ASIC releases its discussion paper on public and private market regulation

The key takeaways for private equity, directors and advisors

ASIC has released its discussion paper on advancing its regulatory roadmap for public and private capital markets (ASIC Release). In releasing the paper Joe Longo indicated review of the operation of private capital markets is intended to be one of ASIC's most significant initiatives this year.

What does the paper do?

The paper does not propose any specific regulatory reforms.

Instead it is intended to set up an ongoing public discussion about the regulation of private and public capital markets, assist ASIC in improving its understanding of the private markets and better inform ASIC of risks in the private markets that could require regulatory action or reform.

The paper makes the point that regulation of private markets is an area of global regulatory focus.

What private markets is ASIC interested in?

The key private markets that ASIC is focused on is private equity, private credit and private funds (particularly in infrastructure and property).

ASIC makes the point that while these private markets remain relatively small asset classes in Australia as compared to the Australian public markets, they have grown substantially recently, are seeing increased retail participation and may confront market failure issues.

While not explicit, it is clear ASIC is concerned that private credit (in particular) does not experience the kinds of market failure issues that were experienced in the mid to late 2000s with mezzanine real estate funds and retail participation in leveraged financial products.

Can we expect regulatory change in the public markets as well?

ASIC makes the point that globally (and in Australia) the importance of public markets has declined and there needs to be an ongoing debate as to whether the regulatory burden imposed on public markets as compared to private markets is appropriate.

In general terms ASIC is proceeding from the perspective that the Australian regulation of public markets is fit for purpose and does not require a radically changed approach. More regulation of private markets is a more likely outcome of the review.

What enforcement implications are there?

The main investigation and enforcement implications that our clients need to be alert to are:

• Clearly ASIC thinks there are real and immediate risks in private markets around illiquidity, lack of transparency, conflicts of interest, valuation uncertainty and leverage. It can be expected ASIC will increase its focus on these risks using its existing powers. In the medium term reform initiatives are a likely outcome.
• ASIC has specifically called out the misuse of confidential information in private markets as being a problem. Expect increased enforcement action against market participants and advisors in the insider trading area as an outcome.
• For Australian financial services licensees and managed investment schemes that are involved in private markets as sponsors, intermediaries or investors, expect more focus on proper management of the risks above, particularly where retail investors are adversely affected.
• For APRA regulated superannuation funds that are involved as investors in private markets, expect more focus on proper management of the risks above, particularly where fund participants are adversely affected.

Where to from here

ASIC has raised a series of questions for consultation responses by late April. It plans on releasing an update on its work later in the year. It is clear that ASIC's regulatory (and enforcement) focus is, increasingly, on the private markets.

Let us know if we can assist you on the potential impact to your business of what ASIC is doing or if you would like us to assist you get involved in the review process.