act, Section 15(b)(4): see Rep. V 25,041.

2 CCH Fed.Sec.L.

274. Section 15b5 (A) .

275. Section 15b5 (B).

276. Section 15b5 (C).

277. Section 15b5 (D).

278. Section 15b5 (E).

279. Section 15b5 (F),

280. For details as to particular examples of these controls, see 2 CCH Fed.Sec.L.Rep. 9 / 25,061.

disciplinary

281. Section 15(b)(6): the Commission is required to consider whether the actions taken in these respects are necessary or appropriate in the public interest or for the protection of investors. Also, appropriate notice and the opportunity for a hearing must be given.

282. Id. See Rule 15b6-l.

283. Section 15(b)(7).

284. Section 15(b)(8).

285. Id.

286. Rule 15b8-l.

VI: 21

287. Defined as "any partner, officer, director or branch manager of a nonmember broker or dealer (or any person occupying a similar status or performing similar functions), or any natural person directly or indirectlycontrolling or controlled by such nonmember broker or dealer (other than employees whose functions are clerical or ministerial) and any nonmember broker or dealer conducting business as a sole proprietor": Rule 15b8-l(c)(2).

288. Any part of which activities is in sales, trading, research or investment advice, advertising, public relations, hiring or recruitment of salesmen, or underwriting or private placements.

289. Rule 15b8-l(a)(1)(ii)(a)(1)-(3).

290. Rule 15b8-l(b).

291. Section 15(b)(ID).

292. Section 15c(c)(1) and (2). See 2 CCH Fed.Sec.L.Rep. ?/ 25,101 and ?/ 25,106.

293. Section 15(c)(3): id.; such rules and regulations are torequire the maintenance of reserves with respect to customers’ deposits or credit balances, as determined by such rules and regulations. The Commission also has power in respect of the financial position of broker-dealers who transact business through stock exchange members by virtue of Section 8 (b) of the Securities Exchange Act. Because of the limited scopeof this power, however, major attention is concentrated upon section 15(c)(3). 294 295 296 * * * *

294. See Securities Exchange Act Release No.10525, Nov.29, 1973; T ~CCH Fed.Sec.L.Rep. 97 25,126.

295. Rule 15c3-l, 2 CCH Fed.Sec.L.Rep. ?/ 25,126.

296. Support for the adoption of a single net capital rule has alsobeen recently urged by the House Subcommittee on Commerceand Finance: Report of the Subcommittee on Commerce andFinance of the Committee on Interstate and Foreign Commerce.House of Representatives. 30-31 (August 23, 1972).

VI: 22

297. Section 17(a).

298. Rule 17a-3(a)(1)-(2). For the exemptions from the requirements of this provision, see Rule 17a-3(b).

299. Rule 17a-4.

300. Rule 17a-5(a)(2). Reports already filed with a nationalsecurities exchange or a state agency may be filed with the Commission: Rule 17a-5(c)(l).

301.

302.

303.

304.

305.

306.

307.

308.

309.

Rule 17a-5 (b)(2).

Rule 17a-5(b)(1).

Id.

Rule 17a-5 (b)(4).

Rule 17a-10(a).

Rule 17a-10(b).

Rule 17a-10(c).

Rule 17a-13(a)(1)-(3) and (d).

Rule 17a-13(b).

310. National Association of Securities Dealers, Reprint of the Manual, January 1, 1973. By-Laws, Article 1. 311

311. These requirements are set against the background of the general NASD standards relating to, inter alia, an applicant actually working in any branch of the investment banking or securities business within the United States (By-laws, Article 1, Section 1) and certain disqualifying conditions (By-laws, Article 1, Section 2).

VI: 23

312. These are persons who are actively engaged in the management of a member’s investment banking or securities business, including supervision, solicitation, conduct of business or the training of persons associated with a member for any of these functions, and include sole proprietors, officers, partners, managers of offices of supervisory jurisdiction and directors of corporations (Schedule C 1(1)(a)).

313. These are employees, including assistant officers other than principals, who are engaged in the investment banking or securities business for a member, including the functions of supervision, solicitation or conduct of business in securities or who are engaged in the training of persons associated with a member for any of these functions (Schedule C II (l)(a)).

314. Schedule C I (1) and II (1). Exemptions are granted to persons associated with a member whose functions are (i) solely and exclusively clerical or ministerial; (ii) related solely and exclusively to the member’s need for nominal corporate officers or for capital participation only, as in the case of limited partners; (iii) related solely and exclusively to(a) transactions on a national securities exchange and who are registered with such exchange; or (b) transactions in exempted securities; or (c) transactions in commodities (Schedule C III).

315. Schedule C IV (1).

316. Sections 15A, 6 (c) and 19(b).

317. December 10, 1971: See Senate Subcommittee. Securities IndustryStudy Report, 25.

318. Id., at 25-26.

319. S.Rep. No.1775, 76th Cong. 3d Sess. (1940) cited II L.Loss. supra, note 258 at 1394.

320. Section 203(a).

321. Section 202(a)(11).

322. Rule 202-1 as proposed in Release No.1A-353, December 18, 1972 -4 CCH Fed.Sec.L.Rep. ?/ 56,155A

VI: 24

323.

324.

325.

326.

327.

328.

329.

330.

331.

332.

333.

334.

335.

336.

337.

338.

Release No.lA-359, effective February 12, 1973; cited 4 CCH Fed.Sec.L.Rep. ?/ 56,155B

As to which see II L.Loss. supra note 258 at 1397 and V L.Loss supra note 258 at 3512.

As to which, see II L.Loss supra note 258 at 1398, and V L.Loss supra note 258 at 3513.

This provision was the subject of a very early Commission Release: No.lA-2, October 28, 1940, cited 4 CCH Fed.Sec.L.Rep.9/ 56,156.

Section 203(b)(1).

Section 203(b)(2).

Section 203(b)(3).

Section 203(c)(1)(A)-(F). Details of the applicant’s then current advisory status must also be furnished; Section 203(c)(2).

Section 203(c).

Section 203(e) (l)-(6).

Section 203(f).

Section 203(g) and Rule 203(2).

Section 203(i).

Section 204.

Section 204.

Rule 204-2(a).

VI: 25

339. Rule 204-2(a). There are certain exceptions to this requirement: id. See id. for the definition of "advisory-rep re sent at ive" which includes, inter alia, partners, officers or directors of the investment adviser and employees who make any recommendation, participate in the determination of which recommendation shall be made, or whose functions or duties relate to the determination of which recommendation shall be made. See also proposed new sub-rules 13 and 14:4 CCH Fed.Sec.L.Rep. ?/ 56,322.

340. Rule 204-2(b).

341. Rule 204-2(c).

342. Section 205.

343. Section 206.

344. See Chapter 2, supra.

345. See Chapter 5, supra.

346. See id. For a brief but interesting description of theactivities of securities companies, see T. Adams and I. Hoshii,A Financial History of the New Japan 165-78 (1972) .

347. Securities and Exchange Law, Article 2(9).

348. The term "securities business" is itself widely defined in the legislation as:a business of a person other than a bank, trust coup any or any other financial institution as may be prescribed by Cabinet Order who conducts any such act as enumerated in the following:(1) To buy and sell securities;(2) To act as broker, agent or proxy with respect to the buying

and selling of securities;(3) To act as broker, agent or proxy with respect to entrusting

of buying or selling transactions on a securities market (including a similar securities market located in a foreign country...);

(4) To underwrite securities;(5) To effect offering-sale of securities;(6) To handle invitation of subscription or offering sale of

securities; Article 2(8).

VI: 26

349. Securities and Exchange Law, Article 28(2).

350. That is, acting on the sale of securities as an intermediary, broker or agent, or the commissioning of a sale order to be executed on a securities exchange in such capacities;M. Tatsuta, Securities Regulation in Japan 68 (1970).

351. That is, underwriting and secondary distribution of securities M. Tatsuta, supra note 350 at 6 8.

352. Id.; that is, the public offering or secondary distribution o? securities.

353. M. Tatsuta. supra note 350 at 69. Id. at 76: securitiescompanies are prohibited from acting as both dealer and broker with respect to the single sale of securities (Articles 47 and 129) and must inform customers as to whether they act on their own account or effect an order for the customer's account (Article 46).

354. Id., at 69.Minimum amounts of stated capital are as follows:(1) Companies which may engage in underwriting

a) Managing underwriters who may engage in another kind orkinds of securities business 3 billion yen

b) Managing underwriters who may engage solely inunderwriting 1 billion yen

c) Other underwriters 200 million yen(2) Companies which may engage in trading on an exchange market

(excluding the foregoing)a) Those who may trade on the Tokyo orOsaka exchange 100 million yen

b) Those who may trade on the Nagoya exchange

c) Those who may trade on other exchanges

(3) Companies other than the foregoinga) Those who have one or more offices Tokyo or Osaka

b) Other companies(4) Companies which deal solely with securities companies

a) Those who have one or more offices inTokyo or Osaka 4 million yen

b) Other companies 1 million yenSEL, art.32 para.l item 1; SEL Enforcement Rule, art.3.

50 million yen

30 million yen

in30 million yen 20 million yen

VI: 27

355. Securities Exchange Law, Article 29.

356. This is perhaps not unrelated to the fact that a licence, once granted, is valid until revoked; there is no provision for the annual renewal of same. See M. Tatsuta, supra note 350 at 71.

357. Securities Exchange Law, Articles 31 and 32.

358. See Cullison, The Kabutocho, The Stock Exchange. 13 (June 1970).

359. Securities Exchange Law, Articles 33 and 34.

360. Id., Articles 42 and 43.

361. Id., Articles 53 and 55.

362. Id., Article 35. Additionally, the Minister may order thedismissal of a director or auditor of a securities coup any where they have been guilty of certain statutory breaches or have become bankrupt: Article 35(2). There is statutoryprovision for the holding of a hearing in the circumstances envisaged by this Article: see Article 36(1).

363. Securities Exchange Law, Article 54(1). Again, provision is made for a hearing in these circumstances: see Article 54(3).

364. Securities Exchange Law, Article 56. This provision appliesto companies engaged in dealer activities: M. Tatsuta. supranote 350 at 73.

365. Securities Exchange Law, Article 57-1.

366. Id., Article 57-2.

367. Id., Article 57-3(1). Again, provision is made for there to be inhearing in this situation; see Article 57-3(2).

See M. Tatsuta supra note 350 at 74, for a discussion of the indebtedness ratio.

368.

VI: 28

369. M. Tatsuta, supra note 350 at 74-75, citing Securities ExchangeLaw, Article 54(1) (2); Soundness Rule, Art.2. Securities companies are further subject to restriction in the amount of credit which they may extend to a customer: Securities andExchange Law, Article 49. For a detailed discussion of this margin trading provision, see M. Tatsuta, supra note 350 at 98-100 and also Cullison, supra note 358 at 14-15.

370. Securities Exchange Law, Article 62: see M. Tatsuta. supranote 350 at 78.

371. Securities Exchange Law, Article 62-3.

372. Id., Articles 63 and 64-3.

373. M. Tatsuta. supra note 350 at 78, citing Securities Exchange Law, Article 64.

374. Id.

375. The basis for this portion of the Japanese legislation was the Maloney Act which in 1938 added Section 15A to the Securities and Exchange Act of 1934. See generally II L.Loss, supra note 258 at 1359-91, and V L.Loss. supra note 258 at 3434-511.

376. Securities Exchange Law, Articles 67-79.

377. Id., Article 67.

378. Id., Article 71.

379. Id., Article 72.

380. Id., Article 75.

381. Id., Article 79.

382. M. Tatsuta. supra note 350 at 79. See generally id., at 78-80. This author was informed by an official of the Tokyo Stock Exchange in May, 1971, that the Ministry of Finance had for some time planned to consolidate these ten securities business associations into one centralized national federation with a number of branches. 383

383. M. Tatsuta. supra note 350 at 80.

VI: 29

384. M. Tatsuta. Addendum to Securities Regulations in Japan 13 (May, 1973).

385. M. Tatsuta. supra note 350 at 111.

386. Com. Act No.83, as amended.

387. Section 2(j) of the Act defines the term as follows: "'Broker'means any person engaged in the business of effecting transactions in securities for the account of others, but does not include a bank".

388. Id., Section 2(g): "'Dealer' shall include every person otherthan a salesman who engages either for all or part of his time, directly or through an agent, in the business of selling any securities issued by another person or purchasing or otherwise acquiring such securities from another for the purpose of reselling them or of offering them for sale to the public, or offering, buying, selling or otherwise dealing or trading in securities for a profit, or who deals in futures or differences in market quotations of price or values of any securities, or accepts margins on purchases or sales or pretended purchases or sales of securities: Provided, That the word "dealer" shallnot include a person having no place of business for the purpose, who sells or offers to sell securities exclusively to brokers or dealers actually engaged in buying and selling securities as a business".

389. Id., Section 2(i): "'Salesman' shall include every naturalperson, other than a dealer, employed or appointed or authorized by a dealer or issuer, to sell securities in any manner. The partners of a partnership and the executive officers of a corporation or other association registered as a dealer shall not be salesmen within the meaning of this definition." No provision is made for the registration of investment advisers.

390. Id., Section 14. A broker, licensed to act as such by theCommission, cannot purchase or sell shares upon its own account without violating its obligations as a broker: Martinez v.Yek Tong Lin Fire and Marine Insurance Co., 67 Phil. 436. 391

391. Securities Act, Section 14.

VI: 30

392.

393.

394.

395.

396.

397.

398.

399.

400.

401.

402.

403.

404.

405.

406.

407.

Since 1967, the Securities and Exchange Commission has conducted a hearing on the application for registration as broker or dealer ten days after publication of notice of the application in a newspaper of general circulation: Yabyabin, The SecuritiesAct and Trading, 1 The SEC Bulletin 1, at 8 (No.3, Oct.1967).

Section 14. Id.; in lieu of such bond, the applicant is permitted to file bonds of the Government of the Philippines or of the United States, or other security acceptable to the Commission.

Id.

In­securities Act, Section 15.

Id.

Securities Act, Section 22.

Securities and Exchange Commission. Rules and Regulations Governing Securities Exchanges and their Members. Brokers. Dealers. Salesmen and Customers; Rule A9.

Id., Rule A29.

Id., Rules B1-B24.

Id., Rule B5.

Id., Rule Bll.

Manila Stock Exchange, Constitution and By-Laws, Article XII, Section 1: Makati Stock Exchange Constitution, Article V,Section 3.

Manila Stock Exchange, Constitution and By-Laws, Article XII, Section 2: Makati Stock Exchange Constitution, Article V,Section 4.

The Investor 1019 (December, 1969).

Bangkok Stock Exchange. Rules and By-Laws (July 13, 1970).

VI: 31

408. S.Robbins, A Capital Market In Thailand 52-54 (1970), herinafter referred to as ’’the Robbins Report”.

409. Id., at 258-263,

410. Id,, at 262-3.

411. Id., at 263,

412. Id., at 286.

413. Id.

414. See letter from Albert Lyman, Director, Bangkok Stock Exchange, to members of the exchange, December 12, 1972.

415. Securities Exchange of Thailand Act, B.E.2517, Chapter I.The term "securities company" is defined in Section 3 as "a limited company authorized to engage in the securities business under the Notification of the Ministry of Finance and such securities business as carried on shall include the businessof brokerage for buying and selling securities". 416 417

416. Thus, the United Kingdom utilizes the provisions of the Prevention of Fraud (Investments) Act, 1958; the United States has both blue-sky and federal legislation in this area; Canada has provincial legislation; India made specific statutory provision in its Securities (Contracts) Regulation Act (1956); Hong Kong’s new Securities Ordinance has adopted licensing provisions for such persons; Malaysia and Singapore have adopted provisions similar to those in Australia; the Philippines has clearly followed the example of the United States legislation and, finally, Thailand has, in the Robbins Report, received recommendations which would require the registration of such persons, and in its Securities Exchange of Thailand Act it has made provision for their membership of the Exchange.

417. See Chapter 3, supra.

418. See Chapter 5, supra.

Chapter 7

VII: 1

1. Company Law Advisory Committee, Report to the Standing Committee of Attorneys - General on~ Accounts and Audit, (October 17, 1968), hereinafter referred to as the ’’First Interim Report”.

2. Id., at 6 .

3. Id.

4. Id.

5. First Interim Report, note 1 supra at 7.

6 . Id., at 8 .

7. Id.

8 . First Interim Report, note 1 supra at 10

9. Id., at 11-13.

10. Id., at 13-14.

11. Id., at 14.

12. Id., at 15.

13. Id., at 5: "Toprotection afforded to the investing public by the existing provisions of the Uniform Companies Acts and to recommend what additional provisions (if any) are reasonably necessary to increase that protection". 14 *

14. See Cohen, "Truth in Securities" Revisited 79 Harv.L.Rev.1340 (1966).

VII: 2.

15. The Committee’s recommendations in this area were referred to in the Second Reading Speech on the 1971 amending legislation in the New South Wales Legislative Assembly as not being able to be described as ’’anything other than conservative” (N.S.W. Parliamentary Debates, Thursday, September 9, 1971, at p.922).

16. For ease of reference, all citations in this portion of thisstudy will be to the Companies Act 1961 (as amended), New South Wales. For the interesting debates on the introduction of the 1971 amending legislation in New South Wales, see New South Wales Parliamentary Debates, Forty-Third Parliament - Second Session: Legislative Assembly: September 9, 21, 22, 23 and29; October 12, 13, 19 and 20, 1971: Legislative Council;November 9 and 23, 1971. For an early and generally favourable assessment of what were at that stage the provisions of the Companies (Amendment) Bill, 1970, seeP.J. Davidson, The Accounts and Audit Provisions of the Companies Act, and comment thereon by N.F. Stevens, in The University of Sydney, Committee for Post-Graduate Studies m tne Department ot Law, fudiic company securities,Volume z, (September, iy/0j.

17. The following discussion of the obligations imposed in the accounts area is based upon the statutory provisions themselves and in part upon Brown, The New Accounts Provisions, 2 The Australian Director 35 (No.2, October 1972).

18. These are defined in Section 161 of the legislation (in relation to a corporation) as including "such working papers and other documents as are necessary to explain the methods and calculations by which accounts of the corporation are made up”.

19. Companies Act, Section 161A (1) (a).

20. Id., Section 161A(2).

21. Id., Section 161A(8).

22. Id., Section 161B(1). The Commission may grant exemptionTrom this requirement ; Section 16IB(3). 23

23. Id., Section 162 (1) and (3).

VII 3

24. "Group accounts" are defined in Section 161, in relation to a holding company,as meaning -

(a) a set of consolidated accounts for the group of companies of that holding company;

(b) two or more sets of consolidated accounts together covering that group;

(c) separate accounts for each corporation in that group; or(d) a combination of one or more sets of consolidated

accounts and one or more separate accounts together covering that group. Id., Section 162B(1); these group accounts are not to be issued until after the directors have received from each subsidiary its audited accounts, the statements required under section 162, the directors’ report in accordance with section 162A and the auditor’s report in accordance with section 167.

25. Companies Act, Section 162(7). For a discussion of directors’ obligations under this provision, see Page, Directors’ Reports, 2 The Australian Director 2 (October 1972) at 46-47. For a draft pro forma questionnaire for the use of directors in obtaining necessary details in this area, see Irish, Directors’ Responsibilities as to Annual Accounts,id. at VT.

26. Companies Act, Section 162(8); id., Section 162(9): theseaccounts must comply with the requirements of the revised Ninth Schedule to the Act, but where accounts or group accounts so prepared would not otherwise give a true and fair view of the matters required by the section and to be dealt with in the accounts or group accounts, the directors of the company are obliged to add "such information and explanations" as will give a true and fair view of those matters. For a brief discussion of the most significant requirements of the Schedule, see Brown, supra note 17 at 36-37. 27 28 29

27. Companies Act, Section 162(1) and (11). This requirement has led to a serious policy clash between directors and auditors, the former indicating in many instances that the accounts do give a true and fair view and the latter, in the same case, qualifying their statement that the accounts give a true and fair view.

28. Companies Act, Section 162(12).

29. Id., Section 162A(1).

430.VII:

31.

32.

33.

34.

35.

36.

37.

38.

39.

40.

41.

42.

43.

44.

45.

Id., Section 162A(1) (a) - (o). Id., Section 162A(2); similar details are required of the directors of a holding company. Id.., Section 162A(4): certain of the stipulatedparticulars do not apply to or in relation to an exempt proprietary company. Id., Section 162A(6), (8) and (9): the directors are also required in some circumstances to furnish details of options and certain benefits received by directors.

Id., Section 162C.

Id., Section 163: one thousand dollars ($1,000) orimprisonment for six months. In the case of offences committed fraudulently, a penalty not exceeding two thousand dollars ($2 ,000) or imprisonment for a term not exceeding one year or both.

