Australian Institute of Criminology

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Chapter 8 - Self-regulation, business ethics and insider trading

Published in:
Casino capitalism? Insider trading in Australia / R Tomasic
Canberra : Australian Institute of Criminology, 1991
ISBN 0 642 15877 0
(Australian studies in law, crime and justice series) ; pp 79-98


We are not here for the day, don't govern us as thieves.
(Very senior Melbourne broker)

We are all thieves in this industry.
(Prominent Sydney broker)

Laissez faire capitalism must be regulated as a response to the greed factor.
(Financial adviser)

The failure of insider trading laws to make an impression cannot be attributed solely to the problems facing regulatory authorities and to understand part of the reason for insider trading being able to flourish it is necessary to look at the values and attitudes of practitioners in the securities industry. Although the failure of the regulatory authorities to come to grips with insider trading is serious enough, it is reasonable to say that the persistence and intractability of insider trading as a phenomenon is also influenced by the fact that it is tolerated within the securities industry at large. If the formal system of regulation is wanting it is appropriate to ask whether self-regulation would be a more effective response. This is an option that must always be considered particularly in a climate of deregulation and when confronted by the typical response of the Australian business sector which is to say "leave it to us. We can do better with self-regulation". As well, the developments in the United Kingdom following the introduction of the Financial Services Act 1986, at least suggest that the self-regulation option should be put on the reform agenda.

Attitudes to self-regulation

Many of the brokers' views about self-regulation were based on the expectation that the Stock Exchange would be the regulating body. Opinions about self-regulation were fairly equally divided. Some of those who thought that a system of self regulation would be more effective referred to the value of self-interest in making it work and the ability of the Exchange to suspend companies where there has been insider trading. A Melbourne broker stated, for example, that it is best to "leave it to the Stock Exchange. They have the skills to detect and investigate. The Stock Exchange is highly computerised and insider trading can be tracked down". A typical reaction was that "the expertise in the Stock Exchange is far in excess of other regulators - they are closer to the operators. The efforts of the Stock Exchange in its regulations, articles and by laws is excellent but the problem is with regulating people outside the industry. It might not be practical".

There were as many who did not think that self-regulation would be any more effective in dealing with insider trading. One such view was that regulating insider trading was beyond the reach of the Stock Exchange because "it is not the preserve of the Stock Exchange. The NCSC is the right body. The Stock Exchange should report to the NCSC". One broker expressed doubt as to whether insider trading was properly within the ambit of self-regulation. As he put it, "to the extent that insider trading is a problem it is theft and as such is not within the ambit of self-regulation. It is difficult for the Stock Exchange to do more-how can you identify the buyer? With more automated trading there is greater facility for co-operation with the authorities". It was often suggested that self-regulation is not effective - "I am not sure that self regulation is as good as it is said to be" and the ever present problem of public confidence in self-regulation systems was referred to by a Perth broker who argued that insider trading should be regulated by a government body in order to develop public confidence. The capacity and commitment of the Stock Exchange for self-regulation was also doubted. One broker said that "the London Panel is a wonderful process. To understand insider trading a panel would help. The Stock Exchange is not likely to devote funds for the technology to monitor insider trading. Based on its performance with accounting systems the Stock Exchange could not do it". Only one Exchange official supported the idea of self-regulation while the others offered a variety of masons as to why it was not suitable in this country. The issues were summarised by a Stock Exchange official who pointed out that "the Stock Exchange could not reach the non-brokers. The current scheme is a form of co-regulation. The Stock Exchange would support the elimination of duplication between it and the agencies. The Australian culture is different to that in the UK because of the role of the Bank of England".

There was not a great deal of support for self-regulation amongst the financial advisers. The difficulties were perhaps best summed up by one of the advisers who said, "the industry is mainly conducted by honest people and self-regulation can be effective but there is a difficulty with inward looking regulation and criminal sanctions and some outside investigations are still needed". A more forthright view was that "laissez faire capitalism must be regulated as a response to the greed factor". Along similar lines was the opinion that, "in the Australian securities industry self-regulation is pathetic. Players have varied and vested interests and without pressure from the NCSC the Stock Exchanges would be pathetic". Self-regulation in Australia has traditionally been token. One financial adviser expressed the fear that "Stock Exchange persons who are inside traders would make the rules against insider trading and this would be a sham". Despite their reservations about the existing system and their support for the principle of self-regulation the market observer group were almost unanimous in rejecting self-regulation alone as a realistic alternative. One reason for the lack of support was that "brokers are interested only in making money - they are driven by greed". The need for an independent body, the critical importance of public confidence in the process, and the problem of effective enforcement were the relevant factors emphasised by the advisers. A more explicit view was expressed by the former broker who said that "the Stock exchange has always had self-regulation, but it was suspect because of being run by brokers. Some of their decisions were motivated by commercial reasons. The Bank of England is a major factor in the London Exchange. We need a mixture of regulation by the Stock Exchange and the Commission".

The typical lawyer's assessment of self-regulation was expressed by a lawyer who asserted that "Stock Exchanges are hopeless! Brokers don't have a lot of integrity at the moment. I don't think that brokers are effective self-regulators. Self regulation would be Rafferty's rules. Other professions don't have the same training in moral principles as lawyers do. You can justify anything by saying that the market justifies it. This leads to anarchy and no rules. We need to see a lot more integrity demonstrated by brokers, who are a greedy lot generally, before self-regulation would be possible". This negative view was not confined to any one city.

The agency officials were predominantly critical of the idea of self-regulation of the Australian securities market. Even those who supported the principle of self-regulation did not believe that it would prove any more effective than the current regulatory approach. The most favourable view was, "I would like to think that persons in the industry could be trusted to self-regulate but self-regulating organisations are slow to gasp the opportunity. Self-regulation is an experiment worth the effort, but probably would not work as de-regulation would occur". More commonly, regulators were blunter in their reaction and supported the view that "self-regulation is an irrelevant debate in Australia; it just would not work". The reasons for this scepticism consistently related in one way or another to a poor regard for the integrity of stock brokers.

Self-regulation in the City of London

The City of London is often used as a model when regulation of the Australian securities market is discussed and during the course of the project questions were asked about the application of the City model in Australia. Regulation of brokers as far back as the thirteenth century took the form of licensing by the Lord Mayor and aldermen of the City of London. Licensed brokers were required to swear an oath of good behaviour and, in particular, to eschew deceit. Amongst other things, they were required to disclose the identity of their principal and, under pain of disqualification for life, not to deal on their own account. As the scale and style of market operations developed, the forms of regulation multiplied but a constant feature was that self-regulation was always a prominent aspect of the control system. This was made possible by the close knit community which was bound together by the geographical proximity, tradition, self-interest and the culture of the English class system which incorporated shared values and imposed acceptable forms of conduct.

