Explanatory Memorandum
(Circulated by authority of the Treasurer, the Hon Peter Costello, MP)16 Title and transfer
Preliminary
16.1 Proposed Part 7.11 will replace Part 7.13 of the Corporations Law. In brief, it will:
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- omit the special position of the ASX's Securities Clearing House (SCH); and
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- provide for the detailed procedural provisions to be made in the regulations.
16.2 The purposes of the changes referred to briefly above are to facilitate competition between clearing and settlement facilities in the settlement of, at least, securities transactions and to provide greater flexibility in procedure to accommodate future developments.
16.3 It should be noted that 'security' in Part 7.11 includes a managed investment product. This is indicated in the definition of 'security' in section 761A. The scope of 'security' is indicated in the relevant provision, or Division.
Divisions 1 and 2 Title to and transfer of certain securities
16.4 Divisions 1 and 2 of proposed Part 7.11 largely reproduce the provisions currently found in Division 1 and 2 of Part 7.13 with the following changes. The new provisions:
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- refer to prescribed clearing and settlement facilities (and their operating rules) rather than to the ASX's SCH (and its business rules);
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- refer to regulations (where the relevant provisions are to be moved from the Act into the Regulations);
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- correct several cross-references;
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- extend some provisions to units in managed investment schemes; and
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- make some minor drafting improvements.
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- These include shorter sentences and the reordering of provisions so that groups of sections will deal with the same types of interests.
16.5 Thus:
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- the nature of shares and certain other interests, the numbering of shares, matters to be specified in share certificates and the loss of title documents for certain securities are addressed in proposed sections 1070A to 1070D (Division 1);
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- they are currently addressed in sections 1085-1089;
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- general provisions relating to the transfer of certain securities, including provisions regarding refusal to register transfers, the duty to issue certificates, certification of transfers and the instrument of transfer are addressed in proposed sections 1071A to 1071H (Division 2 Subdivision A);
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- they are currently addressed in sections 1091 to 1096 and 1111;
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- special provisions relating to shares, including a number of relevant replaceable rules (for example, transmission of shares on mental incapacity), are addressed in proposed sections 1072A to 1072H (Division 2 Subdivision B);
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- they are currently addressed in sections 1091AA to 1091E, and 1096A.
16.6 In addition, while the current provisions refer to 'allotment' (for example, section 1096), the comparable proposed provision refers to 'issue'. The proposed change is in line with the CLERP Actand would not appear to alter the obligations in the relevant provisions (although it is acknowledged that allotment and issue are separate steps).
Division 3 - Transfer of certain securities effected otherwise than through a prescribed clearing and settlement facility
16.7 The purpose of proposed Division 3 is to replace Subdivision B, Division 3 of Part 7.13 of the Corporations Law (that is, sections 1099A to 1109) and the relevant definitions in Subdivision A.
Procedural requirements to be moved into the regulations
16.8 The major change will be to move the detailed procedural requirements (including the forms currently found in Schedule 2) into the regulations.
16.9 The reasons for doing this are:
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- it is inappropriate to clutter the Act with detailed procedural requirements such as what is a sufficient transfer by an authorised trustee corporation, and the effect of a broker's stamp on a transfer; and
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- it will allow greater flexibility to adapt the requirements to developments in the industry, and more efficient procedures which may emerge.
16.10 This will be facilitated by the regulation-making power in proposed section 1073Dwhich empowers the making of regulations about, among other things:
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- the way a security may be transferred;
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- the legal effect of a proper or sufficient transfer of a security and the relevant rights, liabilities and obligations on persons involved in the transfer;
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- what is a sufficient transfer; and
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- offences connected with these matters.
16.11 In addition the following amendments have been made:
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- in place of the current definitions of 'marketable security', 'marketable right' and 'prescribed security', proposed subsection 1073A describes the kinds of securities (including managed investment products) to which proposed Division 3 applies;
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- in place of the definition of 'eligible body' in current subsection 1097(1), proposedsection 1073C provides that proposed Division 3 applies to certain specified bodies as if they were companies;
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- in place of current section 1099A, proposed subsection 1073D(1) provides that the regulations do not apply to a transfer of a security effected through a prescribed clearing and settlement facility;
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- in place of section 1113A, proposed section 1073E provides for ASIC's power to extend the regulations to securities otherwise not covered by the regulations.
Division 4 - Transfer of financial products effected through a prescribed clearing and settlement facility
16.12 The aim of these provisions is to be facilitative (offering efficiencies to the financial services industry), rather than requiring that financial products be transferred in a particular way.
Prescribed clearing and settlement facilities
16.13 The basic purpose of proposed Division 4 is to support transfers effected through prescribed clearing and settlement facilities, in a manner comparable to the support currently provided to SCH-regulated transfers under Subdivision C, Division 3 of Part 7.13 of the Corporations Law.
16.14 What is crucial is that the transfers are effected through a prescribed clearing and settlement facility. It is not relevant whether the transaction was entered into on-market or off-market.
16.15 Proposed Division 4 therefore uses a new concept - the prescribed clearing and settlement facility (see proposed section 761A). This is defined as a licensed clearing and settlement facility which is prescribed by the regulations for the purpose.
