Enforceable undertakings – practical tips

April 2014

Enforceable undertakings (EUs) are a regulatory tool used by the Australian Securities and Investments Commission (ASIC) for dealing with breaches by Australian financial services (AFS) licensees and their officers of their financial services obligations. In recent years we have seen EUs experience a resurgence and ASIC has used them extensively: for example, the ASIC Enforceable Undertakings Register reveals that 27 EUs were accepted in 2013 and 6 have already been accepted in 2014. By contrast, during the period between 2006 and 2010, ASIC only accepted 10 undertakings on average per year1. Accordingly, the regulatory trend seems to be that ASIC will continue to use EUs as an alternative to civil or administrative action where it considers that it will provide a more effective regulatory outcome.

EUs - some practical guidance

If you find yourself in the unenviable position of potentially negotiating an EU with ASIC, we recommend that you keep the following considerations front of mind.
 

Initiating discussions

An EU may by initiated by the regulated party and so there could be benefits from voluntarily co-operating with ASIC, as this can influence ASIC's choice of enforcement mechanism. ASIC may be more inclined to accept a negotiated outcome than use court proceedings and will acknowledge a regulated partyfs co-operation in the EU, which may help to minimise reputational harm. In self-reporting breaches to ASIC, regulated parties should always ensure that they attempt to take remedial measures as soon as the breach is identified, that they present ASIC with a remedial plan and fully co-operate with ASIC. Essentially, ASIC is looking for a positive and genuine commitment to rectify the breach and prevent it from reoccurring.
 

What ASIC will be likely to accept

ASIC is more likely to accept an EU from a regulated party who is prepared to compensate clients who have suffered loss or harm; improve internal compliance arrangements; appoint an independent expert to review parts of their business; oversee their implementation of the EU and report on performance to ASIC; or refrain from engaging in certain activities for a period of time. While these undertakings can be onerous, the regulated party will at least have the opportunity to negotiate the content and drafting of the EU with ASIC before it is finalised, which affords the regulated party some degree of input into the process. For example, the regulated party may seek to retain the power to select and appoint an independent expert, or limit the extent of reporting obligations to "substantial" non-compliance with the EU.

Regulated parties should think carefully about what obligations they agree to assume in relation to compensation, for example:

  • an EU should not be used to secure the de facto payment of a pecuniary civil penalty (this should be determined by a court); and
  • the regulated party may be assuming obligations that are quite unrelated to the contravention (for example, one regulated party undertook to contribute $1 million to Financial Literacy Australia Limited).

Acknowledgments

ASIC will not accept an EU that denies liability completely and so the regulated party will need to acknowledge ASIC's concerns. However, such acknowledgement can be followed by the words "nothing contained in the undertaking constitutes an admission." In some EUs, regulated parties have also been allowed to state that "they do not agree with the view formed by ASIC." This wording is important as it can help preserve the regulated party's access to insurance and minimise the risk of a third party using the EU in court proceedings as evidence of an admission of the alleged breach.
 

Subsequent proceedings

ASIC will also not accept an EU unless it includes clauses acknowledging that the EU does not affect the rights of third parties, or ASIC's power to investigate and conduct surveillance or to pursue criminal or civil penalty proceedings. Accordingly, while an EU may be used to achieve immediate resolution, it may be merely an adjunct to the other remedies ASIC seeks. Therefore regulated parties need to be mindful of the risk of ASIC pursuing other avenues of redress and consider whether it is to their strategic advantage to enter into an EU.
 

Preserving legal professional privilege

Legal professional privilege needs to be preserved during the negotiation process and during the operation of the EU. During negotiations with ASIC any documents or information produced to ASIC should be reviewed for legal professional privilege and arrangements should be made to ensure that a claim of privilege is not waived by disclosure. This is especially significant in voluntary negotiations, as the statutory protections found in sections 68 and 92 of the ASIC Act (regarding self-incrimination and third party claims) will not be available.

In terms of ongoing monitoring of the EU, ASIC will often add a clause seeking that the regulated party agrees to provide all documents and information requested by ASIC for the purpose of assessing compliance. It is important that such clauses are qualified by adding the words "subject to legal professional privilege." There may also be scope to include additional qualifications to such clauses.
 

Costs

Compliance with an EU is costly - both in terms of direct monetary cost (e.g. external legal and/or compliance advisersf fees) - and in terms of opportunity cost, including the existing internal resources that need to be devoted to the EU. In addition, another potential cost to be wary of in negotiating an EU, is that ASIC may seek to recover its costs from the regulated party.
 