Page, supra note 25 at 55.

See Sections 165A and 165B: unlimited exempt proprietarycompanies and exempt proprietary companies are relieved of the obligation to appoint auditors in certain circumstances. It should be noted that only the New South Wales and Victorian Statutes contain this Section 165B.

Companies Act, Section 165.

Id., Section 166.

Id., Section 166A.

Id., Section 166B.

Id., Section 166C.

Id., Section 167B.

Id., Section 167. In respect of the duties and responsibilities of auditors, see Pacific Acceptance Corporation Ltd. v. Forsyth and Others, 92 W.N. (N.S.W.) 29 (1970).

Companies Act, Section 167(1).

Id., Section 167(2) (a) (i) and (ii).

Id., Section 167(2) (b).

Id., Section 167(2) (c).

VII: 5

46. Id., Section 167 (2) (d),

47. Id., Section 167 (2) (e).

48. Id., Section 167 (3).

49. Id., Section 167 (4), (5) and (10).

50. Id., Section 167 (7).

51. Id., Section 167 (8) and (9).

52. See Kelleher, Auditors and the New Companies Act, 2 TheAustralian Director. (No.2, October 1972) at 39.

53. Id., at 41-43.

54. The Australian Financial Review, Nov.14, 1972 at 17, cols. 1-4 and at 18, cols. 5-6.

55. Id.

56. Companies Act, Section 167 (4).

57. Id., Section 164 (1).

Cn CO Id., Section 164 (2). Id., Section 164 (3): with these provisions is an offence.

failure to comply

59. R.J. Chambers, Securities and Obscurities, A Case for Reform ofthe Law of Company Accounts, (1973).

60. Id ., at 18-19.

61. Id., at 19: surprisingly, in a discussion of Milton Cohen'sclassic article "Truth in Securities" Revisited 79 Harv.L. Rev. 1340 (1966), Chambers, (while pointing out that Cohen did not question the historical cost accounting basis of the SEC) only mentions, and does not discuss at all,Cohen's vitally important periodic and current reporting requirements.

62.

VII:

63.

64.

65.

66.67.

68.69.

70.

71.

72.

73.

74.

75.

76.

77.

78.

6

Id., at 7-8. For some of the discussion which this proposal Has engendered, see H. Rappaport, Lack of Information Harpers Company Planning, The Australian Financial Review, June 7, 1973 at 28, cols. 1-6. See also The Australian Financial Review, June 7, 1973 at 3, cols. 3-5.

R.J. Chambers, supra note 59, Chapter 5.

Id., Chapter 6.

Id., Chapter 7.

Id., Chapter 8.

Id., Chapter 9.

Id., Chs. 11 and 12.

Id., at 187-188.

Id., at 189-190.

Id., at 219.

Id. Detailed particulars were given in the study as to the precise methods of calculating both balance sheet and profit and loss figures.

Id., at 225. See id., at 226, for methods of calculating group statistics.

Id., at 225.

Report of The Company Law Committee, Grind. 1749, paras.141-47 (1962).

Company Law Advisory Committee. Second Interim Report to the Standing Committee of Attorneys- General on Disclosure of Substantial Shareholdings and Take-Over Bids, 5 (February 28, 1969) hereinafter referred to as ’’Second Interim Report”.

Id.

For the definition of a substantial shareholder, see Section 69c.

VII: 7

79.

80.

81.

82.

83.

84.

85.

8 6 .87.

88 .

89.

90.

91.

92.

93.

94.

95.

96.

The word "company" is widely interpreted in the legislation: see Section 69A(2) and (3).

Section 69D(1). This simply worded section requires, for its interpretation, an awareness of the statutory definitions of the terms "voting share" (Section 5(1)) and "relevant interest" (Section 6A(1) (a)).

See 1 CCH Aust. Corp. Affairs Rep. f/ 8-510 and f/.8-515.

Companies Act, New South Wales, Section 69D(2) (b).

1 CCH Aust. Corp. Affairs Rep. ,? / 8-520.

Companies Act, New South Wales, Section 69E.

Id., Section 69F. Specific provision is made to extend the statutory requirements to non-residents: see Section 69H.

Companies Act, New South Wales, Section 69K.

Id., Section 69K(5): Section 69L.

Id., Section 69N(1) (a).

Id., Section 69N(1) (b).

Id., Section 69N(1) (c).

Id., Section 69N(1) (d).

Id., Section 69N(1) (e).

Id., Section 69N(1) (f).

Id., Section 69N(1) (g).

Id., Section 69N(1) (h). Id., Section 69N(10): there is apenalty of $1000 and a default penalty of $200 for contravening or failing to comply with an order under the Section.

Id., Section 158. Companies not having a share capital are required by Section 159(1) to lodge a return in the form prescribed in Section 159(2).

VII: 8

97.

98.

99.

100.101.102.103.

104.

105.

106.

107.

108.

109.

110.

For details as to the different dates for lodgment required by different states, see 1 CCH Aust. Corp. Affairs Rep. // 12-205.

Companies Act, Eighth Schedule, Part I, Sections 1, 2 and 2A.

Id., Section 3. This includes infoimation as to particulars 0? issued shares, nominal or authorized capital, total number of shares taken up, and particulars of the total indebtedness of the company secured on the property or undertaking of the company (Section 4).

Id., Section 15.

Id., Section 6.

Id., Sections 8 and 9.

Id., Section 11. For a description of the N.S.W. Corporate Affairs Commission's recent moves against defaulters in this area, see The Australian Financial Review, May 21, 1974 at 1, cols. 1-5 and at 22, cols. 3-6.

Companies Act, Section 160(1). Id. Subsection (2) provides that the Commissioner may by order require any company granted such an exemption to comply with any of the provisions from which it had been exempted.

Id., Section 146.

Id., Section 112.

Id., Section 134.

Id., Section 202(2) (a).

Id., Section 230.

Such dealings often took the form of a disposal to an associated company of all of the worthwhile assets of the public company at low prices, prior to the fact of such disposal being brought to the notice of either the shareholders or any regulatory authority.

VII: 9

111. A.A.S.E. Listing Manual, Section 3A(1). Id.; this includes any intormation necessary to avoid the establishment of a false market in the coup any’s securities.

112. Id., Section 3A(2) - (4).

113. Id., Section 3A(5) (a) and (b).

114. Id., Section 3A(6).

115. Id., Section 3A(7).

116. Id., Section 3A(8). Id., Section 3A(9) requires that notification also be given of any recommendation or decision that any dividend be passed.

117. Id.., Section 3A(10).

118. Id., Section 3A(11).

119. Id., Section 3A(12) (a) and (b).

120. Id.., Section 3A 13(a) and (b).

121. Id., Section 3A (15).

122. Id.., Section 3A(16).

123. Id,, Section 3A(17) (a) and (b).

124. A.A.S.E. Listing Manual, Section 3A (January, 1972 Amendment).

125. Section 3A(1).

126. See Section 3A(6), (7), (10) and (15).

127. A.A.S.E. Listing Manual, Section 3B.

128. "Extraordinary items” are stated to include "items which aresignificantly different from the typical or customary business activity of the company and which are not of a regularly recurring nature": A.A.S.E. Listing Manual,Section 8(9).

VII: 10

129. A.A.S.E, Listing Manual. Section 3B (1): id., these reportsare also required to give details of changes' in the company's issued capital.

130. A.A.S.E. Listing Manual. Section 3B (3) (a) (i). Id., Section 3B (3) (a) (ii) provides specifically for parent companies.

131. Id., Section 3B (3) (b).

132. Id ., Section 3B (3) (c). For details as to exactly which amounts the A.A.S.E. believes should be compared, in the half-yearly reports and preliminary final statements, with corresponding amounts for the preceding year, see A.A.S.E. Listing Manual. Section 8 (9).

133. See The Australian Financial Review, August 31, 1972 at 15,cols. 1-4: ’’The A.A.S.E. is having its own problem with thebanks in Australia in trying to get their interim reports into line with A.A.S.E. listing requirements - a task that is taking some time".

134. See The Australian Financial Review, January 19, 1973, at 16cols. 3-6: "Since the listing requirement" [3B(lJ] "was firstintroduced there has been virtual nerve warfare between theA.A.S.E., which was insisting on compliance but reluctant to delist anyone as powerful as the banks, and the banks, which claimed that interim percentage variations were misleading."

135. See, for example, The Australian Financial Review, April 10, 1973, at 19, cols. 1-4.

136. See The Australian Financial Review, April 12, 1973 at 20,cols. 3-6; The Australian Financial Review, April 24, 1973 at 16, cols, 5-6. Additionally, the A.A.S.E. has recently been taking a much more rigorous attitude towards the late filing of annual accounts and reports: see The Sun, Jan. 2, 1974at 67, cols. 2-7.

137. A.A.S.E. Listing Manual. Section 3C. These provisions allow companies to adopt equity accounting provided that anyadjustments resulting from such adoption are indicated in notes to the accounts.

138. Id,., Section 3D.

Id., Section 3E.139.

VII: 11

140.

141.

142.

143.

144.

145.

146.

147.

148.

149.

150.

151.

152.

153.

154.

155.

156.

157.

158.

Id., Section 3F (1).

Id., Section 3G.

Id., Section 3H (5).

Id., Section 3H (6).

United Kingdom Companies Act, 1967, Section 9 and Schedule 2.

First Interim Report, note 1 supra at 6.

L.C.B. Gower. The Principles of Modem Company Law, 472 (3d ed. 1969). See id., 454-473 for a general discussion of these accounts provisions.

Id.

The Jenkins Report, note 75 supra at 50.

Id., at 50-51.

Id., at 51.

Companies Act, 1967, Sections 33, 34.

See L.C.B. Gower, supra note 146 at 390.

Id.

Companies Act, 1967, Section 33 (5).

These include, inter alia, those in respect of the company’s officers, registered office and share capital.

Companies Act, 1948, Sections 124-129.

L.C.B. Gower, supra note 146 at 449.

See Rules and Regulations of the Stock Exchange. Rule 159(2) and Appendix 34. This rule and appendix replace the document entitled Admission of Securities to Quotation - Memoranda of Guidance and Requirements of the Federation of Stock Exchanges in Great Britain and Ireland , invariably referred to as ’’The Yellow Book”. For a brief statement of the provisions of the General Undertaking then required, see G. Cooper and R. Cridlan, Law and Procedure of the Stock Exchange. 85-89 (1971).

VII: 12

159. Rules and Regulations of the Stock Exchange, Appendix 34, Schedule VIII, Part A, Sections 1-4.

160. Section 3A (1).

161. Appendix 34, Schedule VIII, Part A, Section 6 (a) - (c).

162. Id., Section 8.

163. Id., Section 9.

164. A.A.S.E. Listing Manual. Section 3H (19).

165. See The Yellow Book, note 158 supra, at Schedule VIII, Part A, Section 7.

166. Id., Section 7 (a) (2).

167. Id_., Section 7 (b).

168. Appendix 34, Schedule VIII, Part A, Section 3.

169. Id., Section 5.

170. Id.., Section 17.

171. See J. Peter Williamson. Securities Regulation in Canada. 40-44 (1960) and Supp. 12-15 (1966).

172. Brief to the Royal Commission on Banking and Finance, submitted by The Toronto Stock Exchange fAugust.19621.

173. Id.., at 99-100, citing The Security Analysts’ Association of Toronto. Brief to the Royal Commission on Canada’s Economic Prospects (1956).

174. Id., at 100.

175. Id.

176. Brief to the Royal Commission on Banking and Finance, at 101- 102 .

VII: 13

177.

178.

179.

180.

181.

182.

183.

184.

185.

186.

187.

188.

189.

190.

Id. at 103. Id. at 103-104:information to be included in the annual report should encompass, inter alia, consolidation of the accounts, two-year detailed comparative balance sheets and earnings statements together with detailed notes, explanation of accounting methods, statement of earned surplus, annual review of operations, two-year statistical summary of operations, source and application of funds, sales breakdown, ten-year comparative statement of income and balance- sheet items, expenditures on research, labour reactions, trend of industry, officers and directors, description of outstanding securities, options, etc., lease arrangements, description of plants and properties and summary of products.

Id., at 104. Id.; such legislation could result from either co-ordination of provincial laws or amendments to federal law.

Report of Royal Commission on Banking and Finance (1964), hereinatter reterred to as "the sorter Report".

Id., at 338.

Id., at 350 (footnote omitted).

Id.

The Toronto Stock Exchange, Brief to the Attorney General’s Committee on Securities Legislation, Province ot Untario '(May," T9Wy)------“ --------- *----------------------------------------Id., at para. 4.06: "...there is no provision for ensuring that the shareholder will continue to be kept informed, either as to his company’s financial status or its management”.

Id., at para. 4.07: id. the exchange suggested that companiesshould be required toTile annual, semi-annual or quarterly and also current reports.

Id., at para. 4.09.

Id., at para. 4.10.

Id., at para. 4.11.

Id., at para. 4.12.

The recommendation specified only "upon the happening" of the particular event.

VII: 14

191. Province of Ontario. Report of the Attorney General's Committee on Securities Legislation in Ontario (March. 19651. hereinafter referred to as ’’The Kimber Report”.

192. Id., at 28.

193. Id.

194. The Kimber Report, note 191 supra at 30.

195.

196.

197.

198.

199.

2 0 0 .

Id., at 30-31.

Id., at 31.

Id., at 31-32.

Id., at 32-33.

Id., at 33.

Id., at 33-34. Id., at 34: the committee recommended that such interim reports contain ”a source and application of funds statement and sufficient relevant information in summary form to reflect the over-all results of operations for the period covered by the report, including sales or gross revenues, extraordinary items of income or expense, net income before income taxes, income taxes and net income.”The Committee envisaged that such reports (which did not need to be audited) should be furnished to shareholders within 60 days of the expiration of the period to which they related.

201. Ontario, Report of the Royal Commission to Investigate Tradingin the Shares of Windfall Oils and Mines Limited (September 1965), hereinafter referred to as ’’The Kelly Report”.

202. Id., at 114.

203. Id.

204. Id.: it also laid emphasis upon the obligations of the listedcompanies themselves: ’’The recognition by a listed company that it is under an obligation to provide immediately to the Exchange any information that is requested is an essential consequence of the listing of its shares. In fact, this consequence extends to the recognition by the listed company that it can have no secrets from the Exchange”.

VII: 15

205.

206.

207.

208.

209.

210 .

211 .

212.213.

214.

215.

216.

217 .

Ontario. Legislative Assembly. Interim Report of the Select Committee on Company Law f19671. hereinafter referred to as ’’The Lawrence Report”.

Id., at 16.

Id., at 88.

Id., at 87-95.

Id., at 112.

Id., at 112-113.

Id., at 113. Id.: such financial statements, filed with theCommission, would be open to public inspection.

Id.

For a recent statement confirming this basic principle, see The McRuer Report. Chapter 126 (p.2087): ’’The rights of^shareholders and investors to adequate and proper information respecting the financial affairs of corporations should be adequately protected. ’'

Ontario. Report of the Royal Commission Appointed to Inquire Into the Failure of Atlantic Acceptance Corporation Limited (September 12, 1969), hereinafter referred to as ’’The Hughes Report”.

Id., at 1442.

Province of Ontario. Department of Financial and Commercial Affairs« Report of the Committee of the Ontario Securities Commission on the Problems of Disclosure Raised for Investors by Business Combinations and Private Placements (February,1970), hereinafter referred to as ’’The Merger Study’’.

Id., at 15-17.

VII: 16

218. Id., at 19-22. Id., at 20: the Committee clearly appreciated the existence of~one of the major problems in this area of disclosure, viz., the adequate dissemination of information:".. .information is of little use as long as it remainsburied in the Commission’s files. The Commission has therefore sought to publicize its availability, on an equally timely basis, through noting the receipt of new reports in its weekly summary of activities published each Monday.”

219. Id., at 25.

220. Id., at 26.

221. Id., at 26-27. Id.., at 27: companies which formed part of thecontinuous disclosure system would be referred to as "reporting companies” .

222. Id,, at 29.

223. Id., at 31.

224. Id., at 35: "The System recommended is ineffective if theresult is merely to fill filing cabinets in the Commission’s offices.”

225. Id.

226. Id.

227. The Merger Study, note 216 supra at 36.

228. This Bill was given its first reading in the Ontariolegislature on June 1, 1972: see Emerson, Towards an IntegratedDisclosure System for Ontario Securities Legislation,10 Osgoode Hall L.J. 1 (August, 1972).

229. Bill 154, Section 60.

230. Id., Section 59.

231. Id., Section 98.

232. Id., Section 100.

VII: 17

233. Id., Section 66. For a detailed examination of proposed Bill 154 and a comparison of its effect with that of the SEC's Rule 144, see Emerson, supra note 228.

234. Bill 75, The Securities Act, 1974, Section 75.

235. Id., Section 76.

236. Id., Section 73.

237. That is, at the date of writing.

238. R.S.C. 1970, c. C-32, as amended R.S.C. 1970 (1st Supp.)C.10; S.C. 1970-71, c.l.

239. Id., Section 117.

240. Id., Section 118.

241. Id., Section 119.

242. Id., Section 120.

243. Id.., Section 120.1.

244. Id., Section 121.

245. Id., Section 122.

246. Id.., Section 123.

247. Dickerson, Howard and Getz, Proposals for a New Business Corporations Law tor Canada, z vois. (April, I9/ij.

248. Id., Vol.I, at 108.

249. Id., at 109.

250. For a favourable assessment of this suggestion, see Emerson,supra note 228 at 8, n.31.

VII: 18

251. R.S.O., 1970, c.89, Sections 97-111. These provisions, apart from closely resembling those of the Canada Corporations Act, are important in that they clearly distinguish between public and private companies in respect of the obligations of the company to furnish financial statements to shareholders (Section 110 (1) and (2)).

252. R.S.O. 1970, c.53, as amended by 1971, c.26; 1972, c.138:1974, c.26; Sections 167 et seq.

253. S.O. 1971, c.27 as amended, 1972, c.l and 139. This statute contains the important Section 3 requiring the filing of annual returns, their up-dating in the event of changes inthe board of directors and in the company’s authorised capital, and their being made available for examination by shareholders, members or creditors of the corporation, and members of the public.

254. R.S.O. 1970, c.426 as amended 1971, c.31; 1972, c.l; 1973, c.ll.

255. Id., Part X.

256. Id., Part XI.

257. Id., Part XII.

258. See Chapter 8, infra.

259. The Securities Act, Section 118 (b) (i) and (ii). For exemptions from the scope of these provisions, see id.,Section 118 (b) (iii), (iv) and (v).

260. The Merger Study, para. 2.35.

261. The Securities Act, Section 119.

262. Id., Section 120.

263. Id.., Section 120 (1) (a) and (b).

264. Id., Section 120 (1) (c) - (f). For prescribed contents of the profit and loss statement, surplus statement, source and application of funds statement, and balance sheet , see Sections 121, 122, 123, and 125 respectively.

265. The Securities Act, Section 126.

266. Id., Section 128.

267. Id., Section 127. The rationale of this particular provision is unclear, as, unless its meaning is by custom or regulation well established, it would, through the myriad possibilities of interpretation to which it gives rise, seem to create more problems than it would solve.

268. The Securities Act, Section 130(1).

269. Id., Section 130(1) (a).

270. Id., Section 130(1) (b). See id. for details as to the information to be included in this summary form.

271. The Securities Act, R.S.Q. 1964, C.274, as amended, 1967, c.82; 1971, c.77; Section 130(4) and (5).

272. Id., Section 130(6).

273. See Securities Act Regulations, Part III.

274. See, for example, the Companies Information Act; R.S.Q. 1964, c.273 as amended 1971, c.76; 1973, Bill 18, s.l.

275. The Securities Act, Quebec, Sections 95-112.

276. Ontario Securities Commission Uniform Act Policy No.2-12.

277. Id.

278. Id.

279. See Emerson, supra note 228 at 52 and n.250, for examples of the Commission's exercise of this power.

280. Policy No.3-23.

281. Id.

282. The Toronto Stock Exchange Policies, Part I, Corporate Disclosure, 3 CCH Can.Sec.L.Ren, f/ 92-004. 283

283. Id., 9/ 92- 005.

VII: 19

VII: 20

284. Canadian Stock Exchange Policy, Quarterly Reports by Listed Corporations, 3 CCH Can.Sec.L.Rep, at j/ 84-800. See also Montreal Stock Exchange Policy, Quarterly Reports by Listed Corporations, id., at }/ 88-090.

285. Montreal Stock Exchange, Listing Agreement, id. at ?/ 88-054. Canadian Stock Exchange, Listing Agreement, TcT. at f/ 84-628.