The reordering of the international financial market, especially its globalisation, imposed pressures on the financial services sector in London which led to a series of reviews of the system of regulation. The review process finally resulted in the Financial Services Act 1986, which established a new style of regulation for the securities market. The thrust of the new scheme was that power to regulate was delegated by the relevant minister to a "designated agency", in this case the Securities and Investments Board (SIB), which in turn operates through "recognised self-regulating organisations" (SROs). The Bank of England also has a role in the supervision of the SIB. The SIB is made up of persons representing the industry and public interest. It has a rule making power, it recognises SROS, provides a mechanism for investigation of complaints and it oversees the operations of the SROS. The SIB is a company limited by guarantee with financial independence from government. It is, in a real sense, a privatised regulator.

An SRO is defined as "a body regulating the carrying on of investment business of any kind by enforcing rules which are binding on persons carrying on business of that kind". The rules of the SROs must satisfy criteria imposed by the Act and the SROs are accountable to the SIB. An important requirement for SROs is that they have effective arrangements and resources for monitoring and enforcing their rules. The SROs' governing bodies must include independent members in order to protect the public and to avoid the risk of acting in the interests of its members. Below the level of the SROs are "registered professional bodies" (RPBS) which regulate the professional activities of their members. The scheme also incorporates institutions in the form of "recognised investment exchanges" (RIES) whose function is to provide a market for trading in securities. The Stock Exchange would fit into this category. The RIEs are recognised by the SIB and are subject to criteria imposed by the Act. Similar bodies are the "recognised clearing houses" which provide settlement and related facilities associated with business conducted on the investment exchange. It appeared from what the brokers reported that many of them were not aware of the system of self-regulation in London. One broker who was aware of this explained that "the system in England works because of the role of the Bank of England. Without that, it will not work in Australia". Several others pointed out that the geography of the Australian financial markets would make it impossible for the London system to apply in Australia. A leading Sydney broker also suggested that a 11 system [like that] in the UK [but] with more suasion is very effective. The SROs are expert in securities; the NCSC is not as expert. I believe absolutely that it would be more effective". Even though the Australian financial services market has traditionally been largely the preserve of private school educated boys, the class bonds that apply in England are not nearly so strong in Australia. Perhaps it was the absence of these bonds that Mr Henry Bosch was referring to when he lamented that Australian business ethical standards suffered because of the demise of the men's club. It is also relevant to take account of the fact that the Australian financial market has developed in its own way and that overseas models do not necessarily translate well into the Australian environment.

Conflicts of interests

All of the participants were asked about the frequency of conflicts of interest arising from their (and others') access to price sensitive information. Lawyers had little trouble in identifying the point of this question but many of the non-lawyer respondents experienced difficulties in coming to terms with the notion of conflict of interest. This should not be because conflicts of interest only arise in relation to legal work, because it appears that conflicts are part and parcel of a broker's working life, especially for those engaged in corporate advising. The ability of brokers to manage conflicts is an important consideration in deciding whether a regime of self-regulation could be introduced. The brokers who understood the issue were as one in saying that conflicts are resolved quite properly. According to a Melbourne broker, "nine out of ten people would not exploit their position". And, as a Perth broker responded, the problem "is solved by ethical rules". The approach of a senior and respected Melbourne broker was that "you must order your affairs to handle it. It could be a time bomb but, so far, we have been able to resist the temptation". The Melbourne broker quoted at the head of this chapter was affronted by the suggestion that brokers are unable to manage conflicts and he responded sharply that "sharebrokers live with it everyday".

The responses from Stock Exchange officials suggested that they are not close enough to the market work-face to have a real experience of the problem. One perceptive comment, however, was that despite the various measures taken to avoid conflicts "ultimately one person in the firm must know everything and thus a conflict arises". The financial advisers indicated from their answers that conflicts of interests were a frequently occurring phenomenon but, surprisingly, there was no information provided about how they are resolved. The market observers thought that conflicts would be common. One financial journalist who thought this, went on to say that "it is acute where a merchant bank advises a company. The window of opportunity approach is an uneasy solution; managers and directors are most exposed". Another of the journalists expressed the view that "brokers tend not to think of conflicts, it is a matter of low ethics. It could happen to people close to the company".

Most lawyers reported that conflict of interest situations were very common but, as a Sydney lawyer explained, "whereas lawyers recognise conflicts readily and don't do it, non-lawyers find the problem of conflict of interest hard to understand". The sensitivity about conflict of interest is not a matter of lawyers having an exaggerated impression of themselves. They are formally trained in ethics and throughout their education and their professional lives, the conflict issue is reinforced. A composite assessment by the lawyers was that, as well as the legal profession, the brokers, company executives and directors were confronted by conflicts. In the legal profession the problem is curtailed by a variety of procedures so that, although there is potential, actual conflict is rare. Brokers were seen as not handling conflicts well while merchant bankers do better and the banks are "pretty good at keeping information to themselves". A simple solution to the problem of conflict of interest in relation to share dealings was offered by a lawyer who said, "they don't happen to me. I don't share trade". This might well be an appropriate solution for many others in conflict of interest situations, at least as far as trading around company announcement times is concerned. Although the volume of sensitive information that enters the government agencies is vast, regulators reported that conflicts did not occur because of well developed internal procedures. The regulators acknowledged that, while they had no personal experience with conflicts of interest in the handling of price sensitive information, such conflicts would be commonplace for people in the private sector. As one explained, "this must be common, there are only four or five top notch merchant bankers and it follows that there must be conflicts of interest".

Principal trading and insider trading

Two examples of conflict arising in the starkest possible fashion are when brokers engage in principal trading. Principal trading is commonly associated with insider trading in Australia. This should not be surprising if the findings of the Rae Committee (1974) are any guide. It is of the very nature of the industry that such illegal practices are intertwined, for example warehousing and insider trading, and it is wasted effort to consider which of a range of marketplace abuses is the more serious. By effectively attacking one form of illegal conduct, regulators would be able to achieve a certain synergy because of the close relationship between them. Of course, control of improper conduct must also be seen in the context of efforts to provide an appropriate ethical foundation for work in the securities industry. Where the prevailing ethic is one motivated by greed, the herd instinct and peer pressure make it especially difficult to resist the temptation to engage in illegal conduct. The level of resistance is particularly low where, because of poor or no training, because of the firm's culture, or merely because of immaturity and lack of experience, the capacity to resist conflict of interest situations is poorly developed.