Publicity

The negotiations surrounding the acceptance and drafting of an EU are private, however once finalised the EU will be publicly available on ASIC's Enforceable Undertakings Register and publicised by ASIC by a media release2. Therefore any EU will involve some risk of reputational harm for the regulated party. However, the regulated party can ask that certain information not be released, for example if it is commercial in confidence, consists of an individualfs personal details or would be against the public interest. If ASIC is satisfied as to one of these matters and the information is deleted, the EU will appear on the register with a note stating that certain information has been removed.

In addition, since ASIC will not remove EUs from the register even once they have been fully complied with or have expired, a regulated party should ensure that, in so far as possible, it is comfortable with the contents of an EU.
 

Enforcement

While it is possible for ASIC to attempt to enforce an EU in court where there is a substantial breach, the likelihood of this occurring seems relatively low. When an EU is breached ASIC tends to seek to reopen negotiations and either vary the initial EU or enter into a new EU. This may be because of the cost of instituting enforcement proceedings as well as because the court will not automatically enforce an EU. When asked to enforce an EU, the court will consider procedural fairness and the appropriateness of the terms of the EU3. Thus the court must first determine whether a breach of the EU has occurred (if there is no breach no enforcement consequences will follow) and, if a breach can be shown, whether the EU can be enforced (for example, its terms may lack certainty). This can lead to very uncertain prospects of success for ASIC in seeking to enforce compliance with an EU.
 

The bottom line

EUs have emerged as a prevalent regulatory enforcement tool in recent years and this trend is only likely to continue.

This can been seen as a constructive development in enforcement trends, since the negotiated aspects of EUs allow the regulated party to influence the enforcement outcome and preserve their reputation, while still allowing breaches to be rectified in a timely and cost effective manner. 

1

Year  2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
ASIC EUs 27 14 7 11 10 7 20 18 27 6

2 ASIC's policy on public comment is found in Information Sheet 152.
3 Marina Nehme, 'Enforceable undertakings: are they procedurally fair?' (2010) 32 Sydney Law Review 471, 496.

Nikki Bentley

I understand the financial services industry and thrive on helping our clients in this industry succeed.

Nikki Bentley Partner

Nikki is a leading investment funds advisor specialising in financial services and corporate law.  She specialises in business establishment and structuring, fund establishment, funds merger and acquisition, product disclosure and distribution. Nikki leads HDY's corporate group which combines expertise from the Financial Services, M&A and Tax areas.

Nikki provides advice to leading Australian and global fund managers on a full range of corporate, commercial and regulatory issues facing their businesses. She has considerable experience in assisting clients with fund establishment (onshore and offshore), disclosure and distribution. Nikki regularly advises clients on establishing, buying, selling and restructuring their businesses. She also regularly assists clients responding to regulatory enquiries and investigations.

With more than 15 years funds management experience in private practice, government and as an in-house lawyer, Nikki's practice spans the range of funds management products, with particular expertise in hedge funds, property funds and equities.

Nikki is regularly involved in industry and government discussions on regulatory reforms impacting the Australian funds management industry. Nikki is a passionate advocate for the development of a new corporate collective investment vehicle because of the opportunities it could provide to grow the funds management industry. She is the Honorary Legal Counsel and Chair of the Regulatory Committee for the Australian branch of the Alternative Investment Management Association (AIMA) and is a regular participant on the Financial Services Council (FSC) working groups.

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Jon provides advice to leading Australian and international financial services clients on the full range of corporate, commercial and regulatory issues facing these businesses. He has considerable experience advising them on establishing, buying into, selling and restructuring their businesses.

Jon regularly advises on funds management issues including fund structuring, disclosure, investment management and outsourcing arrangements. He has particular expertise in the area of investment distribution and has advised on key projects for platform operators and advice providers.

Recently, Jon has advised on the establishment of a fully digital investment platform, the negotiation of a material outsourcing arrangement for a global investment bank and a scheme modernisation project for a leading Australian fund manager. Jon has also recently advised on the establishment of the Australian operations of a global diversified financial services business, including regulatory and corporate issues related to its expansion.

Jon's clients value his advice on recent law reforms, including around product disclosure statements and the digital provision of financial services. Jon is consulting to the Committee for Sydney and is a regular participant on Financial Services Council working groups.

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