286. Act No.l of 1956, as amended.

287. Id., Section 209-223.

288. Id., Sections 224-233-B. For an examination of the accounts and audit provisions, see A. Singh. Indian Company Law, ch.14 (3d ed. 1971). See also A. Sen, and J. Mitra. Commercial and Industrial Law. Book IV, Ch.8 (10th ed. 1972).

289. Companies Act, Section 233-A.

290. Id., Section 233-A (1) (a)-(c).

291. Id., Section 233-A (3).

292. Id., Section 233-A (6). For a discussion of this special audit power, see V. Kulshreshtha. Changing Dimensions of Company Law in India. 118-120 (1971).

293. Section 234(1).

294. Id. See A. Sen and J. Mitra, supra note 228 at 320.

295. Securities Contracts (Regulation) Act, 1956, Section 4(1)

296. Section 8.

297. Securities Contracts (Regulation) Rules, 1957, Rule 19.

298. Rule 19(3) (f>.

299. Rule 19(3)

300. Rule 19(3) (i).

301. Rule 19(3) (j)-

302. Rule 19(3) (k).

(a).

303. Rule 19(3) (1).

304. Rule 19(3) (m).

305. Rule 19(3) (n).

306. Rule 19(3) (o).

307. Rule 19(3) (p).

308. Rule 19(3) (r).

309. Rule 19(3) (s).

310. Rule 19(3) (t).

311. See, for example, Bombay Stock Exchange, form of ListingAgreement.

312. See, for example, Singapore Companies Act, Part VI.

313. See, for example, Singapore Companies Act, Part V, Division 5 "(annual return).

314. G. Ferris. A Study of the Securities Market in Singapore and Malaysia. 2 (1970) hereinafter referred to as ’’The Ferris Report”.

315. Id., at 16.

316. Id., at 17.

317. Id.

318. Id.

319. Id.

320. The Stock Exchange of Singapore Limited - Rules. Bve-Laws and Requirements.

321. Id. > Section 71(2) and (3).

Stock Exchange of Singapore Limited. Corporate Disclosure Policy (May 26, 1973).

VII: 21

322.

VII: 22

323. See id., at 3.

324. Act No.112 of 1973.

325. Act No.17 of 1973.

326. Chapter 32.

327. Id., Sections 121-141.

328. Id. See, for example, Sections 92, 93 (registered office and name); 95-102 (register of members); 103-106 (local or branch registers) and 107-110 (annual return).

329. Hong Kong Stock Exchange Ltd.. Admission of Securities to Quotation (February. 1973). Appendix III 1 (a), (b), (e) and

330. Id., Appendix III 1 (c) and (d).

331. Id., Appendix III 1 (g).

332. Id., Appendix III 2 and 3.

333. Legal Supplement No.2 to the Hong Kong Government Gazette,Friday, January 22, 1971.

334. First Report, June 24, 1971 (hereinafter referred to as "The Investor Protection Report").

335. Companies (Amendment) Bill 1972, H.K. Government Gazette,Legal Supplement No.3, c.391.

336. Second Report of the Companies Law Revision Committee. Company Law. (April 12, 1973).

337. Securities Exchange Act of 1934, Section 12(a). For a general assessment of the statutory disclosure requirements in the United States, see Bentson, Required Disclosure and the Stock Market: An Evaluation of the Securities Exchange Act of 1934,63 Am.Econ.Rev. 132 (19737:

338. Section 12 (d).

VII: 23

339.

340.

341.

342.

343.

344.

345.

346.

347.

348.

349.

350.

H. Sowards, The Securities Acts Amendments of 1964: New Registration and Reporting Requirements, 19 U. of Miami L.Rev.33 at 34-35 (1964-65).

Section 12 (g) (1). From July 1, 1966, the registration requirement applied to issuers with total assets in excess of $1,000,000 and a class of equity security held of record by 500 or more persons.

See II L.Loss, Securities Regulation 787 (1961).

Section 13 (a). Prior to the 1964 amendments, companies were required to file the necessary information with the appropriate exchange and only to file such duplicate originals with the Commission as the Commission required: 2 CCH Fed.Sec.L.Ren.°H 23,501. There are additional aspects of the statutory disclosure scheme laid down by the 1934 Act which will, for reasons of space, not be treated in detail in this study: these relate to the use of proxy solicitations (Section 14) ; and ownership reports (Section 16).

Section 13 (a) (1). For a brief discussion of the current report requirements see II L.Loss supra note 341 at 812-814 and V L.Loss Securities RegulationTSu p p . 1969), at 2777-2778.

See 2 CCH Fed.SEc.L.Rep.. Law Report No.532, May 1, 1974; As from July 1, 1974, the SEC’s instructions for the use of this part­icular form have been amended, to accord more closely with the requirements of Regulation S-X. The latter has itself been the subject of amendment.

Regulation 13(a) - 11(a).

2 CCH Fed.Sec.L.Rep. ?/ 23,591. The form and content of financial statements required to be filed with Form 8-K are governed by Regulation S-X: see note 344 supra.

2 CCH Fed.Sec.L.Ren. ?/ 23,591.07

Securities Exchange Act, Section 13 (a) (2). ][d.; duplicates ofsuch documents are required to be filed with the appropriate exchange.

Regulation 13(a)-(1).

Regulation 13(a) -(10).

VII: 24

351.

352.

353.

354.

355.

356.

357.

358.

359.

360.

361.

362.

363.

Form 10-K, Part I. Those companies which have not filed with the Commission a definitive proxy statement pursuant to Regulation 14A or a definitive information statement pursuant to Regulation 14C are required to include in their annual report the information required by Part II of Form 10-K.This encompasses, inter alia, details as to principal security holders and the security holdings of management; the directors of the registrant company; their remuneration and that of the company’s officers; the options granted to management to purchase securities; and the interests of management and others in particular transactions. As with Form 8-K, the form and content of financial statements are governed by Regulation S-X. For recent suggestions by the Commission for improving disclosure in, and disseminations of, annual reports, see SEC, Exchange Act Release No. 10591,Jan.10, 1974, cited CCH Fed.Sec.L.Rep, f/ 79,619.

Upon Form 10-Q.

2 CCH Fed.Sec.L.Rep, f/ 23,615.08.3 CCH Fed.Sec.L.Ren. ?/ 31,035.

2 CCH Fed.Sec.L.Ren, f/ 23,615.095.

Securities Exchange Act, Section 13 (b).

For information as to the manner of the SEC's interpretation of the accounting principles and rules, see 4 CCH Fed.Sec.L.Rep.?/ 72,001.

Part 210, Title 17, Code of Federal Regulations. For a recent statement by one of the SEC’s Commissioners as to the proper standards for financial reporting, see A.A. Sommers Jr.,’’The Four Mists of Financial Reporting”, (Jan. 1974), reported CCH Fed.Sec.L.Ren. ?/ 79,620.

Id., Article 1,

Id., Article 2,

Id., Article 2,

Id., Article 3.

Id., Article 4.

Regulation 1.01 (a)

Regulation 2.01.

Regulation 2.02 (b)

(1) and (2).

and (c).

VII: 25

364. Id., Article 5.

365. Id., Article 5A.

366. Id., Article 6.

367. Id., Article 6A.

368. Id,, Article 6B.

369. Id., Article 6C.

370. Id., Article 7.

371. Id., Article 7A.

372. Id., Article 8.

373. Id., Article 9.

374. Id., Article 10.

375. Uniform Securities Act, Section 305 (a) (i).

376. Id., Section 305 (a) (h).

377. NYSE Company Manual, Section B5.

378. NYSE Company Manual, page A-91: the reasons given are that while Form 8-K does not require the information to be given until a month after the event, the Exchange insists upon prompt notice; that Form 8-K reports are not available for processing by the Exchange; that once Form 8-K details are placed in the public files of the Exchange they cease to be within the control of the Exchange and that items, once in that file, become mutilated or lost.

379. Listing Agreement, Section II, para. 6.

380. A.A.S.E. Listing Manual, Section 3C.8.

381. Form 8-K, Item 2.

382. A.A.S.E. Listing Manual, Section 3A (12) and also (13).

383. NYSE Company Manual, Listing Agreement, Section 1, para. 5.

A.A.S.E. Listing Manual, Section 3A (7).384.

385. Listed companies are required, by the Listing Agreement, tofurnish their stockholders annually with a balance sheet and an income statement and surplus statement. Additionally, the majority of companies have also agreed to publish interim statements of earnings: NYSE Company Manual, Section A4.

386. Listing Agreement, Section II, para. 2 and Section 1, para. 1.

387. A.A.S.E. Listing Manual, Section 3A (2) and (4).

388. Listing Agreement, Section 1, para. 4.

389. Form 8-K, Item 6.

390. Listing Agreement, Section III, para. 4.

391. A.A.S.E. Listing Manual, Section 3A (8) and (9).

392. NYSE Company Manual, Page A-98.

393. Listing Agreement, Section III, para.4.

394. Form 8-K, Item 11.

395. A.A.S.E. Listing Manual, Section 3A (15).

396. Form 8-K, Item 9.

397. This does not apply to the disclosure of information in respect of options which is required in listing applications to the NYSE. For Australian provisions in respect of options, seeA.A.S.E. Listing Manual, Section 3H (8) and (11).

398. Form 8-K, Item 10.

399. For the continuous disclosure requirements of the National Association of Securities Dealers, Inc. (NASD), see NASD Manual, By-Laws, Schedule D, II B and C (January 1, 1973).

400. 78 Harv.L.Rev. 1340 (1966).

401. Id., at 1368-1372.

402. Id., at 1372-1375.

VII: 26

VII: 27.

403. Id., at 1375-1378.

404. Id.., at 1377.

405. For support for this author's criticisms in this respect, seeH. Sowards, The Wheat Report and Reform of Federal Securities Regulation, 23 Vand.L.Rev. 495 at 499 fApril. 19701.

406. Cohen, supra note 400 at 1379-1380: while not specifically defining this category, Cohen regarded it as including those issuers fully subject to the reporting, proxy soliciting and insider trading provisions of Sections 13, 14 and 16 of the 1934 Act and those issuers which have come under Section 13, but not Sections 14 and 16, by virtue of Section 15 (d).(These issuers would be treated as continuous registrants for most, but not necessarily all, purposes). * 414 415 416 * * * * * * *

407. Id.., at 1380-1392.

408. Id., at 1392-1395.

409. Id., at 1395-1398.

410. Id., at 1398-1400.

411. Id., at 1402-1406.

412. SEC. Disclosure toAdministrative Policies under the '33 and '34 Acts - The Wheat Report (1969).

413, Id., at 36.

414. Id., at 313.

415. Id., at 313-316.

416. Id., at 331. The Report did not follow Cohen's view that the 1934Act "might usefully take a leaf from the 'timely disclosure'book of the stock exchanges with respect to immediate reportingof specified, exceptionally important events" (Cohen, supranote 400 at 1373), indicating that the Commission's currentreporting requirements were "not intended to, nor could theyadequately, duplicate the timely disclosure policies of theself-regulatory agencies" (id. at 332).

VII: 28

417. Id., at 333.

418. Id., at 335.

419. LI.

420. The WheatReport at 337-343 and Appendix X-l. The major categories of information described were, description of the registrant’s business, details of earnings, particulars of capital structure and property, information as to management and control, description of outstanding securities, financial statements, information as to the trading market for its securities, and details of material legal proceedings and significant legal documents. 430 * * *

421. Id., at 343-•351.

422. Id., at 351-■356.

423. Id., at 356-•363.

424. Id., at 368.

425. Id., at 372.

426. Id., at 384.

427. Id., at 387-■391.

428. Id., at 392-•395.

429. Id., at 395-■397.

430. The American Law Institute - Federal Securities Code-Tentative Draft No.l (Apri1 25, 1972), hereinafter referredto as "T.D.l", and Tentative Draft No.2 (March, 1973),hereinafter referred to as "T.D.2".

431. T.D.l, Introductory Memorandum, at xviii.

VII: 29

432. Id*, at 118: Section 601 (a) (1) - (4). Id., Section 601 (c)reports are to be filed at whatever time the SEC specifiesby rule, but the optional material which is pemitted by Section 601 (b) may not be required by the Commission to be filed before it is sent to security holders or published.

433. Id., at 119 and also at 120.

434. Id., at 120.

435. Id., at 121.

436. Id. Id., at 122: the commentary further argues that the SECsKould"Te able, under the continued disclosure philosophy,"to require, as the exchanges and the NASD do, that news that might reasonably be expected materially to affect the market be released promptly. See 6 Loss. ___3590-92 Sec.Ex.Act Rel.8995 (1970) (TimelyDisclosure of Material Corporate Developments).”

437. Id., at 123; Section 601 (d).

438. Id., at 124; Section 601 (e).

439. Id_., at 126; Section 601 (f).

440. Id.., Section 601 (g).

441. T.D.l, at 126-136; Section 602.

442. Id.., at 136-137; Section 603 (1).

443. Id., at 137-138; Section 604 (a). See id., at 145; (Section 606) for the required contents of the statement under Section 604.

444. Id., at 138.

445. For example, what "other reports” is the Commission likely to require? 446 *

446. T.D.2, Section 604 (a). This new provision enables theCommission to prescribe the due date by rule.

VII: 30

447. See Kell, The SEC’s New Disclosure Rule on Forecasts,XXV Michigan Business Review 17 (May. 19751.

448. M. Tatsuta, Securities Regulation in Japan. 54 (1970).

449. Securities Exchange Law, Article 24, para.l.

450. M. Tatsuta. supra note 448 at 55. See id., n.31 for an examination of the requirements of the Commercial Code in respect of the accounting periods of, and the payment of dividends by, Japanese corporations.

451. Id., at 55. Id.; as Tatsuta correctly points out, the statutory provision leads to the incongruous situation in which such reports must continue to be filed by all companies in respect of whose securities a registration statement is effective, no matter how sadly their fortunes may have declined, yet no such reports are required to be filed by those companies whose securities have not been sold through either a public offering or secondary distribution, yet which may be actively traded in the over-the-counter market.

452. Securities Exchange Law, Article 24, para.2.

453. Id., Article 118, para.l.

454. Defined in Article 281 as including the inventory sheet, balance sheet, income statement, business report and surplus appropriation plan.

455. Commercial Code, Article 170, para.l; Articles 183, 273-280,281 and 282, para. 1.

456. These are defined in Securities Exchange Law Article 193; Financial Statement Regulation Article 1, para.l (cited byM. Tatsuta, supra note 448 at 57, n.41) as including the balance sheet, income statement, surplus statement,surplus appropriation statement or deficit reconciliation statement, and schedules. They are the accounting documents required to be filed as part of the registration statement, periodic report or periodic report on listed securities under the terms of the Securities Exchange Law. 457

457. M. Tatsuta, supra note 448 at 57-59.

458. Id., at 59. See id. for details of the 1970 plan which it is hoped will remove this discrepancy.

459. Articles 6, 12, 24, 25 and 118.

460. Articles 282, 283 and 293.

461. Law No.4 of 1971.

462. Article 24, para.l.

463. M. Tatsuta. Addendum to Securities Regulation in Japan. 4(May, 1973). See also Japan Securities Research Institute. Securities Market in Japan 1973. 129-130 61973"). ^

464. Article 24-5, para.l.

465. Id.

466. M. Tatsuta. Addendum, supra note 463 at 4.

467. Icl., citing Securities Exchange Law, Article 24-5, para.2and Registration Rule, art.17). 468 469 470 471 472 473 474 475 476 477

468. Tokyo Stock Exchange. Listing of Securities. Regulations of the Tokyo Stock Exchange 22 (March, 1970).

469. Id., Section 1 (1).

470. Id., Section 1 (3).

471. Id., Section 1 (4).

472. Id., Section 1 (5).

473. Id., Section 1 (7). There is also a general provision by which the listed coup any agrees to furnish on demand such information as the Exchange may require "for supervision and regulation of trading in the listed stock” (Section 2).

474. Id., Section 4 (3) - (5).

475. Id., Section 5 (1).

476. Id., Section 5 (2).

477. Id., Section 5 (6).

VII: 31

VII: 32

478. Id., Section 5 (10).

479. Id., Section 5 (11).

480. Id., Section 6.

481. Id., Section 9.

482. Id.., Section 10.

483. Id., Section 11.

484. Act No.1459, as amended.

485. Act No.1459, Sections 51, 52. For a more detailed discussion of these disclosure provisions, see III A. Agbayani. Commentaries and Jurisprudence on the Commercial Laws of thePhi lip-pines, 510-519 (1970 ed.), and V.G. Venturini, Joint Stock Companies under Philippine Law, 39 Philippine Law Journal 3 and 4.371 at 428-431 (Sep.-Nov. 1964).

486. Under Philippine Law, the owners of shares in a stock corporation are called "stockholders”, while the term "members" is used to refer to those persons (known as "corporations") who compose a non-stock corporation, or who compose a stock corporation but do not own capital stock in that corporation: see S . Guevara. The Philippine Corporation Law 42 (5th ed. 1967).

487. S. Guevara, supra note 486 at 189-191.

488. Id., at 191-193.

489. Id., at 193.

490. Id.

491. S. Guevara, supra note 486 at 194.

492. The Securities Act, Section 11. Id..; this statement, which mustbe filed not later than February 15 each year, must relate to the company's position as at the preceding December 31. 493

493. Id.

VII: 33

494. Section 34 exempts from disclosure any trade secrets or processes contained in any application, report or document filed withthe Commission.

495. Securities and Exchange Commission. Rules and Regulations.Rules and Regulations Governing Securities Exchanges and their Members, Brokers, Dealers, Salesmen and Customers, Rule A18.

496. Id., Rule Cl.

497. Securities and Exchange Commission. Rules and Regulations, at 26-27. See also the Commission’s Rules and Regulations on Form and Content of Financial Statements (July 1, 1973).

498. Id., at 27-28.

499. Id., at 29-30.

500. Id., at 76-80.

501. The Civil and Commercial Code, Book III, Section 1196.

502. Ld., Section 1197.

503. Id., Section 1199.

504. Section 1198. For illustrations of these reports, see Thai Investment Review, January, 1971.

505. The Civil and Commercial Code, Book III, Section 1206.

506. Id., Section 1207.

507. Id., Sections 1208-1212.

508. Id., Section 1214.

509. Kirkwood. Kaplan. Russin and Vecchi, Thailand Business LegalHandbook. 4 and 11: it is expected that new legislation inThailand will effectively distinguish between public and private companies.

510. Bangkok Stock Exchange, Rules and Bye-Laws, No.4.

511. Id.

VII: 34

512. Securities Exchange of Thailand Act, B.E.2517, Section 15(7).

513. Sidney M. Robbins. A Capital Market in Thailand (December, 1970) hereinafter referred to as "The Robbins Report”.

514. Id., at 35-36.

515. Id., at 36.

516. Id., at 117. Implicit in the Robbins Report's recommendations m this area is that a distinction be made, in the new legislation which it proposed, between public and private companies.

517.

518.

519.

520.

521.

522.

Id., at 198.

Id., at 201.

Id., at 305-309.

Id., at 310.

Id., at 313.

Id.

Id. Id., at 314: in the event of the proposed amendmentsbeing adopted, Professor Robbins believed that Sections 1210, 1211 and 1212 could be deleted.

523.

Chapter 8

VIII: 1

1. Insider Trading, A Report by JUSTICE, 1 (1972). Britishsection or m e international commission or jurists, su d-committee on company Law.

2. W. Painter, Federal Regulation of Insider Trading 2-3 (1968)

3. [1902] 2 Ch. 421.

4. Id. at 422: The court was not satisfied on the evidence that the board did intend to sell the company’s undertaking.

5. Id. at 423.

6. Id.

7. Percival v. Wright, note 3 supra at 424.

8. Id. at 426.

9. Section 195.

10. The Cohen Committee Report, paras. 86 and 87.

11. Report of the Company Law Committee, Cmnd. 1749, hereinafter referred to as "The Jenkins Report”.

June, 1962,

12. Id., para. 88.

13. Note 3, supra.

14. The Jenkins Report, note 11 supra at para. 89.

15. Id.

16. The Jenkins Report, note 11 supra at para-99 (a) (i).

17. Id., para. 99 (a) (ii), Id., para. 99 (a) (iii): it wasrecommended that breach of these provisions should render a director liable to the company both for profits which he made and damages which were suffered by the company as a result of the breach.

18. Id. para. 99 (b).

VIII: 2

19. See Companies Act, 1967, Sections27-30,

20. See notes 17 and 18 supra.

21. See The City of London Solicitors* Company, Report of the Company-Law Sub-Committee on Insider Trading (January, lyV3) for the arguments (ij that a company probably has a cause of action against a director who misuses confidential information (citing Boardman and Another v. Phipps, [1967]2 A.C. 46) and (ii) that there now exists a general principle that receipt of information known to be confidential gives rise ipso facto to a duty of confidence to the person who imparted that information (citing Seager v. Copydex [1967]2 All E.R. 415). In respect of the first (and by now well-established) propositon, see also Selangor United Rubber Estates Limited v. Cradock (No. 5)H968| 2 All E.R. 1073, and Industrial Development Consultants Ltd. v. Cooley 2 All E.R. 162.