16.16 It is expected that the Minister will have regard to the adequacy of the arrangements for the transfer of title pursuant to these provisions, and any stamp duty issues arising, before recommending that the clearing and settlement facility be prescribed.
16.17 This consideration will address, among other things, how the difficulties which may result if more than one clearing and settlement facility is handling the transfer of the financial products of the one issuer have been addressed. (This may arise in connection with a number of issues including those currently addressed in sections 1109N and 1109P.)
16.18 There may also need to be links established between clearing and settlement facilities handling the financial products of the one issuer.
16.19 Ongoing oversight of this and related issue will be provided through vetting of the operating rules. From the time a clearing and settlement facility is prescribed for this purpose, the scope of the operating rules which must be lodged and are disallowable under Part 7.3 expands accordingly.
16.20 The SCH is expected to be prescribed from commencement.
16.21 The subject matters relating to the transfer of financial products such a prescribed facility may deal with in its operating rules are described (proposed section 1074C). They include the financial products that may be transferred through the facility. Amendments to the operating rules must be lodged and are subject to disallowance under proposed Subdivision B, Division 3 of Part 7.3.
16.22 One of the purposes of these reforms is to remove the special position of the ASX's SCH and facilitate competition between clearing and settlement facilities.
16.23 Thus, it is not appropriate to replicate current Subdivision C, Division 3 of Part 7.13 which includes provisions relating only to the procedure of the ASX's SCH (for example warranties by member organisations whose identification code is included in a transfer document, and determinations of who holds quoted securities for the purposes of a meeting).
16.24 Instead, proposed section 1074E empowers the making of regulations which will cover such issues in relation to the ASX's SCH and any other prescribed clearing and settlement facility licensee.
16.25 Obviously, in relation to the latter, it is not possible currently to craft provisions of the level of particularity that Subdivision C, Division 3 of Part 7.13 provides for the ASX's SCH.
16.26 Putting all such provisions in the regulations therefore has the advantages of putting the relevant provisions in the one place (whether they are applicable to the ASX's SCH or some other prescribed clearing and settlement facility licensee), moving detailed procedural provisions out of the Act and accommodating the possibility of new classes of financial product being transferred this way.
16.27 In brief, proposed section 1074E provides for the making of regulations in relation to, among other things:
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- transfers of financial products effected through a prescribed clearing and settlement facility, in accordance with its rules;
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- the legal effect of such a transfer, and the rights, liabilities and obligations of a person in relation to it;
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- the circumstances in which a person is required to register or not to register a transfer through the facility;
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- offences arising from, for example, the use of identifying codes in relation to transfers of financial products; and
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- civil liability for contravention of the operating rules in this connection.
16.28 The proposed amendments will widen the potential ambit of the provisions which are currently found in Subdivision C Division 3 of Part 7.13 to financial products.
16.29 This does not mean that all financial products will be able to be transferred in this manner. For example, benefits under a retirement savings account cannot be assigned; similarly the transfer of a superannuation interest of a member or beneficiary is generally prevented. Some other products are unlikely to be traded (and hence their transfer is unlikely to be effected through a clearing and settlement facility).
16.30 In addition, there will be limits imposed through:
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- the excision of specific products by regulation (proposed section 1074A);
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- the conditions on the licence of the clearing and settlement facility which specify the financial products for which it can provide its services;
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- the vetting (and possible disallowance) of operating rules of the clearing and settlement facility;
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- any need for specific regulations under Division 4 to support the transfer of a particular financial product;
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- the body of law relating to conflicts of laws, and the rules of statutory interpretation as to what Division 4 (see particularly proposed section 1074G) will override.
16.31 These provisions cannot apply to a class of assets which are not financial products, such as bullion.
16.32 However, a prescribed clearing and settlement facility may wish to provide services in relation to a wider class of assets using the infrastructure established to provide services for financial product transactions.
16.33 The proposed provisions will not affect the current mechanism for transferring financial products which are not subject to proposed Division 3 and which are not transferred through a prescribed clearing and settlement facility in accordance with proposed Division 4.
16.34 Other supporting provisions are to be included in the Law:
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- if a transfer of a financial product is effected through a prescribed clearing and settlement facility and in accordance with the operating rules of the facility, the transfer is valid and effective for the purposes of any law or instrument governing or relating to the way in which the financial product may be transferred (proposed section 1074D);
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- substantial compliance is to be determined under the operating rules of the facility (proposed subsection 1074C(2)(c));
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- This replaces the approach taken in section 1097D.
16.35 Proposed section 1074F, which provides protection from civil liability for a person's contravention of prescribed clearing and settlement certificate cancellation rules, follows current section 1112D.
Common provisions
Operation of Divisions 3 and 4
16.36 Proposed sections 1073F and 1074G, which relate to the operation of Divisions 3 and 4 respectively, are based on current section 1110 (and the definition of 'legal representative' in subsection 1097(1)). In general terms, they addresses the relationship between the provisions of proposed Divisions 3 and 4 and other relevant legislation and instruments, the terms and conditions on which the financial products are sold and the use of other forms of transfer.
Division 5 - Exemptions and modifications
ASIC's power to exempt and modify
16.37 ASIC will have extensive powers to grant an exemption from Part 7.11 (and the relevant regulations) or modify provisions (proposed section 1075A).
16.38 Such an exemption or declaration must be gazetted (proposed subsection 1075A(5)).