ASIC rattles a long hidden sabre by issuing a warning that it will seek recovery of expenses associated with its investigations - Financial Services

ASIC rattles a long hidden sabre by issuing a warning that it will seek recovery of expenses associated with its investigations

By information sheet INFO 204, the Australian Securities and Investments Commission (ASIC) has alerted relevant stakeholders of its intention to utilise its pre-existing powers under section 91 of the Australian Securities and Investments Commission Act 2001 (ASIC Act) on a more regular basis.

No doubt the decision is justified by the obvious budgetary impact given the number of large scale investigations ASIC is presently conducting – but it may also be a further instance of ASIC adopting the "nudge" approach – seeking to drive behaviours by amending the consequences. This change in policy shouts out that the incentives for people and entities who are the subject of ASIC investigations have changed. If it is clear that an organisation has been involved in contravening conduct (with a finding likely), the incentives to assist ASIC in an investigation have just increased.

We have touched on ASIC's adoption of behavioural economics in a post earlier this year.

Who will be affected?

ASIC has always had the power to make orders seeking recovery of expenses associated with its investigations. INFO 204 states that ASIC has the power to make orders for recovery of expenses from:

persons who have been convicted of an offence in a prosecution that was begun as a result of an ASIC investigation; and

persons who have had judgment, a declaration or other order made against them in court proceedings that were begun as a result of an ASIC investigation under Division 1, Part 3 of the ASIC Act.

ASIC's decision to call this power into action on a more regular basis heralds a new approach that will apply to:

persons the subject of an investigation commenced after 29 July 2015; and
persons the subject of an investigation commenced before 29 July 2015, unless:
- proceedings have already been commenced that are not interlocutory in nature, concern asset preservation orders or travel restraint orders;
- charges have been laid against a person; or
- an agreement has already been reached with that person to resolve the subject matter of the investigation.

INFO 204 notes that ASIC may decide not to apply their new approach to a person the subject of an investigation commenced before 29 July 2015 if to do so would be unfair to the person concerned. This approach is consistent with the fact that such persons would not have had notice of ASIC's new approach and accordingly have been given the opportunity to mitigate the quantum of any order through voluntary cooperation in ASIC's investigation.

What can ASIC order you to pay and in what circumstances?

ASIC will not usually seek to recover its investigation expenses and costs in circumstances where the judgment, declaration or order:

is only interlocutory in nature;
concern asset preservation orders or orders restricting a person's travel movements; and
where the judgment, declaration or order is made in the context of a judicial challenge to the exercise by ASIC of its powers.

For proceedings in respect of which section 91 applies, ASIC may order people to pay investigation costs and expenses which include:

the salary costs for ASIC staff who have worked on the investigation; and
travel expenses.

More alarmingly, ASIC may make an order to recover the costs of external legal counsel and the cost of employing an expert to perform an analysis relevant to the investigation.

Given that section 91 applies only to court proceedings that have been finally determined, the quantum of costs associated with external legal counsel and expert witnesses are likely to be crippling.

D & O Insurance policies

There is a possibility that persons affected by the quantum of any such order may seek to be indemnified by insurance policies that apply to directors and officers, however consideration should be given to the specific wording of any such policy and any exclusions in the policy which apply to directors and officers engaging in certain types of conduct.

Factors that are taken into account by ASIC when making such an order

In addition to explaining that such orders will not usually be made by ASIC for interlocutory judgments or orders or orders which arise out of challenges to the exercise by ASIC of its statutory powers, Table 1 of INFO 204 sets out the circumstances that ASIC takes into account when determining whether to make an order pursuant to section 91 of the ASIC Act.

The most relevant of these are:

a high degree of voluntary cooperation in a timely manner which has the effect of significantly reducing the length of an investigation;
the impecuniosity of the person;
exceptional hardship to the person (i.e. over and above the "usual" hardship that such an order would cause a person and extending, for example, to the person's ability to care for a family member that is suffering from a severe medical condition);
the likely effect that such an order would have to other third parties, such as investors who have suffered loss; and
the degree of culpability of a person was minor and less than that originally alleged by ASIC.

Where there are multiple defendants, ASIC will consider whether the time and cost of the investigation can be apportioned to particular defendants.

Opportunity to be heard

Prior to making such an order, ASIC will notify you of the proposed amount of any order and give you a "reasonable" time to consider the proposed order and make written submissions to ASIC about whether the order should be made, the amount of the order and the form of the order. INFO 204 states that ASIC will consider any submissions before making its decision.

Whilst INFO 204 does not stipulate that ASIC will furnish you with reasons for its decision, you are entitled to apply to the Federal Court for review of ASIC's decision pursuant to the Administrative Decisions (Judicial Review) Act 1977 and, as part of this process, you can request ASIC to furnish you with a copy of its reasons.

What happens if ASIC makes an order and you fail to comply?

Failure to comply with ASIC's written order results in a penalty of either 50 penalty units or imprisonment for 1 year, or both.

Pursuant to section 91(4) of the ASIC Act, ASIC is also empowered to bring proceedings in a relevant court for recovery of any amount under its order that is not paid as a debt due to ASIC.

This basically means that if you fail to pay the amount required under ASIC's order by the date and in the manner specified in the written notice, you will be required to pay a penalty of $8500, may also be imprisoned and will most probably still be required to satisfy the original amount due pursuant to debt recovery action subsequently taken by ASIC. Subsequent debt recovery processes may extend to garnishee orders that attach to your personal property or your wages.

Conclusion

In the light of the fact that ASIC has rarely used its pre-existing powers in the past, there are various questions thrown up by ASIC's intention to use its powers under section 91 of the ASIC Act on a more regular basis which may only be answered with time.

If you are currently being investigated by ASIC, you should consider the factors that ASIC takes into account when deciding to make such orders in order to mitigate the likelihood of and quantum of any such order ever being made against you.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.


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