22. The Australian Financial Review, Feb. 13, 1973 at 28, cols. 5-6 and at 39, cols, 1-3.

23. Financial Times, November, 1972, cited id. at 28, cols. 4-5.

24. Id.

25. Morse, Insider Trading, The Journal of Business Law 118(April, 1973). ~

26. Id.

27. The Justice Report, note 1, supra.

28. See note 2 supra and accompanying text.

29. The Justice Report, note 1 supra at 1.

30. Id.

31. Id.

32. The Justice Report, note 1 supra, at 7.

33. Id. at 3.

34. Id.

VIII : 3.

35. The Justice Report, note 1 supra at 7.

36. I_d. at 8.

37. Id.

38. The Justice Report, note 1 supra at 9.

39. Id.at 10.

40. Id.at 11.

41. The City of London Solicitors1 Company, Report of tfte Company Law Sub-Committee on Insider Trading ^January, 19 73) .

42. Id., at 1-8; of particular importance was its brief but informative descriptive of the United Kingdom extra-legal sanctions, v i z .,(i) Rule 30 of the City Code on Take-Overs and

Mergers and General Principle 10, Rules 5-7 and Practice Note No. 3; and

(ii) Clause 4 of the London Stock Exchange's "Listing Agreement - Companies".

43. I d . at 9-11; while it recommended that solicitors, accountants and other professionals be included within the definition, it would specifically exempt a company's bankers and stockbrokers for dealings undertaken by them "in the furtherance of their services to the company or in the normal courseof their business".

44. Id. at 10.

45. Id. at 11-14.

46. Id."At

, Introduction. Id; present there seems

the Report conceded that to be no consensus about

the desirability of introducing any new criminal penalty or civil remedy for insider trading".

47. Id. at 18.

48. Department of Trade and Industry, Company Law Reform, (Cmnd. 5391) (July, T9r7T) (hereinafter referred to as "the White Paper"). For a brief assessment of the insider trading provisions of the White Paper, see Spinks, Company Law Reform, The Insider, the Warehouseman and the Concert Party, 809 New~Law Journal (August 30, 1973).

V I I I : 4.

49. Id. at 8-9

50. Id., at 8.

51. Id. at 9.

52. Section 11(a). For recent SEC releases relevant to this provision, see Releases No.33 - 5275 and 34-9671, July 26, 1972, 37 F.R. 16011, in 1 CCH Fed. Sec. L. Rep.// 4506B.

53. Section 11(a) (l)-(5): these include, inter alia,all persons who signed the registration statement; directors of or partners in the issuer at the time of the filing of the relevant portion of the registration statement; persons who, with their consent, are named as being or about to become such directors or partners; professional persons such as engineers, accountants and others, who have prepared or certified any part of the registration statement; and underwriters with respect to the particular security.

54. Id.

55. Section 11(b).

56. See Escott v. Bar Chris Construction Corporation,283 F. Supp. 643 (S.D.N.Y. 1968),

57. Section 11 (e).

58. Section 12(1). Both sections are subject to a one year limitation of actions provision (Section 13).

59. An exception to this requirement is created bySection 15, which extends the liability imposed by both Sections 11 and 12 to those persons deemed to be in ’’control" of the defendants: Section 15.

60. For illustrations of actions brought under Section 12, see 1 CCH Fed.Sec.L .Rep. pp.4114-4135.

61. W. Painter, supra note 2 at 309.

V I I I : 5.

62. As this study is concerned primarily with theideational basis of the regulatory provisions, the actual mechanics of regulation such as those imposed by the NASD and the New York Stock Exchange will not be considered. For the reason that it proceeds on the assumption that insider trading should be regulated, no consideration is given to The American Law Institute’s Federal Securities Code Tentative Draft No.2: see, however, id., XIII, Deceptive andManipulative Acts. Finally, in order to keep this study within manageable bounds, no examination is made of blue sky regulation of insider trading.

63. Section 16 (a).

64. Section 16 (b).

65. This term has been defined as follows: " a president,vice-president, treasurer, secretary, comptroller, and any other person who performs for an issuer, whether incorporated or unincorporated, functions corresponding to those performed by the foregoing officers” (SEC Rule 3b-2) and, more recently and in a more limited contex, as ”a Chairman of the Board of Directors,Vice Chairman of the Board, Chairman of the Executive Committee, President, Vice President (except as indicated in the next sentence), Cashier, Treasurer, Secretary, Comptroller, and any other person who participates in major policy-making functions of the bank. In some banks (particularly banks with officers bearing titles such as Executive Vice President, Senior Vice President and First Vice President as well as a number of ’’Vice Presidents") , some or all "Vice Presidents" do not participate in major policy-making functions and such persons are not officers for the purpose of this part". Fed. Res. Reg. F, 12 Code Fed. Regs.§ 206.2 (o) :FDIC rules, 12 Code Fed. Regs. §335-2 (o), cited VL.Loss, Securities Regulation, 3052 (1969) . * 23

66. For a critical examination of a recent attempt toimply a private right of action under this sub-section, see Notes: An Implied Private Right of Action UnderSection 16(a) of the Securities Exchange Act of 1934,23 Case Western Reserve L. Rev. 155 (1971).

VIII: 6

67. For a discussion of the question of whether such payments,when made, are tax deductible, see Nelson, Tax Deductibility of Insider Profit Repayments: ResolvingAn Apparent Conflict, 24 Case Western Reserve L.Rev.330 (1973). -------------------------------

68. Section 16(b).

69. See Smolowe v. Delendo Corporation, 136 F. 2d 231 J 2 d Cir. 1943) cert, denied, 320 U.S. 751 (1943) and Blau v. Max Factor § Co., 342 F. 2d 304, 308 (9th Cir.) cert, denied, 382 U.S. 892 (1965).

70. See 2 CCH Fed. Sec. L. Rep. 7/26,081-7/26,094.71. Id. at 7/ 26,101.

72. S ee, for example, Cook and Feldman, Insider TradingUnder the Securities Exchange A c t , 66 Harv. L.Rev. 385(1953); Comment: Reliance Electric, OccidentalPetroleum and S.16(hJ~; Interpretative Quandary over Merger, 51 Texas L.RevT 89 (1972) ; Comments:Minimizing s.16(b) Liability for Beneficial Owners- Two Step Transactions: Reliance Electric Co. v .Emerson Electric Co. 404 U.S. 418 (1972) , WashingtonU.L.Q. (Winter, 1973); Recent Decisions:Securities - Corporations Receptive of Insiders* Short Swing Profits" 56 Marquette L. Rev. 142 (Fall, 1972):Case Notes: Securities - Insid'ers* Liability underSection 16 (b) on Second Sale in Two-Step Selldown Transactions in Reliance Case, XIV Boston Coll.I. $ C. L. ReVl 560 (1973); Section 16 (bj'ot the 1934 Act The~Question TTf Applicability in Determining Insider Liabilities, 811 24 Syracuse L. Rev. (1973) ; and Nelson, Tax Deductibility ot insider Profit Repayments: Resolving an Apparent Conflict, 24 Case Western ReserveL. Rev.3§0 (19/33• In respect of the six-month limitation period, see Diamond v. Oreamuno, 24 N.Y. 2d 494 248 N . E . 2d 910, 310 N.Y. 5. 2d 78 (1969) and Notes: Securities - Inside Information as a Corporate Asset,1970 Wis.L.Rev. 576.

73. See Comments, Insider Trading on the Open Market: Nondisclosure and Texas Gulph Sulphur, 42 So. Cal. L. Rev. 309309 (1968-69). In respect of the narrow judicial interpretation accorded the section, see particularly Blau v. Lehman, 368 U.S. 403 (1962).

74.

75.

76.

77.

VIII:

78.

79.

80.

81.

82.

83.

84.

For an interesting anecdotal account of the formulation of this Rule, see W. Painter, supra note 2 at 21, n. 21.

Adopted by the SEC in Release No. 3230, May 21, 1942.13 F.R. 8177.

See Painter, Inside Information: Growing Pains forthe Development of Federal Corporation Law Under Rule 10fbV-5. 65 Colum L. Rev. 1361 f19651. See also McClure v. Borne Chemical Co., Inc 293 F. 2d 824 at 834, CCA 3, (1961).

See Stock Exchange Practices. Report of Com, on Banking and Currency. S. Rep. No. 1455, 73d. Cong. 2d Sess (1934) (hereinafter cited as "the Senate Report"). In this study, attention will be concentrated upon the Senate Report: it is acknowledged that the House Report added nothing of substance in this area. See H. Marine, Insider Trading and the Stock Market (1966) citing H.R. Report No. 1383, 73d Cong., 2d Sess., 1934.

The Senate Report, note 77 supra at 3.

Id., at 30-55.

Id., at 56-68.

Id., at 55: "Among the most vicious practices unearthedat the hearings before the sub-committee was the flagrant betrayal of their fiduciary duties by directors and officers of corporations who used their positions of trust and the confidential information which came to them in such positions, to aid them in their market activities. Closely allied to this type of abuse was the unscrupulous employment of inside information by large stockholders who, while not directors and officers, exercised sufficient control over the destinies of their companies to enable them to acquire and profit by information not available to others".

Id., at 61.

Id., at 62-63.

See Mathias, Manipulative Practices and the Securities Exchange Act, 3 U. Pitt L. Rev. 7 at 110 (1936).

7.

V I I I : 8.

85. The Senate Report, note 77 supra at 66-68.

86. ]A1. at 67.

87. _Id. at 68: Anaconda Copper Co.; Chile Copper Co.;Andes Copper Co.; Greene Cananea Co.; the Fox Film Corporation and the Fox Theatres Corporation.

88. Id.

89. Id.

90. Section 9.

91. Section 16 (b).

92. Comment, Insider Trading on the Open Market: Non-disclosure and Texas Gulph Sulphur, 42 S o .Cal.L .Rev.309 at 316 (1968-69).

93. A number of difficulties have arisen in the inter­pretation of the section. For the argument that where a director of the issuer corporation acts in the interests of another firm, the latter may be said to have deputed him, and should thus be liable as an insider for any short swing profits which it makeson the issuer’s securities, see Sherman, Deputization under 16(b): The Elements of a Cause of Action,31 U. Pitt L. Rev. 724 (1969-70). For examinations of a recent decision (Reliance Electric Co. v.Emerson Electric Co., 404 U.S. 418 (1972)) which may have the effect of limiting the scope of the section, see Reliance Electric and 16(b) Litigation: A Returnto the Objective Approach, 58 Va. L. Rev. 907 (1972), and Notes: Reliance Electric Co. V. Emerson ElectricCo. : Split Sale Device May be Used to Avoid LiabilityUnder Section 16(b) of Securities Exchange A c t 67 Nw. U.L. Rev. 263 (1972). Finally, for a considered plea tor a reassessment of the whole function and purpose of the section, see Gerson, Section 16 (b) : Re-evaluation is Needed, Comment, 25 U. of Miami L. Rev. 144 (1970). ---------------------

Ruder, Civil Liability Under Rule 10b-5: Judicial * 627Revision o£ Legislative Intent?.57 Nw. U.L. Rev.627 at 628 (1962-63). --------------

94.

VIII 9.

95. Note, The Prospects for Rule X-10B-5; An EmergingRemedy for Defrauded Investors, 59 Yale L.J. 1120 at 1133 (1950). ---------

96. Ruder, supra note 94 at 645-658.

97. Proceedings, Conference on Codification of Federal Securities Laws, 22 Bus.Law. 793 at 922 (1967), remarks of Milton Freeman.

98. Id.

99. 69 F. Supp. 512 (E.D. Pa. 1946); 73 F. Supp. 798(E.D. Pa. 1947).

100. d.. , at 513.

101. Id.

102. Kardon v. National Gypsum Co., note 99 supra at 514.

103. Id.

104. See Ruder, supra 94 note 94 at 631-635.

105. Kardon v. National Gypsum Co., note 99 supra at 514.

106. Id.

107. See Note, 59 Yale L.J. , note 95 supra at 1134-5, and also Fischman et.al. v. Raytheon Manufacturing Co.et. al. 188 F. 2d 783 (2d Cir 1951) at 787,n.4, citing id .

108. Ruder, supra note 94 at 635.

109. See Joseph v. Farnsworth Radio § Television Corporation, 99 F.Supp. 701, 706 (S.D.N.Y. 1951).

110. 40 S.E.C. 907 (1961).

111. Chairman Cary, Commissioners Woodside and Cohen: Commissioner Frear dissenting in part.

112. Cady, Roberts § Co., note 110 supra at 911.

VIII; 10,

113. Id. citing, inter alia, Kardon y, National Gypsum Co.,73 F, Supp, 798? 800 (E,D. Pa. 1947], The Commission also indicated that if disclosure would be improper or unrealistic under any particular set of circumstances,the insider’s alternative was to not enter the transaction.

114. Cady, Roberts § Co., note 110 supra at 912,

115. Id. at 913-914.

116. Id, at 914-915.

117. For the argument that, prior to the Cady, Roberts case, it was doubtful that the Commission saw Rule 10b-5 as being related to insider trading except in situations of fraud, see W. Painter, supra note 2, at 155-158.

118. Securities and Exchange Commission v. Texas Gulph Sulphur et.al., 258 F. Supp. 262 (S.D.N.Y. 1966] hereinaftercited as "TGS No.l”; 401 F. 2d 833 (2nd Cir. 1968] cert, denied sub. nom. Coates v. SEC, 22 L. Ed. 2d 756 (1969], hereinafter cited as nTGS No. 2". For an examination of the law relating to insider trading at the time at which the second circuit was considering the appeal in this case, see Jennings, Insider Trading in Corporate Securities: A Survey of Hazards and DisclosureObligations Under Rule 10b-5 62 Nw U,L. Rev. 809 (1968]

119. See the District Court judgement, 258 F. Supp. 262 at 267-275.

120 W. Painter, supra note 2 at 100-101.

121. TGS No. 1, at 277, In coming to this conclusion, the court relied primarily upon SEC v. Capital Gains Research Bureau, 375 U.S. 180, 84 S. Ct. 275, 11. L.Ed. 2d 237 (1963].

122. Id.at 278. In this respect, the Court relied uponCady, Roberts $ Co., 40 SEC 907 (1961] and III L. Loss,Securities Regulation, 1473, 1474 (2d ed. 1961].

123. Citing Strong v. Repide, 213 U.S. 419, 29 S.Ct, 521,53 L. Ed. 853 (1908].

124. TGS No. 1, at 279.

VIII 11.

125.

126.

127.

128.

129.

130.

131.

132.

133.

134.

135.

136.

137.

138.

139.

140.

141.

142.

143.

144.

145.

Id. citing Cochran v. Channing Corporation, 211F. supp. 239 (S.D.N.Y. 1962).

ID.

TGS No. 1 at 280.

List v. Fashion Park, Inc., 340 F. 2d 457, at 462 (2d Cir. 1965).

Cady, Roberts $ C o .,note 110 supra at 911. * 12

TGS No. 1 at 280-281, citing Fleischer, Securities Trading and Corporate Information Practices: The Implicationsof the Texas Gulph Sulphur Proceeding, 51 Va. L . Rev.12 7"l ,"T2F9-ri'9"^J • ~ -

TGS No. 1 at 289-290.

W. Painter, supra note2 at 193 § n.10, citing Commission Post-Trial Memorandum P. 34, n. 34; p.113, n.72.

See note 118 supra.

TGS No. 2, at 848.

Id., citing Fleischer, supra note 130.

TGS No. 2,at 849.

Id.

TGS No. 2,at 851-852.

Id., at 875-876.

Id., at 877.

Id., at 854.

See TGS No. 2, at 854, citing TGS No. 1 at 288.

TGS No. 2, at 854-855.

ID., at 866-868.

See W. Painter, supra note 2 at 231-236.

VIII: 12.

146. TGS No. 2,at 852-853.

147. Ross v. Licht, 263 F. Supp. 395 (S.D.N.Y.), cited in W. Painter, supra note 2 at 224.

148. For some subsequent developments in this area,see notes 167 and 168 infra and accompanying texts.

149. TGS No. 2, at 858-862.

150. Id., at 860.

151. Id., at 860-861.

152. Id., at 884.

153. Id. , at 885.

154. Id., at 886-888.

155. Id., at 886.

156. See, for example,Note, Insider Trading on the Open Market: Nondisclosure and Texas-Gulph Sulphur, 42 So. Cal. L. Rev.309 at 324 - 327 (T9F8-69'): ahdTTV, fainter, supra NoteT at 261-263.

157. For a brief, general assessment of the post-Texas GulphSulphur situation, see Starr, Insider Trading after Texas Gulph: Where We Now? XLIV Penn. Bar Assocn.Quarterly,525 (June, 1973). For a defence of the expansion of Rule 10b-5 and an argument against codification of the law in this area, see Lowenfels, Codification and Rule 10b-5,23 Vand. L. Rev. 591 (1970).

158. Marsh, What Lies Ahead Under Rule 10b-5? 24 The Bus. Lawyer.69 (1968-69).

159. Loss, The Fiduciary Concept as Applied to Trading by Corporate "Insiders" in the United States 33 ModT L. Rev.34 (1970).

160. See Schoenbaum v. Firstbrook 405 F. 2d. 215 (2d Cir. 1968); Superintendent of Insurance v. Bankers Life and Casualty Co. 404 U.S. 6 (1971); and Drachman v. Harvey, 453 F.2d 722 (2d. Cir. 1972). For comments on these cases and their influence on Rule 10b-5, see Roantree, The Continuing Development of Rule 10b-5 as a Means of Enforcing the Fiduciary Duties of Directors and Controlling Shareholders,34 U. Pitt L. Rev. 201 (1972); Lowery, Securities Regulation - Deception and the "in connection with*' * 347clause of Rule 10b-5, 50 Nth Carolina L. Rev. 943 (1972). cf., however, In re. Penn Central Securities Litigation,347 F. Supp. 1327 (E.D. Pa. 1972).

V I I I : 13.

160. contd.

See also Kincaid, The Nature and Scope of the Reliance Requirement in Private Actions under SEC Rule 10b-5 , 24 Case Western Reserve L. Rev. 363 (1973) and also~The Supreme Court, 1971 Term; Securities Regulation, 86 Harv. L. Rev. 259(1972) . Additionally, in respect of' tire Bankers Life case, see Notes, Securities Regulation - Rule 10b-5 - The Supreme Court's Holding in Superintendent oT Insurance v. Bankers Life and Casualty C o . 404 U . S . 6 X1971), May Force a Renewed Search for a Limiting Doctrine for Rule 10b-5 Liability, 50 Texas L. R e v . 1273 ("1972). Also in respect of Drachman v ." Hamrey, see Recent Decisions, 10 Duquesne L. Rev. 692 (1972).

161. Roantree, supra note 160 at 219.

162. TGS No. 2, 401 F. 2d 833 at 848 (2d Cir. 1968).

163. In r.e Investors Management Co., SEC SecuritiesExchange Act Release No. 9267, (1970-1971 Transfer Binder) CCH Fed. Sec.. L. Rep. 7/ 78 , 163 (July 29 , 1971). For a discussion of the etfect of this decision which concludes that it adds to the existing confusion surrounding Rule 10b-5, see Comments, Investors Management Co: Confusion of Clarification of Rule~10b-5? 1971Utah L.~ Rev. 594.

164. CCH Fed. Sec. L. R e n , at 80, 519. See Ruder,Multiple Defendants in Securities Law Fraud Cases;Aiding and Abetting, Conspiracy, In Pari Delicti, Indemnification, and Contribution, 120 U. Penn. L . Rev.597 at 610-612 (1972). ------------------

165. Ruder, supra note 164 at 612. For a recent illustration of the imposition of liability upon both "tippees" and non-trading "tippers” , see Shapiro, et.al.v. Merril Lynch, Pierce, Fenner § Smith Inc., et.al.,CCH Fed.Sec. L. Rep, 'll 94,473.

166. SEC v. Texas Gulph Sulphur Co., 312 F. Supp. 77 at 93 (S.D.N.Y. 1970) aff’d in part and rev’d in part, 446F.2d 1301 (2d cir), cert, denied 404 U.S. 1005 (1971).