It is a generally held view that stockbrokers are poorly equipped, and the least able, to manage conflicts of interests by comparison with other occupational groups active in the securities industry. The failure of brokers to meet basic professional standards was attributed to a variety of factors, such as the widespread opportunities for market abuse, the pressure imposed by clients to make money, the lack of example by "tribal elders" within the industry, the absence of a professional tradition and the poor level of socialisation in the handling of conflict situations. The poor image of brokers in this regard is a problem for the industry but, more significantly, it is a serious dereliction of their fiduciary duties. The existence of a fiduciary duty imposes on the broker the obligation to meet the highest standards of performance but, in essence, the obligation means no more than that the broker must act honestly and fairly with the client. A fiduciary is prohibited from profiting from that position and if a broker were to engage in principal trading, in situations in which it is illegal, such conduct might amount to a breach of fiduciary duty and would be a serious failure to meet basic professional standards in relation to clients. Section 843 of the Corporations Act 1989 provides a penalty of $2,500 and/or six months imprisonment for dealers who act as principal where they do not first inform the person with whom they are dealing that they are dealing as principal and not as agent, The exceptions to the prohibition cover the situations where a dealer trades as principal with another dealer, or where the dealer specialises in the trading of odd lots of securities. A dealer who acts as principal in a transaction with a non-dealer is required to state this fact in the contract note and is prohibited from charging commission or a brokerage fee in the transaction. At first sight, a major difference between section 843 and section 66, its equivalent in the Securities Industry Act 1980, seems to be that s 66(2) has been dropped. Section 84 of the Act, however, incorporates s 66(2) in its definition of "own account dealings and transactions". The Explanatory Memorandum, in dealing with clause 84, states that its purpose is to cover the following situation:

A person deals in or enters into a transaction of sale or purchase of securities on the person's own account where the person deals or transacts as principal or on behalf of an associated person or a body corporate in which the person has a controlling interest. If the dealer is in partnership and the dealer's interest and that of the dealees partners constitutes a controlling interest, the dealer will also be acting on the person's own account for the purposes of the clause.

A difference between section 843 of the Corporations Act 1989 and section 66 of the Securities Industry Code is that s 843 applies to a dealer who is a corporation as well as to dealers who are natural persons. Another change found in section 843 is that the dealing on one's own account, if it is not undertaken by a dealer that is a corporation, must be undertaken by a dealer in the course of "an eligible securities business carried on by the dealer". Section 93 defines an "eligible securities business" in such a way as to "disregard" an act by an employee of the dealer, or one which is undertaken on behalf of the dealer. This suggests that the trading as principal must be by the principal and not by employees or by persons acting on the principal's behalf. In the United States it has been held that the mere reference to oneself as acting as principal may not be sufficient to satisfy the obligations created by section 843 where one is dealing with an unsophisticated client (see Baxt et al. 1988).

The Rae Committee highlighted the conflict of interest problems which house or principal trading created in the past and no doubt continues to create. House trading was identified as a major factor in the collapse in the early 1970s of John T Martin & Co. and of Michael Ricketson & Co (Ricketson's) (see Rae Committee Report 1974, Chs. 4 & 5). In both cases, house trading had been heavily relied on when the business of the firm was unprofitable. The Rae Committee (1974, pp. 155-6) interpreted this as an illustration of what it described as "brokers as privileged speculators". The heavy reliance on house trading by Ricketson's led the Committee to conclude that:

the conflicting interests faced by Mr Ricketson made it extremely difficult for him to advise clients on their investments, and to act for them with the degree of objectivity that is desirable among stockbrokers (Rae Committee Report 1974, pp. 163-4).

An extraordinary feature of this case was that, over a period of five years, neither the Melbourne Stock Exchange nor the firm's own auditors saw any need to investigate more closely until after Ricketson's had defaulted. In the case of the affairs of John T Martin & Co., the Rae Committee highlighted the problems which can arise when a firm relies heavily on house trading. In this case, house trading:

turned the risks of insolvency for John T Martin into a certainty... Of the other causes of failure, the combined losses arising from Leopold, as a result of client short-selling and the firm's buying on its own account, were perhaps not much greater than the losses which were to be finally attributed to bad debts from employees' speculative trading, but the plunges into Leopold shares certainly precipitated the collapse and determined the timing of it (Rae Committee Report 1974, p. 124).

The Melbourne and Sydney Stock Exchanges failed to detect the failures until it was too late and, as the Committee observed, there seemed to be an assumption by the firm that such conduct would be tolerated. As the Committee reported,

This assumption was apparently based on the long experience of Mr Martin and his senior colleagues in the broking industry and, in the absence of a system of adequate spot checking by some authority, the assumption was by no means unreasonable. Had it not been for this firm's mere inefficiency-managerial incompetence, weak control and bad speculative judgement - the nature of its business standards would doubtless have avoided exposure (Rae Committee Report 1974, p. 149).

In both the Ricketson and Martin cases, evidence of principal trading contrary to the interests of clients emerged only when the firms were beyond being saved from collapse. On the basis of these examples, and drawing a parallel from the activities of liquidators in enforcing directors' legal duties, a good case seems to exist for looking at this area of activity much more closely than has occurred to date if only to prevent the embarrassment and losses that would arise from acting after the horse has bolted. The Rae Committee concluded that although the episodes of principal trading which were contrary to the interests of clients were not rife, they were nevertheless not isolated cases (Rae Committee Report 1974, p. 150). The findings of the Rae Committee despite their age are as relevant in the 1990s as they were in the 1970s. The cases discussed by the Committee illustrate that house trading tends to be found with other types of marketplace abuse and in circumstances where conflicts of interest are not handled well. As the Committee documented, it is this type of climate in which insider trading flourishes.

Brokers and conflicts of interest

As mentioned earlier, it is a well established rule that brokers should not compete with their clients. This rule is at the basis of the prescription that brokers should not trade as principal without first informing their clients of this fact. As Street J (as he then was) put it, "[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" (Hewson v. Sydney Stock Exchange Ltd [1968] NSWLR 224). In a later case involving J T Martin & Co, Street J said of the stockbroker that "[clients, some with great, others with little, business acumen an ability to protect themselves, seek and act on his advice and permit him to handle their money and their shares. Those clients are entitled to expect from a broker no only competence, but also integrity and the absence of conflicting personal interests Ms position is one of trust and responsibility" (Bonds & Securities Trading Pty Ltd v Glomex Mines NL [1971] 1 NSWLR 879 at 891). Another consequence of the general relationship of trust between broker and client has been the legislative response to the problem of brokers not giving priority to client orders and, instead trading on their own behalf ahead of the client. This practice is prohibited by section 844 of the Corporations Act. The legislative prohibition does not apply where the client has specified conditions which the dealer is unable to comply with or where the transaction is to be entered into in prescribed circumstances.

