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• Published on 2 September 2016
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16-289MR CommSec pays $700,000 in infringement notice penalties and refunds $1.1 million in brokerage

Commonwealth Securities Limited (“CommSec”) has paid a total penalty of $700,000 to comply with two infringement notices given to it by the Markets Disciplinary Panel (“MDP”), and has voluntarily refunded $1.1 million in brokerage to more than 25,000 clients.

Confirmations: disclosure of crossings and trading as principal

The MDP had reasonable grounds to believe that CommSec contravened subsection 798H(1) of the Corporations Act by reason of contravening:

• rules 3.2.3 and 3.4.1(3)(f) of the ASIC Market Integrity Rules (ASX Market) 2010; and
• rule 3.4.1(3)(f) of the ASIC Market Integrity Rules (Chi-X Australia Market) 2011.

These rules relate to confirmations of transactions which require disclosures in relation to crossings and trading as principal. A crossing occurs where a market participant acts for both the buyer and the seller in a transaction.

Failure to disclose crossings

Between 1 August 2010 and 13 February 2014, CommSec issued 114,841 confirmations to retail clients whose orders were executed as crossings but which did not contain the required statement that the transactions had involved a crossing, namely:

1. between 1 August 2010 and 13 February 2014, in relation to trading on the ASX market, CommSec issued 6,579 confirmations which failed to include the required disclosure of crossings. This failure was caused by different fields being used by the systems of CommSec and another NZ-based financial services company to identify crossings for the purposes of marking confirmations;
2. between 1 August 2011 and 9 October 2012, in relation to trading on the ASX market, CommSec issued 56,522 confirmations which failed to include the required disclosure of crossings. This failure was caused by the CommSec’s systems not being able to interpret all of the different condition codes relating to crossings;
3. between 15 August 2011 and 9 October 2012, in relation to trading on the ASX market, CommSec issued 46,231 confirmations which failed to include the required disclosure of crossings. This failure was caused by a configuration flag within CommSec’s settlement system not being turned on;
4. between 17 October 2011 and 18 December 2013, in relation to trading on the ASX market, CommSec issued 1,768 confirmations which failed to include the required disclosure of crossings. This failure was caused by a system platform change for the settlement of options market contracts, which contained an incorrect data field, as a result of which it was unable to correctly identify that a crossing had taken place; and
5. between 15 March 2012 and 26 April 2013, in relation to trading on the Chi-X market, CommSec issued 3,741 confirmations which failed to include the required disclosure of crossings. This failure was caused by CommSec’s retail and institutional participant identifier numbers being treated as two separate participants by Chi-X’s systems.

Failure to disclose trading as principal

Between 16 May 2011 to 13 February 2014, CommSec issued 50,484 confirmations to retail clients in relation to which CommSec had entered into transactions as principal but which did not contain the required statement that CommSec entered into the transactions as principal and not as agent, namely:

1. between 16 May 2011 and 13 February 2014, in relation to trading on the ASX market, CommSec issued 3,949 confirmations which failed to state that CommSec entered into the transactions as principal. This failure was caused by different fields being used by the systems of CommSec and another NZ-based financial services company to identify principal trading for the purposes of marking confirmations;
2. between 15 August 2011 and 9 October 2012, in relation to trading on the ASX market, CommSec issued 46,231 confirmations which failed to state that CommSec entered into the transactions as principal. This failure was caused by a configuration flag within CommSec’s settlement system not being turned on; and
3. between 26 February 2013 and 6 March 2013, in relation to trading on the ASX market, CommSec issued 304 confirmations which failed to state that CommSec entered into the transactions as principal. This failure was caused by the introduction of new operator references in CommSec’s system which did not contain the phrase typically used by CommSec to indicate when a related entity was the originator of the orders.

The MDP specified a penalty of $400,000 for the alleged contraventions.

CommSec voluntarily refunded approximately $1.1 million in brokerage to more than 25,000 clients, and notified 48,205 clients of the lack of disclosure and to provide corrective disclosure.

CommSec also co-operated with ASIC throughout its investigation and did not dispute any material facts.

The compliance with the infringement notice is not an admission of guilt or liability, and CommSec is not taken to have contravened subsection 798H(1) of the Corporations Act.

Verification of identity of selling shareholders

The MDP had reasonable grounds to believe that CommSec contravened subsection 798H(1) of the Corporations Act by reason of contravening rule 5.5.2 of the ASIC Market Integrity Rules (ASX Market) 2010. This rule requires a trading participant to maintain the necessary organisational and technical resources to ensure that, among other things, trading messages submitted by the participant do not interfere with the efficiency and integrity of the market.

The MDP has reasonable grounds to believe that, between 2 August 2010 to 14 April 2013, CommSec did not have in place adequate organisational and technical procedures or controls that verified the name and address on an issuer sponsored holding matched that of the client who provided the instructions prior to submitting the orders for the sale of the holdings.

The MDP specified a penalty of $300,000 for the alleged contravention.

Re-disseminated by The Asian Banker