167. See In re Investors Management Co., note 163, supra.

168. In respect of the liability of "tippees", see Deference of Tippee Trading Under Rule 10bV~5,38 U. Chi. L. Rev. 372 (1971), which argues,inter alia, that tippers should be fully liable for their tippees’ profits and that tippees should be liable, to the extent of their profits, for judgements which the tipper cannot meet; Investors Management: Institutional Investors as Tippees, 119 U. Pa. L. Rev. 502 (1971)which argues that the Investors ManagemenT decision,in extending liability to tippees, went significantly beyond the Cady, Roberts $ C o .and Texas Gulph Sulphur decisions; and Rapp and Loeb,Tippee Liability and Rule 10b-5 1971 U .I11. L .F .55, which accepts Investors ManagemenT~as an adequate test and argues that, while Rule 10b-5 should cover tippees, it should, in its interpretation, distinguish ’’innocent” tippees from "blameworthy" ones.

169. Fleischer, Mundheim and Murphy, An Initial Inquiry into the Responsibility to Disclose Market Information, 121 D. Penn. L. Rev. 798 (1973). See id.at 799, where market information is defined as "information about events or circumstances which affect the market for a company’s securities but which do not affect the company’ assets or earning power".

170. As illustrations of some of the complexities which havearisen from Rule 10b-5, see Notes: The Role ofScienter and the Need to Limit Damages in Rule 10b-5 Actions - The Texas Gulph Sulphur Litigation, 59 K y .L .J .891 (1970 - 7 1 ) [difficulties re scienter and damages arising from the possibility of three categories of plaintiff instituting actions under the rule);Kellog, The Inability to Obtain Analytical Precision Where Standing to Sue Under Rule 10b-5 is Involved,20 Buffalo L. Rev. 93 (1970-71) and Boone and McGowan, Standing to Sue Under SEC Rule 10b-5, 49 Texas L. Rev. 617 (1971) (problems re status necessary to institute actions); Notes: Securities Regulation - Damages -The Possibility of Punitive Damages as a Remedy for a Violation of Rule 10b-5, 68 MichT L. Rev. 1608 (1969-70) (argues that the 1934 Act may be read for or against awarding such damages, but concludes that a case-by-case approach should be followed, with juries being allowed the right to award such damages in appropriate cases); Notes: Insider Disclosure - AConflict Between Section 5 (c) and Rule 10b-5~37 Brooklyn L. Rev. 123 (argues that the expansive interpretation.and use of Rule 10b-5 is repugnant to the

VIII: 14.

VII I : 15.

170 contd.

general judicial intention that the 1933 and 1934 Acts be construed as one comprehensive scheme of regulations); Escott v. Barchris Construction Corp.283 F. Supp. 643 (S.D.N.Y. 1968) and Notes:Prospectus Liability and Rule 10b-5: A Sequel toBarchris, 1971 Duke L .J . 559 (problems of possible liability under Rule 10b-5 for misrepresentations contained in a prospectus); Notes, Texas Gulph Sulphur:The Question of Remedy, 65 Nw. U.L. Rev. 486 (1970-1971) (the problems of extending the remedy for privity cases in insider trading to exchange market situations);Comments, The Impact of Class Actions on Rule 10b-5,38 U. Chi. L. Rev. 337 (1971) (argues that the expanding liability under 10b-5 class actions may be "undesirable and unwarranted"); Dykstra, The Battle Grounds of 10(b)-5, 1971 Utah L. Rev 297 (1971)(general problems inherent in the development of Rule 10b-5, for example, standing to sue, scienter, materiality, causation and reliance); Kripke, Rule 10b-5 Liability and "Material Facts", 46 N.Y.U.L. Rev. 1061 (1971)(general difficulties with the Rule, and specifically the problems of "materiality" and the proper deter­mination of facts in cases under the Rule); and Notes and Comments "Federal Corporation Law" and 10b-5 :The Case tor Codification, 45 St. Joh n ’s L. RevT 274 (1970) (suggests legislative clarification as "the long range solution to an already strained inter­pretation of rule 10b-5").

171. H. Manne, supra note 77.

172. This judgement was delivered on August 19, 1966.

173. H. Manne, supra note 77 at 2-4.

174. Id. , at 4-8.

175. Id. , at 8-10.

176. Id. , at 12-15.

177. Id. , at 15 (footnote omitted).

178. Id. , at 17. Cf. the U.K. White Paper, note 48 supra

179. 213 U at 21

.S. 419 (1909). -24.

See H. Manne, sup ra note 77

180. H. Manne, supra note 77 at 26-31. In this respect, he stressed the' 'importance of the Supreme Court’s restrictive inter­pretation of the Section in Blau v. Lehman? 368 U.S. 403 (1962).

181. H. Manne, supra note 77 at 36-37.

182. Id., at 37-39.

183. Id., at 39-46.

184. Id., at 48. First category information consists of knowledge oF the functions and operations of the securities market, how various events affect that market, etc. Information of this kind, which is knowledge or market sophistication possessed by brokers, dealers or investment advisers, would not normally be regarded as ’’inside” information. Second category information consists of knowledge of specific events or the probability of future events which will cause a change in share prices. As Manne points out, the value of this informationis highly ephemeral and thus its acquisition and transmission quite complex.

185. Id.., at 93-109.

186. Id., at 110. For an economist's examination of Section 16, which suggests that speculative trading by insiders may be beneficial in an economic sense, see Wu, An Economist Looks at Section 16 of the Securities Exchange Act of 1934, 68 Colum.L. Rev. 260 (1968).

VIII: 16.

187. H. Manne, supra note 77 at 116-117.

188. Id., at 115.

189. Id., at 118.

190. Id.,at 119.

191. Id., at 123: "There is much that we do not yet know aboutentrepreneurial motivation. One thing, however, is clear: we do not know that allowing entrepreneurs to claim high rewards will not produce more of this service".

192. Again, the argument to sustain this rejection is unsupportable; see id., at 134.

193.

194.

195.

196.

197.

198.

199.

200.

201.

202.

203.

204.

205.

206.

207.

208.

VIII;H. Manne, supra note 77 at 138.

Id., at 156.

Id., at 159-160.

Id., at 161-163.

Id., at 166-167.

See Id., Chapter XII.

Symposium - Federal and State Regulation of Securities.Panel Discussion - The Emergence of "Federal Corporation Law" and Federal Control of Inside Information, 34 U.M.K.C.L. Rev.172 at 228.

Id., at 235.

V L.Loss, Securities Regulation, 2999 (1969 Supp.),

W. Painter, supra note 2 at 348-368-

Hetherington, Insider Trading and the Logic of the Law [1967] Wise. L. Rev. 720.

Poser, Book Review, 53 Va. L. Rev. 753 (1967).

See Symposium on Securities Regulation; Manne, Insider Trading and the Law Professors; Ferber, The Case Against Insider Trading: A Response to Professor Manne; Manne, A Rejoinder to Mr. Ferber all in 23 Vand. L. Rev. 119701.

The Toronto Stock Exchange, Brief to the Royal Commission on Banking"and Finance (Auguft, 19bz).

Id., at 89-90.

Brief to the Royal Commission on Banking and Finance, The Montreal Stock Exchange and the Canadian Stock Exchange (August, 1962).Report of The Royal Commission on Banking and Finance (1964) hereinafter"'referred to as "the Porter Report".

17.

209.

18.

210. Id., at 350.

211. Id., at 350-351.

212 Id., at 351.

213. Ontario, Report of the Attorney-General's Committee on Securities legislation m Ontario (March 19o5), hereinafter referred to as^the Kimber Report”. Id., at 6; one of the Committee’s specific terms of reference was- ..the problems.. .of r insider’ trading”.

214. Id., at 9. For a generally favourable review of the Kimber Report's recommendations in this area (because of their alleged contribution to the evolution of a higher level of morality inthe securities industry) see Crawford, Insider Trading,8 Can. Bar. Jnl. 400 (1965J7

215. Id., at 10.

216. Id.

217. Id.

218. The Kimber Report, note 213 supra at 11. These were defined as "the Chairman and any Vice - Chairman of the Board of Directors, the President, any Vice-President, the Secretary, the Treasurer, the General Manager and any other person performing functions similar to those of such officers, together with the five highest paid employees of the Company other than the foregoing, whose direct remuneration paid by the company or its subsidiaries isat a rate in excess of $20,000 per annum”.

VIII:

219. Id., at 11-13.

220. Id., at 13.

221. Id., at 16.

222. Id., at 17.

223. Id., at 15.

224. Id., at 17.

225. W. Painter, supra note 2 at 371.

226. Report of the Royal Commission to Investigate Trading in the Shares of Windfall Oils and Mines Limited (September, 1965), referred to as "the Kelly Report”.

VIII;227.

228.

229.

230.

231.

232.

233.

234.

235.

236.

237.

238.

239.

240.

P. Williamson, Securities Regulation in Canada, 351 (Supp. 1966)•

Dickerson, Howard and Getz, Proposals for a New Business Corporations Law tor Canada, (1971).

19.

Id., at 88: "In the circumstances, it seems unnecessaryto reargue the soundness of the principle here, and we have simply adopted it".

See id., at 88-91. These proposals have found expression, in an amended form, in Bill 75; see Part XIX.

For a brief report on the insider trading of securities in Kaiser Resources Ltd., of British Columbia, which revealed inadequacies in the existing regulatory system, see The Australian Financial Review, Mar. 21, 1972, at 7, cols. 1-5 and at 8, cols. 3-4.

P. Williamson, supra note 227.

Id., at 347-352.

Id., at 351-352.

Id., at 351.

Id.

Bray, Recent Developments in Securities Administration in Ontario: The Securities Act, 1966, in Ziegel (ed.),Studies in Canadian Company Law (1967).

For an examination of insider trading problems in the context of directors’ fiduciary duties, see Beck, The Saga of Peso Silver Mines: Corporate Opportunity Reconsidered,XLIX The Canadian Bar Review 80 (1971).

S. Robbins, A Capital Market in Thailand (1970).

Report of the Committee on Proposed Legislation for the Regulation of Stock hxchanges and Contracts m Securities (1951) (the Gorwala"Report).

241. Ld., at 2: "Speculation, then has a place in the originalmarketing of shares, but it has a strictly limited place for strictly defined categories of persons; and even if the right persons occupy it, there is always before them the temptation to encroach beyond it to a region in which they can only cause harm to the public interest. The essenceof the regulation of stock exchanges is the control of speculation in stock exchanges, and the crux of the control of speculation is its confinement to the right sphere, the right persons and the right type and volume of operations".

242. Views of the Stock Exchange, Bombay, on the Report of Dr. P.J. Thomas bn "The Regulation of the Stock Market m India" (August, 1948). 243 244 245 246 247 248 249 250 251 252 253 254 255

243. Id.,at 35.

244. Securities Contracts (Regulation) Rules,1957, Rule 19 (1) (0).

245. Companies Act, Singapore, Section 131.

246. Id. , Section 133.

247. Id., Section 134.

248. Id., Section 135.

249. This term, which includes directors (S.4), is broadly definedas also including any person who has at any time been an officer of the company (S.132 (6)).

250. This term is also broadly defined, and includes "a banker, solicitor or auditor of the company and any person who at any time has been a banker, solicitor or auditor of the company"(Section 132 (6)).

251. Section 132 (3).

252. See also the new section 132A recently introduced into the Singapore legislation.

253. G. Ferris, A Study of The Securities Market in Singapore and Malays ia~7 (19/0).

254. Id., at 17.

255. Act 112, 1973.

VIII: 20.

VIII: 21

256. Act. No. 17 of 1973.

257. Tan Pheng Theng, The Securities Industry Bills of Malaysia and Singapore, Bill No. 2 of 1973, Malaysia; Bill No. 6 of 1973, Singapore, Malayan Law Journal. XVI at XVIII (1973).

258. Id. For the wider insider trading provisions of the Stock Exchange of Singapore Limited, see Stock Exchange of Singapore Limited. Corporate Disclosure Policy, at 8.

259. Section 87: "It shall be unlawful for any person, to make anystatement or disseminate any information with respect to any security, which at the time it was made or disseminated, heknew or had reasonable grounds for knowing was false or misleading in a material particular".

260. Chapter 32.

261. First Report of the Companies Law Revision Committee - The * 262 263 264 265 266 267 268 269 270 271Protection of Investors (19711. ~

262. Id., at 100.

263. Ordinance No. 12/74.

264. Section 140.

265. This category of persons is extremely widely defined; seeSection 140 (9).

266. Id. Which information is not generally made available but, if it had been, might reasonably be expected to affect materially the market price of the securities.

267. Section 140 (1). A similar provision has been inserted relating to knowledge of specific information in connection with any other corporation; see Section 140 (2).

268. Section 140 (3).

269. Section 140 (4) (a).

270. Section 140 (4) (b).

271. Section 140 (5).

Section 140 (7).272.

VIII 22.

273. Section 140 (8). For exemption provisions which relate to, inter alia, the acquisition of qualification shares, and underwriting, see Section 140 (11).

274. Section 140 (3),

275. Com. Act No. 83, as amended.

276. Id., Section 26 (a) and (b).

277. SEC, Rules and Regulations Governing Securities, Exchanges and Their Members, Brokers, Dealers, Salesmen and Customers,Rule Cl.

278. Section 20 (a) (4).

279. Cagampang, The Fiduciary Duties of Corporate Directors under Philippine Law, 46 Philippine Law Journal 513 at 572 (1971). This article provides an examination of the wider fiduciary duties of directors in the Philippines as well as an interesting background to the Philippines origin of the important United States case of Strong v. Repide, 213 U.S. 419, 53 L.Ed. 853, 29 S.Ct 521, which was a reversal of an earlier Philippine Supreme Court decision 6 Phil. 680 (1906):see also 41 Phil. 947 (1909). On the wider question of responsibilities of directors, see also S. Guevara,The Philippine Corporation Law, 161-163 (bth Ed .T967) and 3 A.Agbayani, Commentaries and Jurisprudence on the Commercial Laws ot the Philippines, 342-424 (1970 ed.j.

280. Cagampang, supra note 279 at 571.

281. Securities Exchange Law, 1948, Section 189.

282. M.Tatsuta, Securities Regulation in Japan, 111 n.5 (1970).

283. Yazawa, The Legal Structure for Corporate Enterprise: ShareholderManagement Relations under Japanese Law, in von Mehren (Ed.)Law in Japan: The Legal Order in a Changing~~Society 547 at 557(1963). This situation appears to have been misinterpreted by one United States commentator who states that "...due to the inability of the Japanese to understand the basis for imposing liability, the legislation has proved to be largely inneffective"; W. Painter, supra note 2 at 46 (1971 $upp.). The position is not that the basis was not understood but that, being understood, it was so contrary to Japanese concepts of shareholder - management relationships that it has not been implemented. For a recent examination of the fiduciary duties of directors in Japan which does not mention the Securities Exchange Act's insider trading provisions, see Shibuya, Fiduciary Duties of Directors - Fairness in Regulation of Corporate Dealings with Directors,5 Law in Japan^ An Annual 115 (1972).

284. Article 58.

285. M. Tatsuta, supra note 282 at 111, n.5.

VIII: 23.

286. Id., at 111.

287. See Sections 1167-1168.

288. Section 1169.

289. Companies Act, Section 124 (1).

290. "Officer" was defined in Section 5 of the statute, in relation to a corporation, to include any director, secretary or employee of the corporation; a receiver and manager of any part of a corporation’s undertaking who was appointed under a power contained in any instrument; and any liquidator of a coup any appointed in any voluntary winding up. The definition excluded receivers who were not also managers, court- appointed receivers and managers and court-appointed or creditor-appointed liquidators.

The inconsistency caused by Section 124’s use of the phrase "officer of a company" and Section 5's use of the term "officer" in relation to a corporation, has, on the recommendation of the Eggleston Committee, been removed by the 1971 amendments. Section 124 now refers to an "officer of a corporation".

291. Companies Act, Section 124 (2).

292. Id., Section 124 (3) (a) § (b).

293. In the Victorian provision, S.107, the words "directly or indirectly" were omitted from sub-section (2).

294. Wallace and Young, Australian Company Law and Practice,393 ti965DV' ~ ~ ----------------------------- 295 296 297

295. Id., citing the Explanatory Memorandum presented to the Victorian Parliament in conjunction with the Bill which became that State’s Companies Act, 1958.

296. 1964 V.R. 443.

297. Id., at 453.

298. Company Law Advisory Committee, Fourth Interim Report to the Standing Coiiifiilltee of Attorneys - General on Misuse of Confidential information, Dealings m options, Disclosure By directors and nummary of Recommendations, February ZU, 1970).

VIII: 24.

299. Id., at 5.

300. Id., at 6.

301. Id.

302. QL902] 2 Ch. 421; see note 3 supra and accompanying text.

303. Eggleston Committee, 4th Interim Report, note 298 supra at 6 (emphasis added).

304. Id.

305. Id., at 7.

306. For the rationale of this change, see Eggleston Committee 4th Interim Report, note 298 supra at 7.

307. Page, Directors and the new Companies Act, 1 The Australian Director, 16 at 33 (1972).

308. New South Wales, Securities Industry Act, 1970-71 Section 75A . Section 124 itself does of course remain in the New South Wales legislation. For an important, although as yet not finally resolved, action by the Corporate Affairs Commission under this Section, see The Australian, Dec. 18, 1973 at 11, cols. 5-6, and The Australian, Apr. 18, 1974 at 17, cols. 4-6.

309. Page, supra note 307 at 35: the N.S.W. Attorney-Generalhas indicated that Section 75A will be assimilated into the Companies Act. This lias as yet, however, not happened. 310 311 312 * 314 315

310. New South Wales Parliamentary Debates, Legislative Council,April 28, 1971, at 347-348.

311. Id., at 348.

312. Id. , at 351.

313 New South Wales Parliamentary Debates, Legislative Council,May 4, 1971, at 498.

314. Id., at 499.

315. Id.,

316. New South Wales Parliamentary Debates, Legislative Assembly, May 6, 1971 at 843.

317. Section 75A (6) (a)-(e).

318. Section 75A (1).

319. New South Wales, Parliamentary Debates, Legislative Council, May 4, 1971, at 499-501.

320. Id., at 499.

321. Id., at 500.

322. Section 75A (2).

323. Section 75A (4).

324. Section 75A (5).

325. Report of the Inspector Appointed Pursuant to Section 178 (1)of the Companies Act 1961 of the State of Victoria to investigate and report on the circumstances in which any person acquired or disposed of, or became entitled to acquire or dispose of, any shares in Tasminex N.L. during the period November 7, 1969 to March 18, 1970 (August 1970), hereinafter referred to as "The Tasminex Report". 326 327 328 329 330 331 332 333 334

326. Id. , at 9: the newspaper story was first published in London,where the company1s shares, in the two hours before close of trading, reached a high of approximately $96.00.

327. Id.,at 10.

328. Id. at 31.

329. Id.,at 38.

330. Id.,at 40-43.

331. Id., at 43-50.

332. Id., at 51-52.

333. Id., at 55.

334. Id., at 56.

VIII: 25.

335. L. Loss, Proposals for Australian Companies and Securities I^gTSTationf Comments from rhe American Experience,(15 July,' 1-975)3-------------------------

336. See Slater, supra note 24.

337. W. Eiteman, C. Dice and D. Eiteman, The Stock Market 31b (4th 5d. 1966j. See also J. Dundas Hamilton,Stockbroking Today,Chapter 4 (19b8j.

338. Id., at 516-527.

339. G. Leffler and L. Farwell, The Stock Market. Chapter 30,(5cT ed~. 1965)"----------- = 340

340. For the most recent New South Wales decision on the question of directors’ duties. See Re Castlereagh Securities Ltd. and the Companies Act, (1973) 1. N.S.W.L.R. 624.

VIII: 26.

Chapter 9

IX: 1

1. See notes 127-138, infra, and accompanying text.

2. The recent fomation by New South Wales, Queensland, Victoria and Western Australia of the Interstate Corporate Affairs Commission, confirms the intransigience of at least these four states in this important field.

3. See Part V D. infra.

4. Commonwealth Administrative Review Committee. Report. 86-92 (1971), herinafter referred to as "The Kerr Report".

5. See Chapter 2 supra.

6. See The Securities Act, 1933, Section 18; The Securities Exchange Act, 1934, Section 28.

7. See Chapter 2 supra.

8. See id.

9. Douglas and Bates, The Federal Securities Act of 1933,43 ^ l e L.J. 171, 211-212 (1933-34).

10. Rodell, Regulation.q£. Securities by .idle..Federal Trade, Commission,43 Yale L.J. 272 at 278-280 (1933-34).

11. Section 2.

12. Section 2(1) and (4).

13. See Smith, The Relation of Federal and State Securities Laws. 4 Law and Contemn. Prob. 241 (1937). 14 15 16

14. See Chapter 2 supra.

15. See Briefs of Toronto, and Montreal and Canadian Stock Exchanges to the Royal Commission on Banking and Finance (1962).