There is no doubt that situations in which a broker does not give priority to client orders may also involve insider trading. The Corporations Act in s 1002(10) listed three circumstances which allow a dealer to avoid the effect of the general prohibition against insider trading in s 1002, namely,

  • where the dealer enters into the transaction as an agent of another in pursuance of a specific instruction from that person in respect of this transaction;
  • where the dealer has not given the other person any advice regarding the dealing in the securities of that particular corporation; and
  • the dealer must not be associated with the person from whom these instructions were received.

The Anisman report contained the following comments about these exemptions:

While a provision intended to except securities professionals from the effect of insider trading legislation must be drafted in light of the manner in which they perform their functions in the markets, it should be tempered to detract from the principles underlying the scheme as little as possible. A market makes use of non-public price sensitive information of whatever type should therefore be limited to his professional role. In brief, an exception provision should permit him to utilise information received in connection with his market making activities, but not otherwise, so long as he does so in a manner that is necessary for the conduct of his business. Limitations of this nature should ensure that he neither trades in a personal capacity nor as is more likely, advises others to trade or informs them of the news" (Anisman 1996, p. 46).

The exemption given to brokers by s 1002(10) is a narrow one intended to facilitate the operation of the securities market. Where the broker trades as principal, or gives a tip to another, after receiving instructions from a client who is an insider trader, the insider trading prohibition in s 1002 would stiil apply to the broker, even though he/she would escape liability where the broker merely undertook the trade on behalf of the client who had given instructions to act on the basis of price sensitive information.

Empirical research findings

In the course of the interviews many brokers said that they were prepared to house trade, particularly after they had obtained price sensitive information through selective briefings from corporate officials or through roadshows put on by companies for brokers and for institutions. Selective corporate briefings have been constantly criticised by the former NCSC Chairman, Henry Bosch, for providing the opportunity for insider trading. The Chief Manager of Investment Operations for the AMP Society has also acknowledged that in these "situations there is the potential for price sensitive information ... to pass" (Griffiths Committee, Hansard, p. 210).

It seems that house trading occurs not infrequently before clients are informed of price sensitive information or advised to trade in the particular stock. The widespread acceptance of this practice by brokers suggests that some of them either do not recognise conflicts, or if they do, are not concerned. The difference between brokers and lawyers on this point is marked and is well illustrated by the observation of a lawyer that "brokers have a more practical approach to conflict of interest [than lawyers], that is they don't handle conflicts well".

There is sometimes a close relationship between illegal principal trading and the existence of insider trading. Both are probably common, but while the latter is severely frowned on, at least officially, the former seems to be encouraged and is widely regarded as a legitimate business activity, provided that the client is kept informed. Both are potentially damaging to the integrity of stock markets and to the public's confidence in the markets. If the differences between the penalties provided under s 843 and those originally found under s 1002 of the Corporations Act are any guide, insider trading is assumed on its face to be at least eight to ten times more serious than illicit principal trading. There is certainly no doubt that insider trading is more serious a crime than illegal principal trading, but they are often linked occurrences. There is a case for treating principal trading more seriously particularly where the internal management of firms is weak and where firms are performing poorly. Illegal principal trading demands closer scrutiny by the ASX and by the agencies.

The handling of price sensitive information

Respondents were asked about the way in which their organisations handled confidential information and whether, in effect, they had self-regulatory structures in place for the protection of price sensitive information. There are several forms of procedural arrangements within broking firms which indicate that there is recognition of the problems that could arise from the misuse of price sensitive information. The extent to which a firm takes precautions depends on the firm size, whether it undertakes conflicting work such as corporate advising and consumer oriented broking services and, sometimes on the firm's international affiliations. Usually staff are required to sign undertakings; staff trading is permitted subject to scrutiny by senior members of the firm and the provision is made for Chinese Walls (a form of "procedural architecture"; see p. 89). In some cases the firm is organised into divisions such as trading and corporate divisions and in some of these firms there is a physical separation of the divisions and restrictions on the flow of information are common. Also, meetings procedures are designed to avoid conflict occurring. In those firms which also operate in London there are compliance officers to satisfy London broking rules and to prepare for the "inevitable introduction" of that requirement in Australia. Breaches of the insider trading rules are said to result in dismissal from the firm. A number of brokers made the point that it is also necessary to develop a culture of ethical conduct within the firm. In the words of one "the example set by the leaders is vital". While the responses to this question indicate that brokers recognise the problems of the misuse of information, what cannot be measured is how well the procedures are policed, particularly at the lower staff levels, and how effective they are in practice.

There is a mixture of procedures employed by the financial advisers. Very commonly there are restrictions on trading either in the form of embargoes or the requirement to obtain permission from a senior staff member. Information is often transmitted on a need to know basis and in some cases the organisations go to the extreme of having sensitive documents typed by directors. One of the accountants said that his Organisation relies on the ethics and integrity of the staff but also takes the precaution of including a term in the employment contract to protect confidential information. Some respondents relied on Chinese Walls and others had physical security arrangements. Two of the merchant banks visited have Chinese Walls made up of separate offices in different States. It appears that the various rules are expressed formally and informally. In one case, because of its international operations, an Organisation had very strict formal rules designed to satisfy the requirements of regulators outside Australia.

All of the Exchange officials demonstrated concern about this issue and have procedures in place within their own organisations. Some are informal and rely on the people involved and an assessment of their integrity, while in one the procedures are formal and rigorous - "staff handling sensitive information are restricted-they sign secrecy provisions; they, and their wives, cannot deal without the approval of senior staff and brokers are not able to process their orders without the appropriate documentation". Because of the nature of their work, many of the market observers do not seem to have this problem. One journalist said that "there have been opportunities to engage in insider trading but it is a matter of ethics for the individual journalist and what is used is very much a personal system". Another journalist took the view that the "only way journalists can work is by printing whatever information they get". In an oblique way this response touches on the vexed question of disclosure of information from the company to the public. The one member of this group who had to face the problem said that, in his Organisation "very few people have access to price sensitive information. Staff would be dismissed if they were dealing on inside information or breached company ethics". This company's policy is no paper tiger as we discovered when another respondent in the study, quite unprompted, specifically referred to the particular company as one that takes seriously the problem of insider trading. The common thread which was present in the answers from the lawyers was that, ultimately, they relied very heavily on the professionalism of their staff to ensure that the confidentiality of price sensitive information is maintained. One lawyer remarked that "having professional legal staff makes it easier to deal with confidential information". Another said that "we don't need to prohibit trades in client firm securities as we are usually insiders [and so are caught by the prohibition]. We are not investment driven and our partners are not investors, as our primary business is law". While some firms are prepared to rely on professional integrity to protect sensitive information, others take more tangible steps such as the formalisation of guidelines about trading, the use of conflicts registers and the control of access to information as well as its flows.

The regulators rely heavily on normal governmental secrecy procedures in the handling of confidential information. The secrecy provisions of the National Companies and Securities Commission Act 1979 (Cwlth) and of the Public Service Act 1922 (Cwlth) cover these circumstances. Reliance is also placed on the integrity of individual staff members and information is only distributed on a need to know basis. One officer said that "of course, sophisticated electronic eavesdropping was possible" and it appears that this is a real possibility. The agencies have procedures in place to supplement the secrecy provisions of the legislation but if overseas experiences are any guide, the security of information might be just as much at risk in government agencies as it is in the offices of private sector professionals.

Chinese Walls

Another issue which was pursued under the broad heading of self-regulation was that of attitudes to and experiences with Chinese Walls. A Chinese Wall is a picturesque description of a form of "procedural architecture" installed within an Organisation to separate areas of conflict. 'nus the corporate advising personnel would be separated from the trading staff so that the possibility of leakages of sensitive information from one group to another would be limited if not eliminated. Participants were asked whether they had much confidence in Chinese Walls as a means of preventing insider trading. Section 1002(7) (b) of the Corporations Act provided a partial defence to an insider trading charge if a body corporate "had in operation ... arrangements to ensure that the information [in the possession of an officer of that body corporate] was not communicated to that person and that no advice with respect to the transaction was given to him by the person in possession of the information". A Chinese Wall can thus be a partial defence to an insider trading charge.

The judicial lack of enthusiasm about the capacities of Chinese Walls to avoid conflict of interest problems for professionals working in advisory firms was illustrated in the decision of Mr Justice Ipp of the Supreme Court of Western Australia in Mallesons Stephen Jaques v. KPMG Peat Marwick and Others (unreported, 19 October 1990). In that case, in September 1988, Humphry, a partner of Mallesons, a national firm of solicitors, had given advice to Louis Carter, a partner in the defendant firm (then known as Hungerfords), in relation to Carter's possible liability for auditing work which had been undertaken for the merchant bank Rothwells. In August 1990, Leigh Warnick, a Perth partner of Mallesons was retained in a prosecution arising out of an official inquiry into Rothwells by Special Investigator MJ McCusker QC (McCusker 1990). This prosecution involved criminal charges against Carter.

The question arose whether Warnick was prevented from acting for the prosecution in view of the fact that a member of his firm had previously given advice to Carter and his firm. The Rothwells prosecution Task Force worked in a different building from that ordinarily occupied by Mallesons. It was argued by Mallesons that a Chinese Wall was in place between the prosecution Task Force and Mallesons and that this was able to avoid conflict of interest problems arising for Mallesons or Warnick. As Ipp J explained (at p. 31):

... all the relevant partners and employees of Mallesons have undertaken to this Court that they will not disclose directly or indirectly to any person without the prior consent of Carter and Hungerfords any confidential information or knowledge acquired by Mallesons acting for Hungerfords in September 1988. This is a practice that has become known as a "Chinese Wall".

Ipp J continued,

The derivation of the nomenclature is obscure. It appears to be an attempt to clad with respectable antiquity and impenetrability something that is relatively novel and potentially porous. It is a practice that apparently emanates from the United States, having been devised by large firms of lawyers in an attempt to justify representation of conflicting interests at the same time. It has been subjected to considerable criticism and scrutiny at the same time.

The Court was unconvinced by arguments that the Chinese Wall had been successful in achieving its aim. In finding against Mallesons, Ipp J concluded (at p. 32) that "there is more than a real and sensible possibility that Mallesons have placed themselves in a position of conflict of interest". In reaching this conclusion, Ipp J relied, inter alia, upon the remarks made by Bryson J in D & J Constructions Pty Ltd (1987) 9 NSWLR 118 at 122-123 where Bryson J noted that:

I would think that the court would not usually undertake attempts to build walls around information in the office of a partnership, even a very large partnership by accepting undertakings or imposing injunctions as to who should be concerned in the conduct of the litigation or as to whether communication should be made among partners or their employees ... Enforcement by the court would be extremely difficult and it is not realistic to place reliance on such arrangements in relation to people with opportunities for daily contact over long periods, as wordless communication can take place inadvertently and without explicit expression, by attitudes, facial expression or even by avoiding people one is accustomed to see, even by people who sincerely intend to conform to control.

Justice Ipp therefore concluded (at pp. 37-8) with the following general observations:

It is therefore, in my opinion, incongruous to suggest that, in determining whether a conflict of interest may exist, the knowledge and duties of certain partners in a firm of several partners should be divorced from the knowledge and interests of other partners in the rest of the firm, and solely for that purpose, those other partners should be regarded, in effect, as separate and independent entities. It would in my view offend against established principle, and, indeed, the public interest in the proper administration of justice, if a scheme could be countenanced whereby a group of partners within a firm of solicitors was able to represent a prosecutor in criminal proceedings, in conflict with the duties owed by other of their partners to the accused person, to the mutual financial profit of all.

There is no reason why these comments should not be applied to other professional-client relationships, such as those found in the securities industry.

Among the brokers interviewed for this study, there was little unqualified endorsement of Chinese Walls as a procedure for preventing insider trading. Even those who thought them to be useful went on to say that their effectiveness depends, ultimately, on the people behind them. One broker merely said "I am extremely confident of them" but most of those who were confident of them based that assessment on their experience of the Chinese Walls in their own Organisation. One Perth broker responded that "they work here", giving as an example a case where the dealers were not aware of a company float with which the firm was associated. Both internal and external discipline will make them work "because of the integrity of the staff. The client would be lost if there was a leak. They can be relied on outside. The Chinese Wall is part of the system of self-regulation". The secret of a successful Chinese Wall "depends on the ethics of the firm - it is not the structure but the commitment. Confidence in them is growing as professionalism grows".

There were, however, many who expressed less than complete confidence. "Our Chinese Wall works in this office but outside the office social contact can break it down" said a Sydney broker who was referring to Friday night after work at a nearby pub. A similar feeling was expressed by an experienced broker who responded that "the idea is good and they work in my experience. The Chinese Walls depend on people to make them work and loose tongues are a problem". Some of the limitations are that "people will try to get around them" and "they will work if you want them to work. The integrity of the people involved is vital". A senior broker condemned Chinese Walls when he said: "they are not worth a bumper. They are as good as the rules and integrity of the people involved. But they are on the right track".