16. See, for example, Report of the Royal Commission on Banking.and Finance 348 (1964); Report of the Royal Commission to Investi­gate Trading in the Shares of Windfall Oils and Mines Limited,102 (September, 1965); and Dickson, A Dominion - Provincial Securities Commission for Canada, (April 15, 1966) (unpublished thesis in Harvard Law School Library).

IX: 2

17. See, for example, Ontario Securities Commission, Report of the Committee of the Ontario Securities Commission on the Problems of Disclosure Raised for Investors bv Business Combinations and Private Placements (1970) (herinafter referred to as "The Merger Study"); Government of Quebec, Report of the Study Committee on Financial Institutions (1969) (herinafter referred to as "The Parizeau Report").

18. These are: in New South Wales, the Commissioner for CorporateAffairs; in Queensland the Commission of Corporate Affairs and in the other jurisdictions, the Registrar of Companies.

19. This problem is particularly evidenced in those difficulties faced by, e.g., an inspector appointed in New South Wales to investigate the affairs of a particular company, which affairs extend throughout other states of Australia. Such inspector has to be appointed a special inspector in another state before he can obtain access to the records of a company in that other state.

20. See Chapter 5 supra.

21. See Chapter 2 supra.

22. See Part V D. infra.

23. C. Howard, Australian Federal Constitutional Law.136 (2d ed., 1972).

24. D. Beniafield and H. Whitmore. Principles of Australian Administrative Law 21 (4th ed. 1971).

25. 46 C.L.R. 73 (1931), herinafter referred to as "Dignan’s Case".

26. Waterside Workers’ Federation of Australia v. J.W. Alexander Ltd., 25 C.L.R. 434 (1918).

27. Dignan's Case, note 25 supra at 79.

28. 44 C.L.R. 492 (1931).

29. 45 C.L.R. 188 (1931).

30. Dignan’s Case, note 25 supra at 84.

31. 29 C.L.R. 329 (1921).

32. Dignan's Case, note 25 supra at 86.

33. Id. at 91.

IX: 3

34. New South Wales v. The Commonwealth, 20 C.L.R. 54 (1915); Waterside Workers’ Federation of Australia v. J.W. Alexander Ltd., 25 C.L.R. 434 (1918); In re Judiciary and Navigation Acts, 29 C.L.R. 257 (1921); and British Imperial Oil Co. v. Federal Commissioner of Taxation, 35 C.L.R. 422 (1925).

35. Dignan's Case, note 25 supra at 96-98.

36. Jd. at 98.

37. 8 C.L.R. 626 (1909).

38. Dignan’s Case, note 25 supra at 98; Dixon J. citing C.J. in Baxter v. Ah Way, note 37 supra at 634.

39. See note 31 supra.

40. Farey v. Burvett, 21 C.L.R. 433 (1916);Pankhurst v. Kieman, 24 C.L.R. 120 (1917);Ferrando v. Pearce, 25 C.L.R. 241 (1918); and Sickerdick v. Ashton, 25 C.L.R. 506 (1918).

41. Dignan's Case, note 25 supra at 99.

42. Id.

43. See note 28 supra.

44. Dignan's Case, note 25 supra at 100-101, (footnote references omitted).

45. See Roche v. Kronheimer, note 31 supra at 337, citing first, Hodge v. The Queen, 9 A.C. 117 (1883); R. v. Halliday, (1917)A.C. 260; and In re Initiative and Referendum Act, (1919)A.C. 935; and secondly, Farey v. Burvett, Pankhurst v. Kieman, Ferrando v. Pearce, and Sickerdick v. Ashton, all cited note 40 su p m .

46. Dignan's Case, note 25 supra at 118.

47. Ld. at 122.

48. Id, at 117.

49. For the probable limits to the doctrine confirmed in this case, see Radio Corporation Pty. Ltd. v. The Commonwealth, 59 C.L.R. 170 (1938). 8

50. 8 C.L.R. 330 (1909).

IX: 4

51. IcL at 355 •

52. IsL at 355-358.

53. Id. at 366 •

54. Id. at 382-383.

55. Id_. at 384 •

56. Id. at 418 -9.

57. C. Howard, supra note

58. 20 C.L.,R. !54 (1915).

59. Section 101: "There shall be an Inter-State Commission, withsuch powers of adjudication and administration as the Parliament deems necessary for the execution and maintenance, within the Commonwealth, of the provisions of this Constitution, relating to trade and commerce, and of all laws made thereunder."

60. Section 102.

61. The State of New South Wales v. The Commonwealth, note 58 supra at 63-65.

62. Id. at 62: "In my judgment the provisions of Section 71 arecomplete and exclusive, and there cannot be a third class of Courts which are neither federal Courts nor State Courts invested with federal jurisdiction." (Griffith C.J. also rejected the argument based upon the fact that an appeal lay from the Commission to the High Court, arguing that the fact that Section 73 specifically mentioned the Commissioners by name indicated that they were not a court, as otherwise they would have been included within the term "federal court".)

63. Id. at 82-85.

64. Id. at 94.

65. Id. at 106-107.

66. Id. at 107-110.

67. Id- at 108-109.

68. M. at 82, per Barton J.

69. Id. at 73.

IX: 5

70. Id. at 75.

71. Id. at 76.

72. Id. at 103-104.

73. 25 C.L.R. 434 (1918).

74. C. Howard. supra note 23, at 147.

75. Id.

76. See note 58 supra.

77. The Shell Company of Australia Limited v. The Federal Commissioner of Taxation, 44 C.L.R. 530 (1930).

78. See note 25 supra.

79. Dignan's Case, note 25 supra at 101.

80. Id.

81. Id. at 117.

82. 82 C.L.R. 587 (1951).

83. Id. at 597.

84. Id. at 598.

85. Id. at 599.

86. Id. at 600.

87. Id. at 601.

88. The Queen v. Kirby; Ex Parte Boilermakers Society of Australia,94 C.L.R. 254 (1955-1956), herinafter referred to as "The Boilermakers’ Case”.

89. C. Howard. supra note 23, at 148; i.e., whether the position was that judicial power could not be conferred on a non­judicial tribunal, or whether judicial or non-judicial powers could not be conferred on the same tribunal?

90. Boilermakers' Case, note 88 supra at 255-259.

91. See note 25, supra.

See note 31, supra.92.

IX: 6

93. See note 73, supra.

94. See note 82, supra.

95. Boilermakers ' Case, note 88 supra at 267-269

96. Id. at 270.

97. Id.

98. Id. at 271-272.

99. Id. at 277.

100. Id. at 275.

101. Id. at 276.

102. See note 25, supra.

103. See note 73, supra.

104. See note 82, supra.

105. Boilermakers ' Case, note 88 supra at 294-296

106. Id. at 300-301.

107. Id. at 301.

108. Id. at 302.

109. Id. at 306.

110. Id. at 309.

111. See note 31, supra.

112. See note 25, supra.

113. As to which, see note 122>, infra.

114. See note 82, supra.

115. Boilermakers1' Case, note 88 supra at 321.

116. See note 73, supra.117. Boilermakers'1 Case, note 88 supra at 324.

Id. at 329.118.

IX: 7

119. Id, at 333-337.

120. Id, at 338, 340-341.

121. Beni afield and Whitmore, supra note 24, at 22 n.34.

122. Attorney-General of the Commonwealth of Australia v.The Queen 95 C.L.R. 529 (1956-57).

123. R. v. Federal Court of Bankruptcy, ex parte Lowenstein,59 C.L.R. 556 (1938).

124. Boilermakers' Case, note 88 supra at 337.

125. C. Howard, supra note 23, at 154.

126. R. v. Davison, 90 C.L.R. 353 (1954).

127. See Beniafield and Whitmore, supra note 24, at 22.

128. 44 C.L.R. 530 (1930).

129. Id. at 541.

130. Id, at 541-542.

131. Id. at 542.

132. 8 C.L.R. 330 at 357 (1908): "the power which every sovereignauthority must of necessity have to decide controversies between its subjects, or between itself and its subejcts, whether the rights relate to life, liberty or property. The exercise of this power does not begin until some tribunal which has power to give a binding and authoritative decision (whether subject to appeal or not) is called upon to take action."

133. The Shell Case, note 128 supra at 543.

134. Id. at 544, citing R. v. Electricity Commissioners, (1924)1 K.B. 171.

135. 100 C.L.R. 518 (1958-1959).

136. Id, at 523. See also Rola Company (Australia) Pty. Limited v. The Commonwealth and Another, 69 C.L.R. 185 (1944).

137. Beni afield and Whitmore, supra, note 24, at 22.

138. As to which, see Part VII A 3 infra..

IX:

139. Beni afield and Whitmore, supra note 24, at 93.

140. Id.

141. Id. n.15; it is noted that some powers such as investigation, supervision and prosecution, do not come within this classi- ficatory model.

142. Id. at 22, n.34.

143. As to which see Part VI B infra.

144. For a discussion of these bodies, see Beniafield and Whitmore. supra note 24, Chapter Xll.

145. Constitution, s.51(v).

146. Constitution, s.51(xiii): "Banking, other than State banking;also State banking extending beyond the limits of the State concerned, the incorporation of banks, and the issue paper money:"

147. Constitution, s.51(ii): "Taxation; but so as not to discri­minate between States or parts of States:"

148. See Chapter 3 supra.

149. Indian Constitution, Union List, entry 48.

150. The Sydney Morning Herald, Jan. 30, 1974, at 19, cols 9-10.

151. See Chapter 3 supra.

152. See id.

153. See id.

154. Dickson, supra note 16, at 57-58.

155. See, for example, Langford and Johnston, The Case for a National Securities Commission. U,.of Ix_Comm. Jnl, (1968) and the Parizeau Report, note 17, supra at 131-135.

156. See Jones v. Securities and Exchange Commission, 79 F (2d)617 (C.C.A. 2d. 1935); Newfield v. Ryan, 91 F (2d) 700 (C.C.A. 5th. 1937).

Woolley v. United States, 97 F (2d) 258 (C.C.A. 9th 1938), cert, denied 305 U.S. 614, 85 L.Ed. 391, 59 S. ct. 73 (1938).

157.

IX: 9

158.

159.

160.

161.

162.

163.

164.

165.

166.

167.

168.

169.

170.

171.

172.

173.

174.

175.

176.

Wright v. Securities and Exchange Commission, 112 F (2d)89 (1940).

The Report of the Corporate Affairs Commission for the year ended 31st December 1973. 9-11 (herinafter referred to as "the 1973 Report".)

Id. at 12.

Id. at 13.

Id. at 31-37.

Id. at 38: persons holding established positions in thisDivision (with the exception of clerks) must be qualified accountants.

See id. at 38-45.

Report of the Programme undertaken by A.B. Greenwood, Assistant Commissioner for Corporate Affairs for New South Wales on a Churchill Fellowship 1973, 131-132 (herinafter referred to as "The Greenwood Report".)

Id.

Id.

See the 1973 Report, note 159 supra at 16-17 for details of investigations and special investigations carried out in 1973.

Id. at 26-27.

14. at 28-29.

For details as to the size and composition of this staff, see id. at 16.

See note 177 infra, and accompanying text.

See the 1973 Report, note 159 supra at 18.

See id. at 14-15.

Address by Senator Rae, seminar on The Companies (Amendment) Act, 1971; May 27, 1972.

The 1973 Report, note 159 supra. at 48.

See Sykes, The Australian Financial Review, Feb. 28, 1972 at 2 cols. 3-6; Feb. 29, 1972 at 10, cols. 1-6; Mar. 1, 1972, at 14 cols. 3-6 and at 15, cols. 1-4; and Mar. 2, 1972 at 2.

177.

IX: 10

178. Id., Mar. 1, 1972, at 14 col. 6, and at 15 col. 1.

179. Id. at 15, citing section 5B(1) of the Securities Industry Act, which prevents the divulging of information and Section 174(3) of the Companies Act which contains a wide provision against self-incrimination by officers of companies.

180. The Australian Financial Review, Mar. 7, 1972 at 14, cols. 3-6.

181. Id.

182. Id.;invitations to join this body have apparently been extended to the two labor-governed states, although at the date of writing neither had accepted.

184. See note 166 supra, and accompanying text.

185. This Council consisted of Messrs. Roy L. Ash (Chairman)George P. Baker,, John B. Conally, Frederick R. Kappel,Richard M. Paget and Walter N. Thayer.

186. The President’s Advisory Council on Executive Organization,A New Regulatory Framework. Report on Selected Independent Regulatory Agencies (Jan, 1971) (herinafter called "the Ash Report").

187. As used in the Ash Report, this term describes the structure which comprises alternately retiring Commissioners with pro­hibitions against dominance by any one political party.

188. The Ash Report, note 186 supra, at 102.

189. Id.

190. Id. at 104.

191. Id.

192. Id.

193. See Securities and Exchange Commission, 36th Annual Report (1970).

194. The Ash Report, note 186 supra. at 104.

195. Id.

196. Ill L. Loss, Securities Regulation, 1886-1887 (herinafter cited as "Loss") For an account of the role of the Commission designed to assist the practising lawyer otherwise unfamiliar

IX: 11

with federal securities regulation, see Hopper, The Securities and Exchange Commission as it Affects the General Practitioner. 36 U. Col. L. Rev. 36 (1963-64). Also see Freeman, A Private Practitioner’s View of the Securities and Exchange Commission. 28 Geo. Wash. L. Rev. 18 (1959).

197. See Chapter 5 supra.

198. 1 CCH Can. Sec. L. Rep. 7/554.

199. Dickson, supra note 16 at 61, recommended merely that the Dominion-Provincial Securities Commission which he proposedbe established would, for political and administrative conside­rations, be comprised of five members, one from each of British Columbia, the Prairie Provinces, Ontario, Quebec, and the Atlantic provinces.

200. 1 CCH Can. Sec. L. Rep. 7/548 201 202 203 204 205 206 207 208 209 210 211 212 213 214

201. Dickson, supra note 16 at 62. For another proposal in respect of regional offices, see Langford and Johnston, supra note 155.

202. See Part III supra.

203. Com. Act. No. 83, as amended, Chapter 11.

204. See note 186 supra. and accompanying text.

205. The Companies Law Revision Committee. Report on the Protection of Investors (First Report, June 24, 1971).

206. Ear Eastern Economic Review, Feb. 12, 1973 at p. 50.

207. Ord. No. 12/74.

208. Id., Section 6.

209. Id., Sections 9 and 10.

210. Act No. 112 of 1973.

211. Id., Section 3.

212. See The Securities Industry Act, 1973 (No. 17 of 1973)Sections 3 and 4. See also. Address by Minister of Finance at inauguration of Securities Industry Council, Jan. 11, 1973.

213. See notes 192-195 supra, and accompanying text.

214. See Part V A . 1 supra.

IX: 12

215. See generally. The Securities Industry Act 1970, as amended, Part 11.

216. Id., Section 5E.

217. See Part IV A. supra.

218. See ic[.

219. See note 142 supra, and accompanying text.

220. For a pessimistic assessment of the affect of the then proposed revision of the Administrative Procedure Act (5 U.S.C., S. 1001) on the S.E.C., see Guinn, The Proposed Revision of the Federal Administrative Procedure Act and its Effects on the Securities and Exchange Commission. 22 Arkansas L. Rev.. 439 (1968).

221. For a description of the Commission’s administrative or executive, as well as its quasi-judicial functions, see Orrick, Organization. Procedures and Practices of the Securities and Exchange Commission. 28 Geo. Wash. L. Rev. 50 (1959).

222. H I Loss, at 1900; VI Loss, at 4028.

223. For proposals as to procedural reforms in the Hearing Examinerprocess, §ee Timbers and Garfinkel, Examination of the Commission’s Adjudicatory Process: Some Suggestions. 45 Va. L.Rev. 817 (1959).

224. Ill Loss, at 1909; VI Loss. at 4040.

225. Securities and Exchange Commission, The Work of the Securities and Exchange Commission 19 (October, 1969).

226. Icl. at 19-20; VI Loss, at 4047.

227. VI Loss, at 4047-4048.

228. The Work of the Securities and Exchange Commission, note 225 supra at 20.

229. Section 25(a).

230. Section 704.

231. Ill Loss, at 1926-7, note 28; VI Loss. at 4061.

232. Which letters indicate merely that, in answer to a question posed to the Commission, the Commission will not take action should the enquirer proceed on his own construction of the problem in question; VI Loss at 4023.

233. Loss sees little merit in this process and would prefer an extension of the Commission's practice of publishing staff opinions: VI Loss at 4025-4026.

234. As to the Commission's role in this regard, see III Loss at 1935-6 and VI Loss at 4071-2.

IX: 13

235. VI Loss at 4072 citing Title 5, United States Code, S. 552(a)(1). See id. at 4073-4 for details of the provisions generally applicable to rule-making under this title.

236. S.E.C. S. Doc. No. 10, 77th Cong. 1st Sess. (1941) cited III Loss at 1937. ,

237. Ill Loss at 1938.

238. Id.

239. See III Loss at 1945-58 for details as to the enabling sections in the respective statutes. For an early description of the Commission's investigatory powers in relation to the Fourth and Fifth Amendments, see Comments - Investigatory Powers of the Securities and Exchange Commission. 44 Yale L.J. 819 (1935).

240. H I Loss at 1948.

241. VI Loss at 4080, citing Rule 4(b) Relating to Investigations.

242. Ill Loss at 1950-54; VI Loss at 4081-4087.

243. Rule 7(b) Relating to Investigations, cited III Loss at 1954-55 and VI Loss at 4087.

244. See generally. VI Loss at 4087-4089.

245. See generally.. Ill Loss at 1956.

246. VI Loss at 4089.

247. Ill Loss at 1957, note 36.

248. VI Loss at 4093, citing 17 Code Fed. Regs. S. 200.30-1 (b)(1), 2(f)(1) and 3(a)(1).

249. For details as to the other statutory provisions, see III Loss at 1966, note 68, and VI Loss at 4098. 250 * *

250. Malloy v. Hogan, 378 U.S.l; Murphy v. Waterfront Com. of N.Y.Harbour, 378 U.S. 52; cited VI Loss at 4101. See generally. IllLoss at 1969-1974 and VI Loss at 4101-4108.

IX: 14

251. The Investment Company Act and the Investment Advisers Act of 1940 both use the terms "has engaged" in place of "is engaged"; see H I Loss at 1975.

252. Wax, The Emerging S.E.C. Injunction. 17 N.Y.L.F. 785 (1971).

253. S.E.C. v. Globus International Ltd., 320 F. Supp. 158 (S.D. N.Y. 1970) cited id_. at 785, n.5.

254. S.E.C. v. Holman § Co., (1964-66 Transfer Binder) CCH Fed.Sec. L. Ren. 91,554 at 95,087 (S.D. N.Y. July 8, 1965) cited isL at 786.

255. The non-government aspect of the regulatory machinery consists of the stock exchanges and the two major industry bodies, the Investment Dealers Association of Canada and the Broker- Dealers Association of Ontario.

256. For a list of such bodies as at 1973, see 1 CCH. Can. Sec. L. Ren, f/503.

257. This does not mean, however, that they have always been immune from criticism. In its February, 1964 Brief to the Attorney- General's Committee on Securities Legislation, The Broker- Dealers’ Association of Ontario stated (p.2):

During the past few years frequent criticism has been heard throughout the financial community concerning the delays involved in registration of prospectuses and amendments to prospectuses. The Ontario Government should be aware of the spectacular development that has taken place in the securities markets. The expansion of the mutual funds, the increasing industrialization of the country, results in new demands for capital funds which is reflected in the ever increasing number of persons engaged in the securities business. Throughout these years the staff of the Ontario Securities Commission has not significantly increased, nor have the government appro­priations been sufficiently large to maintain an adequate Commission. That section which is charged with the adminis­tration of the registration provision of the Statute would appear understaffed and the traditional reluctance to provide remuneration to qualified personnel must further complicate the problem. The Association therefore would urge that the staff of the Securities Branch be substantially augmented with competent and qualified personnel.

258. P. Williamson. Securities Regulation in Canada (1960), 241-246 (Supp. 1966) herinafter cited as "Williamson". 259

259. Id. at 249.

IX: 15

260. For details as to the rules governing administrative procedures in Ontario, see Manual of-Practice on Adminis­trative Law and Procedure in Ontario under The Statutory Powers Procedure Act. 1971. The Public Inquiries Act, 1971.The Judicial Review Procedure Actr 1971 and Related Statutes (Department of Justice and Attorney-General, February, 1972).

261. See Williamson, supra note 258 at 232-246 (1960) and at 258-271 (1966).

262. In relation to the Ontario Securities Commission, see J.C. Baillie, The Protection of the Investor in Ontario. 8 Can.Public Admin, at 212-5 and 250-1. Policy statements issued by the provincial Commissions may be of three types; (i) uniform; (ii) national, or (iii) local.