Some brokers said quite definitely that Chinese Walls do not work. In the opinion of a Melbourne broker "they are almost impossible to administer and it depends on the culture of the Organisation". An even stronger criticism came from a broker who, in other respects, was inclined to say that the market is almost perfect. He described them as farcical and went on the say that "they cannot work in practice and are easy to overcome. The inspection of Chinese Walls by the Stock Exchange is relevant to insurance". A blunter assessment of them came from a Melbourne broker who said "they are useless. They will not work". He told of visiting a now defunct broking firm which proudly showed him its Chinese Wall, a secure looking door, which was in fact the door to the office tea room. Perhaps the most thoughtful response from a non-believer in Chinese Walls was that "[t]o avoid any problems you do not do any conflicting business. People talk, especially senior executives. There is a natural desire to find out information from within the firm".

Not one of the financial advisers expressed unqualified confidence in Chinese Walls. Those who had no confidence in them used terms such as "farce", "no faith" and "as effective as a sieve". Others made the point that unless there is a clear geographical separation they will not work. One merchant banker reported his experience with the Chinese Wall of a stockbroker when, on his way out of a meeting with the broker, he overheard a discussion of that meeting being conducted by the broker's secretary. Those who expressed qualified support stressed the importance of the integrity of the organisation's staff for the success of a Chinese Wall.

When the market observers were asked how much confidence they had in Chinese Walls only one of them expressed any confidence, although he did so only after being told what Chinese Walls are. They were variously described as 1. superficial and not really effective"; "generally a joke built up by brokers as an illusion" and as "unrealistic in view of the need for information to flow". As to their effectiveness one said that "it depends on the firm. With solicitors they are very impressive but I am considerably less confident about merchant banks and stockbrokers". Another said, "it depends on the integrity of the institutions. Some ethical people try to make them work". But one of the journalists was less kind when he said that "it is staggering that people pretend about them. They do not work". One observer whose position led us to expect a vote of confidence reacted by saying, "I am not too keen on these strategies - they do not help to overcome insider trading. There is a great deal of artificiality about them. It is essential to maintain honesty. Governments cannot legislate for honesty but they can legislate against dishonesty". The comment that best expresses the opinion of the Stock Exchange officials in this regard was that "they am not perfect but are better than nothing". Several repeated the comment that Chinese Walls ultimately depend on the integrity of the people behind them. One official made the important point that "there are some very difficult practical problems arising from Chinese Walls such as writing cheques and keeping records".

Most of the lawyers appreciated Chinese Walls although they warned that they work well only if you want them to. According to one lawyer, "their effectiveness depends on the people involved and their level of professionalism". Some lawyers, however, were not as confident about their effectiveness in dealing with insider trading. One lawyer recycled the old aphorism, "I've never seen a Chinese Wall without a grape vine growing over it". A view that is probably representative of the lawyers was that "it depends upon where the wall is located. In a broking office or merchant bank, the mere existence of a Chinese Wall is not enough. It comes down to the individuals involved. Merchant banks' Chinese Walls are probably not as good as people say".

Most of the regulators had little confidence in Chinese Walls and repeated the general view that their effectiveness depends upon the standard of probity of the Organisation. The porosity, thinness and superficiality of Chinese Walls was noted as was their lack of effectiveness in small firms and a commonly held view was that they are cosmetic. The problem of enforcing them was also seen as a negative factor. One experienced and street-wise investigator exclaimed: "Chinese Walls don't exist! I went to see one and couldn't find it".

The monitoring of trading

A commonly expressed challenge to self-regulation is the need for monitoring and, where there is a monitoring process, the need to carry it out properly. Brokers were asked whether they monitored trading for signs of insider trading. Apart from the self-regulation aspect, it was interesting to find out whether insider trading could be detected in this way. Very few of the brokers said that they monitor trading for this purpose and those who did were mainly interested in the trading activities of their staff. The only reference to the conduct of clients was made by the broker who said, "if clients said that they had inside information we would be concerned but otherwise would not enquire".

Some brokers monitor trading for insider trading not for enforcement purposes but to locate stocks in which to trade. It would be surprising if brokers were not keeping a watch on market trends and this seems to be the case judging from comments made by the brokers who responded. Probably the most realistic attitude to monitoring came in the form of comments from two brokers one of whom said that he did monitor the market "but not for insider trading. What interest does the broker have? Who is interested in the results?" The other pointed out that in the real world "it is not profitable. The only monitoring is of clients and their ability to pay". There is probably a lot of truth in the attitude of a Sydney broker who replied "it is not our job". The answers from the Stock Exchanges (at least in 1988) suggested that there is no concerted attempt to identify instances of insider trading. Monitoring was undertaken in a general way-4o find indications of any unexplained or unusual activity-but it appeared that with one exception no Stock Exchange had dedicated resources for this purpose. The ASX has, however, recently adopted a much more active role in monitoring the market. Between March 1989, when more intensive and systematic monitoring was introduced, and June 1990, the ASX detected 105 possible violations of securities laws and of these, 22 were possible insider trading cases (figures supplied by the ASX for the period 1.3.89-30.6.90. See also Sydney Morning Herald, 25 August 1990, p. 42).

Insider trading and risk taking

An accurate measure of the effectiveness of any scheme of regulation is the degree of risk of being caught and punished. The taxation authorities in Australia have successfully created the impression that taxpayers who cheat will eventually be caught and severely punished. Whether the risk of being caught is as great as the Taxation Office claims is not important. What is important and what has generated a new approach to tax compliance is the perception in the community that there is a risk. It is interesting to ask whether the same perception exists in relation to insider trading. Interviewees were asked whether insider traders tend to assess the risk of detection and prosecution to be so low as to be worth taking. This was to obtain some guide as to whether self-regulation would work in practice.

Presumably because they do not know anybody who engaged in insider trading, most brokers said that they were unable to give definitive answers to this question. Most of the answers were either guesses or general observations. One broker explained the process by saying that "it depends on their morals. The risk of detection is lowish; of prosecution, low and even if found guilty the penalty is low". There was a body of opinion that insider trading is not riskless. NCSC surveillance was said to be very effective and a broker believed that "[t]here is more than enough reason to be careful". A commentary on the style of insider traders came from a Sydney broker who replied that "those with criminal minds do not worry about the penalty. They expect not to be caught and are concerned only with profit". Several brokers said that they could not answer this question, but one Melbourne broker suggested that "many people go through a process of rationalisation and overlook the impact on others. They are self-focused". Some of the others thought that the insider traders do not even think of the risks. A broker in Sydney remarked that a scene in the film Wall Street in which a person is led away from the office in handcuffs had a very salutary effect on the younger staff members in his firm. That reaction, if it was typical, suggests that apprehension is not considered as an everyday risk and it does not say a lot for the level of enforcement in Australia.

Those Exchange officials who were able to answer this question reported that some people do it not knowing that insider trading is illegal, but that those who know it is against the law would assess the risk. It appears from the answers given by the financial advisers that if they are aware of the legal significance of what they are doing, insider traders assess the risk of detection to be so low as to be worth taking. As one put it, "professional investors would but 'Mrs Smith' probably does not know about insider trading".

According to a merchant banker "people who frequently insider trade are aware of the risks and go to great lengths to avoid detection. The risks of detection would be higher if there were people investigating and enforcing". A more detailed explanation of the process was provided by a Melbourne banker who said that "there are three levels of insider traders; the disreputable end of the market who will insider trade despite the law; those who do not rely on a licence to trade and are prepared to risk being caught; and those who do rely on a licence and set up structures to avoid being caught". He was critical of the low level of enforcement and drew an analogy with speeding, saying: "if there are no police about drivers will speed". Similarly, the predominant view amongst the market observers was that insider traders do make the assessment that the risks of detection and prosecution are few, or at least do not worry about the risk of being detected. An interesting observation made by several of this group was that some people who engage in insider trading are not aware that it is a crime. Those who make the assessment are "those who do it on a large scale" and they not only make the assessment but "they cover their tracks".

The lawyers felt that most insider traders would probably not even go to the trouble of worrying about the risk of detection and prosecution. In the words of one, "everyone thinks he can get away with it. They pay lip service to the Code, but then ignore it". Another lawyer explained that "until the prosecutions of recent years, most people have not contemplated prosecution". Presumably, he was referring to the prosecutions of insider trading offences which occurred in the United States in recent times. Most regulators simply agreed that insider traders assessed the risk of detection and prosecution to be so low as to be worth taking. It was said that "most traders are aware of the lack of successful prosecutions. If there are no records or witnesses, then the chances of prosecution are low". But others felt that there were also many insider traders who did not make this kind of calculation at all because of their ignorance of the law. It might be that insider trading has more recently been perceived differently. One regulator reported that "ten years ago such activity was considered risk free, but now it is seen to be risky". In fact, it was part of the strategy of the NCSC to attack the intermediaries who assist insider traders and to counsel them to leave the industry. During 1987-1988, more than ten such persons were reported to have left the industry as a result of this informal and somewhat unsatisfactory enforcement strategy of counselling.

Professional attitudes to insider trading

In looking more closely at the way in which self-regulation is practised, interviewees were asked about the attitudes of professional advisers to insider trading. It was no surprise to hear most brokers say that the attitude of other professionals to insider trading was one of propriety - correct and ethical - but there were some who took an opposite view. Some others said that insider trading was not often discussed, if at all. In any event, like tax evasion, "nobody would openly boast about insider trading". But not only ethics generate an attitude against insider trading. As a well established Melbourne broker remarked, "there is genuine distaste for people who indulge in it-they are not the people you want to do business with" or, according to a Sydney broker, "have to dinner". A more down to earth approach was revealed in the answer of a Sydney broker who explained that "everyone is very conscious of any conflict of interest. Nobody wants to be dragged off to court. They are fully aware of the laws and the Stock Exchange rules".

Perhaps the attitude to insider trading is a function of size and location. A Sydney broker said that "the bigger firms are very careful about it" and another of the brokers, from a large firm, replied that "some small firms especially during the boom get 50 per cent of their income from rumour linked trading". This same broker said that "most people are against insider trading. They seek to maintain market integrity" although he then went on to say, with some embarrassment, "in Perth I daresay even our own firm makes money from insider trading". Those who disagreed said of their professional colleagues, "they know it happens and there is a degree of acceptance of its prevalence". Several brokers observed that insider trading is not often discussed but even so "it is considered to be not proper behaviour". A simple illustration of brokers' attitudes to insider trading was provided by a Sydney broker who said that "brokers are generally ethical and in any case are not so stupid as to engage in insider trading. It is wrong to say brokers are best placed to engage in insider trading - they are the prime suspects for investigation-the lack of cases illustrates this".

The Stock Exchange officials also stated that they thought that there is a generally shared opposition to insider trading. Some views were qualified by references to public denunciation, but private tolerance, of insider trading. An enigmatic reflection on the topic was that "there is a deep feeling for the pragmatic aspect" which might be interpreted as meaning that insider trading is tolerated as a fact of market life and that the horror expressed about insider trading relates more to being caught than breaking the law. In fact, it often appeared within the broking community that to be so stupid as to be caught was more reprehensible than being engaged in insider trading.

The most common response from the financial advisers was that insider trading was either not much discussed or never discussed, even though "it is not a taboo subject". The market observer group repeated the view that insider trading is not often discussed. As one journalist said, "like incest, people do not talk about it". One person, however, reported that "it is mentioned often in generally condemnatory terms. Certainly nobody says legalise it". Another said that the attitude was tolerant, "but they are appalled by the more flagrant abuses". Perhaps the most thoughtful commentary on the topic from this group was that "some are appalled by it and say that it needs to be regulated. Others say that they are under peer pressure to do it. Some people are making money from it. The attitude reflects their own values".

Similarly, the most characteristic response from the lawyers was that insider trading was rarely if ever discussed. Sometimes that was because the lawyers knew that the other professionals did not like hearing about the subject. One lawyer reported in terms that would be repeated by most lawyers, "everyone says it goes on, but no client of mine does it". When it was raised, one Melbourne lawyer noted that ,.merchant bankers and brokers are more inclined to ask if they will be caught, not whether it is against the law. Smaller brokers would not survive if they did not insider trade". Of the professional groups that lawyers had to deal with, they had the highest regard for the ethical attitudes of accountants who were "more conscientious about it", because of "audit requirements".

Not surprisingly, regulators reported that it was rare for this issue to come up in their informal discussions with professionals in the private sector, no doubt because officials were seen as police rather than as professional colleagues with whom matters of mutual interest and concern were discussed. It seems that the regulators and the marketplace professionals have a natural and reciprocated suspicion of each other.

This issue was taken further by asking lawyers and accountants what they thought of the ethical standards of their fellow professionals with regard to insider trading. Virtually all of the large firm lawyers interviewed reported that they thought that lawyers in equivalent firms had very high ethical standards in regard to insider trading. A Melbourne lawyer said that "in the major commercial law firms ethical standards tend to be very high". He went on to add however that "there are smaller firms in the securities area about whom I do not have confidence". This qualification was fairly characteristic as it was said that there are some firms prepared to take "a more entrepreneurial view". This point was restated by a lawyer who said that "ethical standards are high where lawyers regard the practice of law as their primary endeavour". It should however be noted that it has not been uncommon for takeover lawyers from the larger law firms to leave their primary commitment to the practice of law and spend their time managing corporations or involving themselves primarily in investment activities. It is interesting to note that in 1989 there was a concentration of lawyers in senior positions in the merchant banking sector. Many had transferred from high profile law firms to equally prominent merchant banks.