263. See Williamson, supra note 258 at 246-264 (1960) and at 271-276(1966). In relation to Ontario, see The McRuer Report, at 2075-2077.

264. There is also a Monopolies Commission, which exercises juris­diction in relation to both monopoly situations and mergers under the Monopolies and Restrictive Practices (Inquiry and Control) Act, 1948, the Restrictive Practices Commission Act, 1953, the Restrictive Trade Practices Act, 1956 and the Monopolies Mergers Act, 1965. Consideration of the role and function of this body is of necessity beyond the scope of this study.

265. The City Code on Take-Overs and Mergers. Revised Edition, February 1972; Introduction, at 4.

266. id.

267. The City Code on Take-Overs and Mergers. (Revised Edition February 1972) contains copies of six such Practice Notes, which are themselves periodically revised.

268. L.C.B. Gower. The Principles of Modem Company Law 627 (3d ed.1969): "It is coming to be accepted that unless the Take-OverPanel can show that it is able to produce and enforce obser­vance of a strict code of conduct, supervision through a state organ - a miniature SEC - will be inevitable." 269 *

269. C.M. Schmitthoff, Some Considerations on the Issue of Securities in English Law, in The Legal Status of Securities in Europe and the United States (LeJtegime Juridique Des Titres De SocietesEn Europe at Aux Etats-Unis! Institut d*Etudes Europeenes, (Universite Libre de Bruxelles) 205 at 219 (1970).

IX: 16

270. Cmnd. 1749, para. 288:

It seems to us that in theory there is a good deal to be said for the independent statutory body. The system of control obtaining in the U.S.A. is based upon such a body in the shape of the Securities and Exchange Commission (S.E.C.) .... That system has been shown by experience to be well suited to U.S.A. conditions, and the U.S. witnesses pronounced it a success for the most part. However, they also pointed out that the conditions affecting the issue of shares to the public in this country, and the methods of issue, are radi­cally different from those in the United States. In the memorandum which they prepared for us the law firm of Davis Polk Wardwell Sunderland and Kiendl wrote:

"Whether or not such a Commission would be a desirable adjunct to the British system is a question that we obviously are not qualified to answer. It seems to us, however, that among the factors that were responsible for its creation there are at least two that have no counterparts in Britain. When in 1933 it became apparent that our securities laws needed strengthening we did not have in existence any nation-wide machinery. There are active securities markets in various locations in the United States, and we have no single stock exchange like the London Stock Exchange whose effective controls operate throughout the country. Furthermore, ... the bulk of our new securities issues are not listed, whereas in England we understand that listing on the London Stock Exchange is a practical prerequisite in the case of a new issue. Secondly, the size of this country, its scattered security markets, the existence of 50 separate state governments and the past history of the securities business made strong centralised control in Washington important."

We are not persuaded that a system of control on the U.S. model would work as well in this country as the more flexible though perhaps theoretically less perfect system which has grown up here over the years. But, given the wider devolution of control inherent in the British system, it seems to us that the present arrangements may be open to criticism on the ground that there is inadequate co-ordination of the experience and views of the Board of Trade and of the other bodies concerned with protection of the investor. 271

271. 222 Economist, Jan. 7, 1967, at 49.

IX: 17

272. Japan Securities Research Institute, Securities Market in Japan 1973. 186 (May, 1973). The Securities Counselling Commission was established in 1952 to consider, from time to time, matters of importance within the securities industry, including the reform of existing provisions, and the introduction of amendments or new legislation where necessary. For a table detailing the reports which it has presented, sg§ id. at 193.

273. Id. at 187.

274. See Yazawa, A Synopsis of Securities Regulation. Past and Future, in Japan, at 3 (unpublished, 1973).

275. Articles 157-164.

276. See Part V C.3(i) supra.

277. Section 31(a). See Reves. The S.E.C. - Its Power of Inquiry and Investigation. 2 The S.E.C. Bulletin 18, 23 (No. 1,Jan. 1968).

278. Section 31(b).

279. Section 31(d).

280. Section 32. For a description of the administrative practices of the Commission, see Yabyabin, Procedure in Administrative Adjudication in the Securities and Exchange Commission. 2 TheS.E.C. Bulletin 1 (No.3, Oct. 1968). For a critical assess­ment of some of the decisions of the Commission, see Guevara, Some Rulings and Regulations of the Securities and Exchange Commission: A Dissent, in Philippine Corporation Law and Practice. 187 (A. Blanco, ed. 1968). For the actual provisions regulating hearings and investigations, see Rules of Procedure Governing Hearings and Investigations in the Securities and Exchange Commission, in Securities and Exchange Commission. Rules and Regulations (1973).

281. Section 33.

282. Section 1215.

283. S. Robbins, A Capital Market in Thailand. 353 (1970).

284. Section 4(2) (iii).

285. See Sections 3-12 inclusive.

286. Section 30.

IX: 18

287. See Companies Act, Part 1A.

288. See Sections 235-251.

289. Section 388-B(l).

290. See Chapter 4 supra.

291. Ordinance No. 12 of 1974.

292. Defined as "the Commissioner or any police officer not below the rank of superintendent” (Section 23(3)).

293. Section 20 prohibits the establishment or operation of a stock market that is not the stock market of a stock exchange;Section 22 prohibits dealers from dealing in securities in a stock market which is not the stock market of a stock exchange.

294. Section 24(1).

295. Section 25.

296. Section 26.

297. Section 27.

298. These are effected through the Securities Commission Disci­plinary Committee: see Sections 38-46.

299. Sections 47-65.

300. Sections 70 and 71.

301. Sections 90, 91 and 92.

302. Part XI.

303. Section 148.

304. See Chapter 5 supra.

305. For a discussion of the applicability of the rules of natural justice, see Beni afield and Whitmore, supra note 24, Chapter Vll.

306. Id. at 144-145.

307. Id. at 145-152.

308. See supra note 305 and accompanying text. There should also exist, at the initial stage, the opportunity for the interests

IX: 19

of the public, through, for example, an association of shareholders, to be placed before the Commission.

309. As to which, see Part VII A. 3 infra.

310. This committee comprised The Hon. Mr. Justice J.R. Kerr (Chairman); The Hon. Mr. Justice A.F. Mason; R.J. Ellicott,Q.C., and Professor Harry Whitmore.

311. Commonwealth Administrative Review Committee, Report, para.233 (August 1971) (hereinafter referred to as "the Kerr Report").

312. Id. at para. 234.

313. For the Committee’s detailed recommendations as to the compo­sition, jurisdiction and function of an administrative review tribunal, see id. paras. 289-311.

314. .Id.

315. This Committee comprised Sir Henry Bland (Chairman), Professor Harry Whitmore and P.H. Bailey, Esq.

316. Final Report of the Committee on Administrative Discretions (hereinafter referred to as "the Bland Report").

317. IcL, para. 130.

318. See id., paras. 45-96 for illustrations of the function ofthe Ombudsman and the Tribunal in relation to the social welfare, customs and excise, and immigration powers of the Commonwealth.

319. Id., paras. 122-123.

320. For a detailed description of each of these grounds, see Beni afield and Whitmore, supra note 24, at 162-186. 321 322 323 324 325

321. Again, for a detailed examination of these remedies, see id.. Chapter IX.

322. The Kerr Report, note 311 supra at para. 58.

323. IcL para. 225.

324. Id. paras. 245-246.

325. Id. para. 247.

IX: 20

326. ld_. para. 258.

327. Id. para 259. For a critical assessment of these grounds, see Fajgenbaum, The Commonwealth Administrative Review Committee and Judicial Review. 47 A.L.J. 353 at 354-5.

328. The Kerr Report, note 311 supra. para. 273.

329. Cited in the Bland Report, supra note 316 at para. 201.

330. Hansard, December 12, 1973, at p. 2725.

331. Superior Court of Australia Bill, 1973, Clause 13(2).

332. Id., Clause 19(l)(e).

333. Id., Clause 25. For an examination of the recently expanded scope of the declaratory judgment in administrative law matters, see Recent Cases, 47 A.L.J. 262 and 331 (May and June, 1973).

334. Superior Court of Australia Bill, 1973, Clause 38.

335. IcL, Clause 39.

336. See Part VII A.2(ii) supra.

337. See 5th and 14th Amendments.

338. Beni afield and Whitmore, supra note 24 at 133. 339 340 341 342 343 344 345 346 347

339. See Part IV A. 3 supra.

340. Davis. Administrative Law Treatise. Chapter 7 (1958).

341. The Kerr Report, note 311 supra at para. 199.

342. M, at paras. 199-200.

343. IcL at para. 204.

344. The Ash Report, note 186 supra at 104.

345. The Kerr Report, note 311 supra at para. 112.

346. Id. at para. 114-115.

347. Id. at para. 116.

Id. at para. 234.348.

IX: 21

349.

350.

351.

352.

353.

354.

355.

356.

357.

358.

359.

360.

361.

362.

363.

364.

365.

366.

367.

368.

369.

370.

371.

372.

373.

The Bland Report, note 316 supra at para. 208.

The Kerr Report, note 311 supra at para. 125-127.

Id. at para. 128.

Id. at para. 136.

Ontario Securities Act, Sections 7 and 8.

See Part VII A.2(i) supra.

Ontario Securities Act, Section 28(1).

Id., Section 28(2).

Id., Section 29(1).

Id., Section 29(2). Similar appeal provisions have been included in the draft of Bill 75; see Part IV thereof.

2 CCH Can. Sec. L. Rep. 7/54-913 and 54-914.

See note 260, supra.

1 CCH Can. Sec. L. Rep. 7/785.-

Securities Act, Section 24a.

Id., Section 10.

Id., Section 13.

1 CCH Can. Sec. L. Rep. 7/805.

Securities and Exchange Law, Article 9.

Id., Article 10.

Id., Article 36.

Id., Article 69.

Id., Article 74.

Id., Article 84.

Id., Article 85.

Id., Article 156-6(2).

374. Id., Article 156-12.

375. See Part VII A.2(i) supra.

376. .See id.

377. Securities and Exchange Law, Article 182.

378. The Securities Act, Section 8.

379. IcL , Section 12.

380. Id., Section 15.

381. Id.., Section 17.

382. Id. , Section 35(a).

383. Id.

384. Id.

385. Pineda v. Lanting, No. L-15350, (Nov. 20, 1962).

386. Securities Contracts (Regulation) Act, Section 5.

387. Id. , Section 11.

388. I d , Section 12.

389. Companies Ordinance, Section 26.

390. Id., Section 29(1).

391. Id., Section 29(2).

392. Id-, Sections 53 and 54.

393. Id., Section 55.

394. Id., Section 58.

395. Id., Section 59.

396. Id.

397. Singapore, Section 13(3): Malaysia, Section 13(3)

398. Singapore, Section 23(1): Malaysia, Section 23(1)

399. Singapore, Section 24; Malaysia, Section 24.

IX: 22

Chapter 10

X: 1

1. Australian Securities Markets and Their Regulation,Report from the Senate Select Committee on Securities and Exchange (1974), hereinafter referred to as "the Rae Report".

2. Id., Vol 1, at 1.7.

3. For one journalist's examination of particular activities not investigated by the Committee, see The Australian Financial Review, Aug. 12, 1974 at 1, cols, 2-5 and at 2, cols. 3-6; Aug. 13, 1974 at 2, cols. 3-6 and at 3, cols. 1-2; and Aug. 14, 1974, at 2, cols. 3-6 and at 3, cols. 1-3.

4. The Sunday Telegraph, July 21, 1974 at 72, cols. 6-7.

5. The Australian Financial Review, July 19, 1974 at 2, cols. 1-2.

6. The Australian, July 19, 1974 at 13, cols. 4-6.

7. The Sydney Morning Herald, July 20, 1974 at 70, cols. 1-4.

8. See The Australian, Aug. 2, 1974, at 11. cols. 2-4.

9. The Rae Report, note 1 supra, Ch. 10.

10. Id., Ch. 11.

11. For the public correspondence in respect of this chapter,see The Australian, May 6, 1974 at 1, cols. 1-2; The Australian. Financial Review, May 6, 1974 at 1, cols. 1-5; The Australian, May 7, 1974, at 1, col. 1; The Australian Financial Review,May 7, 1974 at 10, cols. 4~6; id.., May 8, 1974, at 1, cols.1-5 and at 6, cols. 5-6; and id., May 9, 1974, at 1, cols. 1-5. and at 10, cols. 1-6 and 11, cols. 1-4. 12 13 14 15

12. See /or example, the Australian Financial Review, July 3,1974 at 1, cols. 1-.5, and at 8, cols 5-6; id. , Aug. 15, 1974 at 2, cols. 4-6 and at 3, cols, 1-3.

13. The Rae Report, note 1 supra at ix.

14. Id., at xii.

15. Id., Chapters 3-7 inclusive.

X: 2

16.

17.

18.

19.

20 .

21. 22.23.

24.

25.

26.

27.

28.

29.

30.

31.

32.

33.

34.

35.

36.

Id., Chapter 2,

Id., Chapter 16,

Id., at 10.116.

See the discussion of S.43 of the New South Wales Companies Act in Chapter 4, supra.

See the Rae Report, note 1 supra at 10.7 - 10.8.

See Chapter 7 supra, notes 111, 113, 125 and accompanying texts.

The Rae Report, note 1 supra at 10.26.

Id., at 10.42.

Id., at 10.48.

Id., at 10.69.

Id., at 10.110 - 10.116.

Companies Act, New South Wales, Section 5 (6).

Id., Section 5 (6) (a) - (d).

112 C.L.R. 276 (1964).

Id., at 285-86.

Attorney-General for New South Wales v. Australian Fixed Trusts and Another, [1974] 1 N.S.W.L.R. 110.Id., at 117.

Company Law Advisory Committee, Report to the Standing Committee of Attorneys - General on the Control of Fund Raising, Share Capital and Debentures, 6-7 (1970).

L. Loss. Proposals for Australian Companies and Securities Legislation : Comments from the American Experience, (July 13, 1973).

Report of the Programme Undertaken by A.B. Greenwood,Assistant Commissioner for Corporate Affairs for New South Wales, on a Churchill Fellowship, 1973.

Ontario, Department of Financial and Commercial Affairs,Report of the Committee of the Ontario Securities Commission on the Problems of Disclosure Raised for Investors by Business Combinations and Private Placements (February 1970), at 44-45

37. 346 U.S. 119, 97 L.Ed. 1494, 73 S. Ct. 981.

38,

X:

See, e,g,, Collier v, Mikel Drilling Company, 183 F, Supp. 104, 111-112, and Gilligan, Will § Co, v. Securities and Exchange Commission, 267 F, 2d 461 (1959)> cert, denied, 361 U.S, 896 (1959)

39. Disclosure to Investors, A Re-Appraised of Federal AdministrativePolicies Under the ’33 and ’34 Acts 157, (1969),

40. See 1 CCH Fed. Sec. L. Rep 7/ 5718B.

41. The Rae Report, note 1 supra at 11,12 - 11.13

42. Id.

43. The Rae Report, note 1 supra at 11.11.

44. Id., at 11.27.

45. Id., at 11.32.

46. Id., at 11.34.

47. Id., at 11.41.

OO Id., at 11.28.

49. Id., at 11.29.

50. Id., at 11.30.

51. Id., at 11.43 - 11.46.

52. Id., at 11.46 - 11.51.

53. Id., at 11.54 - 11.55.

54. Id., at 11.56 - 11.73.

55. Id., at 11.73 - 11.81.

56. Id., at v.

57. See, for example, id,, 11.68 et seq.

at 11.36 - 11.37, 11.42 and pp.

58. See id., at 8.1 - 8,7.

59. Id., at 8.14.

60. Id., at 8.12.

61. Id., at 8.15.

62. See id., Chapter 9.

63. Id., at 9.19.

64. See id. , at 15.4-il5.20.

65. Id., at 15.4 - 15.5

66. Id., at 15.7 - 15.8.

67. Id., at 15.8 - 15.12.

68. Id., at 15.13.

69. Id., at 15.14.

70. Id., at 15.16 - 15.17.

71. Id., at 15.18 - 15.19.

72. Id.., at 15.20; "... the exchanges have neither the jurisdiction,the power, the disinterested will and lack of bias nor the appropriate full-time professional approach to warrant the assumption that they are the principal and best regulatorsof the securities market and their members”.

73. Id., Chapter 3.

74. Id., Chapters 4, 5 and 6.

75. Id.., Chapter 7.

76. See Chapter 6, supra.

77. The Rae Report, note 1 supra at 3.17 - 3.18.

78. See Chapter 6 supra.

79. The Rae Report, note 1 supra at 3.27 - 3.32.

80. See Chapter 6 supra

81. The Rae Report, note 1, supra, at 3,81

82. Id.,at 3.36 - 3,44,

83. Id., at 3.45 - 3.47,

Id., at 3.45 - 3.46

X: 4

84.

X: 5

85. See Chapter 6 supra.

86. The Rae Report, note 1 supra at 3.71.

87. Id., at 3.79

88. See Chapter 5 supra.

89. The Rae Report, note 1 supra at 3.81.

90. Id., at 4.7 - 4.12.

91. See id., at 4.12 - 4.20.

92. Id., at 4.20 - 4.24.

93. Id., at 4.27.

94. Id. , at 4.43

95. See Chapter 4 supra.

96. The Rae Report, note 1 supra at 4.34 - 4.37

97. Id., at 4.37.

98. Id., at 4.49.

99. Id., at 5.4.

100. Id., at 5.6 - 5.7

101. Id., at 5.7.

102. Id., at 5.13.

103. See generally id., Chapter 6.

104. Id., at 6.1

105. Id., at 6.4

106. Id., at 6,9

107. See Chapter 5 supra.

108. The Rae Report, note 1 supra at 6.13, See a.

at 6.17 - 6.18.

X: 6

109. Id., at 7.59.

110. Id., at 7.16.

111. Id. , at 7.17.

112. Id., at 7.56.

113. See id., at 7.44 and 7.52.

114. For the Committee’s examination of the option dealer which was also relevant activities, see id., Chapter 12.

role of a particular to investment advisory

115. See id., at v.

116. See Chapter 7 supra.

117. The Rae Report, note 1 supra at 2.36 - 2.37.

118. Id., at 2.59.

119. Id., at 2.35 (emphasis added).

120. Id., at 2.59.

121. Id., at 2.49 - 2.57.

122. Id., at 2.72.

123. Id., at 2.62 - 2.63.

124. Id., at 2.63.

125. Id., at 2.102 - 2.103.

126. Id., at 2.101 - 2.107

127. Id., at 2.106 - 2.107

128. See generally id., at 2.117 - 2.125.

129. See generally id,, at 15.21 - 15.31,

130. Id., at 15.21

131. Id., at 15.22 - 15.26.

132. See generally id., at 15.26 - 15.31.

X: 7

133. Id., at 15.30.

134. Id., at 15.21 - 15.22.

135. Id., at 16.1 - 16,3.

136. See Chapter 2 supra.

137. The Rae Report, note 1 supra at 16.12 - 16.13.

138. See id., at 16.13 - 16.14 where the Committee wisely rejects the concept of a joint state-federal commission.

139. See id., at 16.14 - 16.15.

140. See Chapter 9 supra.

141. See id., and see also Chapter 2 supra.

142. The Rae Report, note 1 supra at 16.16 - 16.17.

143. Id., at 16.18 - 16.21.

144. See Chapter 9 supra.

145. The Rae Report, note 1 supra at 16.21.

146. Id., at 16-21 - 16.22.

147. See Chapter 9 supra.

148. The Rae Report, note 1 supra at 16.23.

149. Id.

150. Id.

151. The Rae Report, note 1 supra at 16.24 - 16.25.

152. Id., at 16.25 - 16.26.

153. See Chapter 9 supra.

154. See the Rae Report, note 1 supra at 16.27-

155. -See Chapter 9 supra.

X: 8

156. See The Australian Financial Review, Dec.9, 1974, at 6, col.6.

157. See, for example, The Australian Financial Review, Dec.6, 1974,at 1, cols. 2-5 and at 16, cols. 3-6; The Australian, Dec.13, 1974 at 11, cols. 1-5.

158. The Corporations and Securities Industry Bill 1974, Section 12, hereinafter referred to as "the 1974 Bill".

159. See notes 27-40, supra and accompanying text.

160. The 1974 Bill, Clause 18.

161. See Clause 3, where the term is defined to mean"(a) a foreign corporation carrying on business in Australia;(b) a trading corporation formed within the limits of

Australia;(c) a financial corporation formed within the limits of

Australia;(d) a corporation incorporated in a Territory; or(e) a corporation that is the holding corporation of a

corporation referred to in paragraph (b), (c) or (d)."

162. See generally, Part VII of the 1974 Bill.

163. See generally, Part III of the 1974 Bill.

164. See Section 45 of the 1974 Bill, and para.35 of The Explanatory Memorandum circulated by the Attorney-General with the Bill.