The accounting profession has a range of firms and division of work not unlike the legal profession. The presence and influence of international firms is, however, much more pronounced in the accounting profession. It was reported that standards vary but "most accountants are strongly opposed to insider trading. Those firms with strong US links are particularly concerned about it". The ethical standards "of the big auditing firms are very high" and, indeed, they set their standards to meet the requirements of tougher overseas jurisdictions. Accountant respondents did, however, lead one to wonder whether the same high standards applied throughout their profession.

The Stock Exchanges as regulators

If self-regulation were to be extended, the Stock Exchanges would play an important part in the process. The success of self-regulation could depend on how well the Exchanges were able to control insider trading amongst their members. Historically, the performance of the Stock Exchanges has left much to be desired. The Rae committee was scathing in its assessment and the securities industry legislation was a result of the inadequacies of the broking industry. When brokers were asked about the value of the Exchanges in regulating insider trading, some spoke favourably and a few unfavourably. Most asked whether the regulation of insider trading was the role of the Stock Exchange. One broker said that "rules are in place but does it see its role as regulating insider trading? Perhaps the CAC should do it", because, as this broker pointed out, "insider trading involves more than brokers so the Stock Exchange is limited. If it knew of cases it would act. There are some grey areas". The division of responsibility was mentioned by several brokers, one of whom said that "brokers are very conscious of surveillance by the NCSC; it is more appropriate for them to do it than for the Stock Exchange to do it". An explanation of the role of the Exchange and of its priorities in regulation was that "the Stock Exchange does not patrol - it wants to be told. There have been no cases [over the past 5 years]. Liquidity is a major concern of the Stock Exchange and rules about good conduct are also taken very seriously". This reply was not completely consistent with the activity of Stock Exchange compliance staff who, at the time of the project, seemed to be more concerned about balancing trust accounts than with improving standards of conduct.

Stock Exchange officials were, not surprisingly, confident of the Exchanges' performance but some of those who elaborated said that the Stock Exchange cannot regulate in this area. As one explained, "the Stock Exchange is not geared up to do significant work. It is an NCSC matter - insider trading involves more directors than brokers". Another made the point about the division of responsibility by saying that "the Stock Exchange cannot regulate it but it will in future be able to detect it and hand it over to the regulators for prosecution". Developments in the detection process were further explained by another official who said that "improvement is possible in the detection of unusual market activity through the use of intelligent computer software. There is likely to be an adoption of the sophisticated US approach". The responses of the financial advisers were similar to those of the brokers. None of them expressed confidence about the adequacy of the Stock Exchanges' regulation of insider trading, although this response does not necessarily imply a criticism of the Exchanges. One opinion was that even if the Stock Exchange could detect insider trading, they do "not have the power to deal with it". Another was that "it is not a role for the Exchanges, but for the NCSC and the CACS". It was also suggested that the Exchanges do not have sufficient resources or systems to undertake this role.

There is some ground for believing that further co-regulation could be developed. There is a fair degree of goodwill to the agencies and, as was often pointed out, the Exchanges and the agencies are already working to much the same goal. There is also some pressure from within the broking community for a system of co-regulation. On the debit side is the natural antipathy of Australians to regulators and it would be romantic to imagine that those close to the market would be happy to see the external enforcement agencies coming closer to their community. A more serious practical obstacle is that neither the Exchanges nor the agencies seem to be well endowed with resources. A system of co-regulation has the advantage of overcoming the common criticism by the industry that the agencies lack market skills. Co-regulation could permit the harnessing of the abundant market skills within the industry and therefore lead to an improvement in the enforcement effort. It is clear that neither the ASX nor the official regulatory agencies can deal with insider trading regulation and law enforcement alone.

Conclusion

The problems encountered with Chinese Walls are indicative of the difficulties which any institution handling price sensitive information faces in avoiding conflicts of interest. It would be foolish to place too much faith in mechanical or procedural devices, where these are not backed up by a strong ethical culture within the organisations and within the profession itself. A regime of regulation in the securities market in Australia which relied entirely, or even to a significant extent on self-regulatory structures, would be unlikely to be effective in dealing with insider trading. The marked cultural and geographic differences between Australia and the City of London were frequently alluded to and it seems that, absent a radical change in the way the Australian market operates, the United Kingdom model of market regulation is unlikely to be effective in Australia. Although there is some commitment to self-regulation amongst some members of the industry, its supporters are in the minority. To be more effective than they currently are, governmental agencies will need greater support from the private sector than is presently available and it is more likely to be a system of co-regulation that provides the necessary degree of co-operation. If the United Kingdom system has any value, it is as a model for co-regulation.

It is quite clear that the ethical culture of the industry and of the particular Organisation is an important factor in dealing with conflicts of interest and in controlling the abuse of price sensitive information. Self-regulatory structures appear to be fragile and at the broader level of the industry there was not much confidence in self-regulation. The Stock Exchange is, at best, only able to control its own members and not others who operate in the securities market. The weakness of self-regulation is illustrated by the fact that little confidence was expressed in the idea of turning over more regulatory functions to the industry itself. Even the ASX officials adopted this position. Members of other professions did not have much confidence in the capacity of the ASX to regulate the securities industry.

The Australian Stock Exchange has undergone significant changes in recent years, but it is still evident that it is regarded as inadequate as the regulatory vehicle for the industry. Too many glaring conflicts of interest, instances of erratic and inconsistent enforcement of listing rules and a limited jurisdiction are the major factors which severely limit the extent to which the ASX could influence the standards of conduct in the market. All too often, the ASX has been a reactive Organisation which has resulted in it being too late to respond adequately to breaches of the securities laws and listing rules.

The self-regulatory structures and arrangements found within the professions involved in the securities industry can provide an essential line of first defence against fraudulent practices in the industry. The survey reminds us that the ethical values and standards of professional advisers are critical to achieving compliance with securities laws. At many levels, however, there was much left to be desired. For example, it was surprising how often brokers were seen to handle conflict of interest situations poorly. The almost contemptuous attitude to insider trading laws in Australia is due in a large part to the widely held perception that the laws are not effective. This perception is of course correctly held, but the tolerance of insider traders within the securities industry further undermines respect for the law and its effectiveness. The culture of greed and peer pressure makes self-regulatory mechanisms impotent when it comes to dealing with insider trading in Australia. All of this adds up to self-regulation being not a realistic option other than in serving as a supplement to regulation by laws that are appropriate and that are properly enforced.