165. See Explanatory Memorandum, para.165.

166. The 1974 Bill, Clause

167. Id., Clause 55.

168. Id., Clause 56(ii).

169. Id., Clause 57.

170. Id., Clause 59.

171. Id., Clause 60.

X: 9

172. Id., Clause 61.

173. Id., Clause 65.

174. See id., Clause 55(2) and para.46 of the Attorney-General’s Explanatory Memorandum.

175. See the 1974 Bill, Clause 55(3) and Schedule I.

176. See id., Clause 56 (4)(h) ’’generally for the carrying on of the business of the corporation with due regard to the interests of the public” and (j) "to ensure fair dealing in securities and the protection of persons buying or selling securities.”

177. See id., Clause 71(3).

178. Id.

179. See the 1974 Bill, Clause 73.

180. Id., Clause 76.

181. Id., Clause 77.

182. Id. , Clause 78.

183. See Explanatory Memorandum, paras.67-73.

184. See the 1974 Bill, Clause 113.

185. Id., Clause 112 and 114.

186. Id-, Clause 115.

187. Id., Clause 116.

188. Id., Clause 116(3).

189. Id., Clause 114(2).

See The Australian Financial Review, Dec.23,1974 at 1, cols. 2-5 and at 4, cols. 1-6.

190.

X: 10

191. See generally Part V, Division 3 of the 1974 Bill.

192. See the 1974 Bill, Clause 89.

193. Id., Clause 90.

194. Id.., Clauses 91-92.

195. Id. , Clauses 93-96.

196. Id., Clauses 97, 98, 100 and 103.

197. Id., Clause 71(1)(a).

198. Id,., Clause 71(b) (i): The Commission is required to besatisfied that "the applicant has the prescribed financial resources."

199. See Part VI of the 1974 Bill.

200. Explanatory Memorandum, para.126.

201. Id., para.127.

202. See the 1974 Bill, Clause 20(2)(e).

203. See Chapter 7 of this study for the arguments against the continued use of the historical cost method.

204. See the 1974 Bill, Clauses 129, 130 and 156.

205. Id., Clause 129(9).

206. Id.., Clause 120 and Schedule 3, Clause 2.

207. Id., Schedule 3, Clause 2(y)(z) and (za) .

208. Id.., Clause 129(1); the period is reduced from six months to five months. 209

209. Id., Clause 134(1).

X: 11

210. Id.., Clause 158.

211. Id., Clause 158(1)(v).

212. See Division 4 of Part VI of the 1974 Bill.

213. Id., Clause 139(2)(b).

214. Explanatory Memorandum, para.126.

215. See the 1974 Bill, Clause 123.

216. Id., Clause 41.

217. Id., Clause 21.

218. See Explanatory Memorandum, para. 15.

219. See Part V of the 1974 Bill.

220. See generally Part IV of the 1974 Bill, and in particular Clause 65.

221. Id., Clause 263.

222. Id.., Clauses 274 and 277.

223. See Part II, Division 2 of the 1974 Bill.

224. See Explanatory Memorandum, para.25.

225. See the 1974 Bill, Clause 283.

226. Id., Clause 284.

227. Id., Clause 264.

228. Id., Clause 266.

229. Id.., Clause 267.

230. Id., Clause 279.

ADDENDUM

TO

SYSTEMS OF SECURITIES REGULATION:

A COMPARATIVE STUDY WITH RECOMMENDATIONS

FOR AUSTRALIA

David Geddes

This thesis, having examined securities regulatory patterns

in a number of widely diverse jurisdictions, has made

recommendations for the introduction of new securities

legislation in Australia. In order that these recommendations

might be considered against the most comprehensive background

as to Australia's current regulatory situation, it has been

thought desirable to emphasise two particular aspects of

that background in this Addendum.

1. Constitutional Considerati·ons

In Chapter 3, a number of constitutional heads of power

were considered as possible bases of federal securities

legislation. Included amongst these was the corporations

power (placitum 51 (xx)). This power, it was argued,

could assist in providing a constitutional base for

securities legislation relating to the distribution of

securities; 1 the organs of the securities markets;2

the

operators in the securities markets; 3 and post-distribution

trading. 4 In none of these four areas, however, was it

envisaged that the corporations power alone would provide

an exclusive constitutional base for the proposed

legislation.

2

Notwithstanding this caveat, the relevance of the corporations

power was particularly highlighted because of two related

factors. First, there has been in recent years in the

Barwick High court an acceptance of the increasing

concentration of economic power in the Commonwealth. 5

Secondly, and as an illustration of this acceptance, the

Concrete Pipes 6 decision seemed to promise both a broad

interpretation of the corporations power itself and,

specifically, an extension of the possible scope of the

concept of trading corporations and the activities of such

corporations which the Commonwealth might be able to

regulate effectively. 7

While these developments did give some cause for optimism

to those favouring Commonwealth legislation in the

securities field, this optimism was in many instances

tempered with a realistic appreciation that the question

was one which would have to be specifically considered

by the High Court in respect of each particular area of

legislative activity. 8 Additionally, it was appreciated

that there would in any event be significant limitations

upon the breadth of the corporations power itself,

particularly in that it could only relate to foreign

corporations and to trading and financial corporations

3

formed within the limits of the Commonwealth. 9

In a recent case, In the Matter of An Application for a

Writ of Prohibition Against the Trade Practices Tribunal

The Honourable Sir Richard Moulton Eggleston and Ronald

Moor Bannerman, The Commissioner of Trade Practices.

Ex Parte The St. George county council, 10~ .. the High court

has given an indication that this realistic and cautionary

approach was well founded, in that the concept of a trading

corporation may not in fact be accorded an expansive

interpretation• As a result of proceedings instituted

under the Trade Practices Act against the St. George

County Council, alleging that it was engaging in

"monopolization," the council sought a writ of prohibition

to restrain proceedings before the Trade Practices Tribunal.

The ground of the application for the writ was that the

council was not a trading corporation formed within the

limits of the Commonwealth. As the Trade Practices Act's

definition of "corporation" involved the expression

"trading corporation formed within the limits of the

Commonwealth," a question of direct relevance for

constitutional interpretation arose.

Chief Justice Sir Garfield Barwick, whose judgment evidenced

a continuation of the broad interpretation of the corporations

4

power which he adopted in the concr·e·t·e Pipes case, dissented

on the question of whether the county council was a trading

corporation. His Honour stated that it was clear that the

applicant did trade, as it bought and reticulated electricity,

bought and sold electrical appliances, installed and repaired

such appliances, etc.; these were the purposes of the

body's incorporation. 11 However, in his view, the ter.m

"trading corporation" "refers not to the purpose of

incorporation but to the activities of the corporation at

the relevant time." 12

It was argued that there were four grounds upon which it

could be held that the county council was not a trading

corporation.

1. The sour~e of the incorporation, i.e., the

Act as an Act providing for local government.

Chief Justice Barwick rejected this argument,

holding that it was not necessary that the

'1 b f d d' 13 counc1 e or.me as a tra 1ng company.

2. The council's power to levy a loan rate.

The Chief Justice, in rejecting this argument,

felt that in terms of increasing government

intervention in business, the power to look

to ratepayers for contributions to its

capital did not preclude a body having a

trading character. 14

3. The statutory limitation on profitability

with the object of ensuring that a public

service is performed by the council for

the county district. Again, the Chief

Justice rejected this argument, indicating

that there was no evidence that the prices

charged by the council were minimal, and

holding that even if a county district was

benefited by low charges, this would not

preclude description of the entity as a

"trading corporation." 15

4. That, by reticulating electricity to

residents of its district, the council was

merely performing a public service and thus

could not be regarded as a trading body.

This argument was also rejected by the Chief

Justice, on the basis that to say that the

council does perform a public service does

not deny that it trades (~., an incorporated

State bank is a financial corporation within

s.Sl(xx)). 16

5

6

The Chief Justice was thus able to hold, by, inter alia,

rejecting these four arguments, that the county council

was in fact a trading corporation. This finding, as

indicated earlier, was consistent with His Honour's

expansive approach in the Concrete Pipes case.

It is difficult to agree with the criticism that Sir

Garfield's judgment represented an 11 over-reading of the

Engineers case 11 and that, by implication, it interpreted

Commonwealth powers 11 aggressively, as though they were

national powers, not federal powers.: 11 17 The Chief Justice

had indicated, early in his judgement, that as the statutory

formula bore a relationship to the terms of section Sl(xx)

of the Constitution, principles of construction appropriate

to the construction of the Constitution should be utilised:

The words must be given their full import without any constraint derived from the circumstance that so construed the constitutional power they express will affect State power, legislative or executive, or that the exercise of the consti­tutional power so construed will or may affect the exercise of State power. The reserved powers doctrine of the past has been fully explored: but care needs to be taken that it does not still in some form or another infiltrate one's reasoning when construing commonwealth powers or Acts of the Parliament.l8

As His Honour pointed out, the question had recently been

19 discussed in the Concrete Pipes case.

7

Had the Chief Justice's construction of the term "trading

corporation" formed the majority decision, it may have

provided a significantly widened constitutional base for

proposed federal securities legislation in this country.

However, Justices McTiernan, Menzies and Gibbs all held

that the county council was not a trading corporation within

the meaning of the statute.

Mr. Justice McTiernan considered that sections 35 & 36

(and, by extension, section 37) of the Trade Practices Act

were applicable to "private business, not a public under-

taking supplying goods or services." The county council,

on the other hand, conducted a municipal trading undertaking:

This is not sufficient to put into the category of a "trading corporation" - a trading company which is incorporated. The council does not supply electricity or electrical goods purposely to win sums of money as profits. If the council's operation of the undertaking is revenue-producing that does not changeth~ character of the enterprise from public to private.20

His Honour reached his conclusion, at least in substantial

part, on the basis of the profit-making factor as a

characteristic of a trading corporation. This was a factor

which was, however, not treated by other judgments as being

of critical importance.

8

Mr. Justice Menzies examined Pt XXIX of the Local Government

Act, 1919 (N.S.W.), under which the council was established;

His Honour also examined the general functions and responsi-

bilities of county councils, finding in the latter respect

that "all county council powers are powers derived from

h . d . . 1. . .. 21 s 1res an mun1c1pa 1t1es.

His Honour expressed the view that

According to the law under which any county council is established, it is incorporated as a municipal corporation for "local government purposes" whatever its particular powers and functions may be at the time of its establishment or later.22

Stressing the necessity both for the exercise of governmental

powers and for public supervision to ensure the proper

functioning of municipal government bodies, His Honour

emphasised the "subordination of trading to community

purposes" 23 through the applicability of Section 419 of

the Local Government Act. He concluded in this respect

that "the council is unquestionably a corporation for

local government purposes which has defined trading

powers." 24

In then considering whether the council could also be

properly described as a trading corporation, His Honour

9

relied upon a number of historical precedents, as well as

the judgment of Mr. Justice Isaacs in the Huddart Parker

case, to show that a distinction has historically been

made between municipal and trading corporations. His

overall conclusion was that "corporations for local

government purposes" are not comprehended within the limits

of the classification of "trading corporations." 25

Mr. Justice Gibbs also examined the provisions of Pt XXIX

of the Local Government Act in detail; in his view, these

provisions made it clear that a county council was a

municipal body, performing powers or duties which would

otherwise be exercised or perfor.med by the municipal or

shire councils within the county district.

His Honour then illustrated the public nature of a county

council by referring generally to its functions under the

Local Government Act. 26 He also noted specifically that

the intention of Section 419(1) was that a trading

undertaking shall not be undertaken with a view to making

a profit if that could be avoided (i.e., electricity

was to be supplied as cheaply as possible). 27

Although His Honour conceded that the activities of the

county council could properly be described as trading,

10

he concentrated on the public character of its activities

(the supply of electricity, the obligation to supply that

electricity as cheaply as possible, the power to levy

rates, and its ability to borrow money under Treasury

guarantee) and concluded that:

The county council is a corporation constituted for the purposes of local government to provide an essential service to the inhabitants of an aggregation of local authority areas, under conditions thought most likely to prove beneficial to them. It is properly described as a municipal corporation.28

He held that the county council was not a trading corporation;

"The purpose of its formation is more properly described as

29 that of fulfilling a function of local government." His

Honour thus adopted the same criterioft as that of McTiernan

and Menzies JJ., i.e., the purposes of the corporation, as

distinct from its activities.

Mr. Justice Stephen, who was in basic agreement with the

Chief Justice and thus dissented from the majority view,

also examined the provisions of the Local Government Act,

1919. He noted that, in New South Wales, local government

bodies did undertake "trading activities, the supply of

goods and services," and that it would be proper for a

separate corporate entity undertaking such activities to

11

be described as a trading corporation. 30 His Honour also

indicated that he rejected matters domestic to the county

council as irrelevant in determining whether it was a

trading corporation.

In an important finding, His Honour indicated that one

factor distinguishing the council ffom a commercial

undertaking was the existence of restrictions upon its

terms of trading (e.g., section 419). He did, however,

reject the argument that this factor_: (combined with the

council's incorporation under local government legislation,

its power to levy rates, and the fact that its functions

benefited the area it served) was sufficient to prevent

it being a "trading corporation." 31 He thus concluded

that the county council was a trading corporation. 32

While His Honour went on to reject the statutory incorporation

and public service arguments (both also earlier disapproved

by Chief ~ustice Barwick), the majority opinion of McTiernan,

Menzies and Gibbs JJ. prevailed.

This narrow three-to-two majority decision has thus supported

the view of those who felt that the expansion of the

corporations power, despite the Con·cr·e·t·e Pipes case, would

12

be a gradual and painstaking process. The decision would

appear to limit the scope of any proposed federal securities

legislation founded upon the corporations power, as the

breadth of the interpretation given by the High Court

to the term "trading corporation" under placitum Sl(xx)

is of critical importance in determining exactly which

areas of Australia's securities markets will come within

the sphere of the placitum and thus, perhaps, under the

proposed federal regulatory umbrella.

2. Insider Trading

In considering the problem of "insider trading," this

thesis has sought to examine the philosophical bases of the

introduction of the regulatory schemes currently used in

a number of subject jurisdictions. The object of this

examination has been to determine whether there are in

fact sound philosophical bases for such schemes; this is

particularly important in view of the fact that legislation

seeking to regulate the practice is expected to be soon

introduced at federal level in Australia.

The current methods of legislative and administrative

control utilised at federal level in the United States

13

represent the most advanced scheme yet adopted. An

examination of the philosophical bases of these methods

does not, however, reveal any planned, cohesive legislative

design behind their initial introduction or subsequent

evolution.

As it is these United States federal provisions which have

been utilised as models by some of the Australian states

and a number of other subject jurisdictions, one would

have imagined that the rationale for the introduction of

the relevant provisions in the former jurisdiction would

have been the subject of close study by securities legislators

prior to the introduction of legislation in the latter

jurisdictions. However, it appears that the "insider

trading" provisions in a number of subject jurisdictions

consist merely of adoptions (and in some instances,

adaptations) of the basic United States statutory and

administrative provisions. To this author, this is an

unfortunate situation, as there remains so much doubt as

to both the need for and (if that need be established) the

most efficient form of regulation of, insider trading

activity, that the mere introduction of United States

provisions or their local counterparts can only lead to

future confusion in this important area.

14

This thesis has examined both the United States33 and the

New South Wales 34 substantive provisions currently regulating

the practice of insider trading. It is clear, however, from

the Parliamentary Debates35 at the time of the introduction

of section 75A of the New South Wales Securities Industry

Act, 1970, as amended, that no adequate consideration was

given to the reasons behind the introduction of the

important United States provisions. Further, it is clear

that these United States provisions for.med the model for

the New South Wales legislation in this area. In order to

illustrate further the debt owed to the United States

model, and in particular to Rule 10b-s, 36 the ensuing

brief comparison of the relevant provisions is in. order.

As indicated in the thesis, sections 11, 12 and 17 of the

United States Securities Act, 1933, do relate to the

problem of insider trading, but specifically in the context

of the sale of securities. 37 Further, there are three

aspects to the relevant regulatory provisions of the

United States Securities Exchange Act, 1934. 38

First: Section 16 (a) imposes a reporting requirement which

obliges beneficial holders of more than 10 percent of any

class of any equity security registered under section 12

15

of the Act, and directors or officers of the issuing

company, to file a statement of the amount of all equity

securities of which they are the beneficial owners.

Such statements must be filed when the securities are

registered on a national securities exchange {or at the

time a section 12(g) registration statement becomes

effective) or within ten days after the person becomes a

beneficial owner, director or officer. A similar reporting

requirement exists in relation to changes in such beneficial

owne_rship; such changes must be reported within ten days of

the end of each month in which they occur.

As explained in the thesis, 39 this author is of the opinion

that there is too long a period allowed before such reporting

must be effected; a mandatory seven-day reporting period

should, it is suggested, be imposed in this respect.

The companies legislation in various Australian states

does impose similar reporting requirements upon substantial

shareholders. 40 These provisions, while not directed

solely toward the problem of insider trading, are relevant

to that area. However, as with section 16{a) of the

United States 1934 Act, the question does arise as to how

16

effective such a disclosure device can be as a tool for

h 1 t . f . 'd t d' 41 t e regu a 10n o 1ns1 er ra 1ng.

Second: Section 16(b) of the Securities Exchange Act,

1934, provides for recovery by a company or its security

holders, from 11 insiders, 11 of any profits made by those

11 insiders 11 from any sale or purchase {or purchase and

sale) of any of the company's equity securities within

any period of less than six months.

As elaborated in the thesis, 42 the various Australian

State companies Acts do contain provisions which render

officers of corporations liable to the corporation for the

improper use of information acquired by virtue of their

positions. Additionally, and with the exception of New

South Wales, the State statutes contain what this author

regards as a rather unsatisfactory provision, section 124A,

providing for civil liability on the part of officers of

a corporation in 11 insider trading .. situations. 43 The

latter provision, in this author's view, will inevitably

lead to many of the complexities of interpretation which

have been faced by United States securities legislators in

this area.

17

The New South Wales Governeent did not introduce section 124A,

but instead added a new Section 75A to its Securities

Industry Act. This section creates the offence of insider

trading in extremely wide terms, and, in its general scope,

it appears to be much wider than section 16(b), particularly

in that it relates to persons who are associated with a

corporation or body, which ter.m is very broadly defined in

the legislation. 44

Third: Rule lOb-S is the major insider trading regulatory

weapon in the United States. The major effect of the Rule,

as widely interpreted by the courts and the Securities and

Exchange Commission, has been to impose civil liability on

persons who have utilised inside information (to those persons

who have purchased or sold securities without that inside

information) without the necessity of establishing privity

of contract. 45

As discussed in detail in the thesis, there is considerable

doubt as to the validity of the expansion of the Rule

from what was originally an anti-fraud device to what is

now a major regulatory tool, the exact limitations of which

have yet to be determined. Additionally, serious technical

problems relating to materiality, the possible extent of

18

the concept of "insiders," and the liability of "tippees"

and "sub-tippees, .. remain unresolved. 46

Section 7SA(2) of the New South Wales Securities Industry

Act, 1970, also provides a right of action against persons

gaining an advantage from insider trading, at the hands

of either 11 another person .. (for the amount of any loss

incurred by that person by reason of the gaining of that

advantage) or at the hands of the corporation or body which

issued or made available those securities (for any profit

which accrued to the insider by reason of the gaining of

that advantage).

It will thus be seen that, although it has yet to be

subject to judicial interpretation, section 75A of the New

South Wales Securities Industry Act contains the seeds of

many of the problems which have arisen in the interpretation

of Rule lOb-S in the United States. 47 As section 75A is

based in large part upon the American provision, it is

regretted that full consideration does not appear to

have been given to the problems encountered with that

provision in the United States before the framing of the

New South Wales legislation.

F 0 0 T. N. .0 .T. E. S

1. See Chapter 3 supra at 208-227

2. See id. at 253-255 ----3. see id. -.at 264-265 ----4. See id. at 274-276 ----5. See id. at 194-201 ----6. See id. at 215-227 ----7. See id. at 222 ----8. See id. at 2261 253-255 1 264-265 and 274-276

9. See id. at 226-227

10. 48 A.L.J.R. 26 (1974) (hereinafter referred to as "the St. George County Council Case"}

11. Id. at 27

12. Id.

13. Id. at 28

14. Id. at 30

15. Id. at 29

16. Id.

17. p. Lane I Federal C'ont·r·o'l ·o•f• T'r'a'd'i·n·g· eo·rpo·rations I 48 A.L.J. 233 at 238 (1974).

18. The St. George County Council case, cited note 10 supra at 28.

19. Id.

20. Id. at 31

21. Id. at 32

22. Id.