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Attachment C: The Origins of the National Guarantee Fund

The National Guarantee Fund, formed in 1987, is the successor to the separate fidelity funds of the State stock exchanges. The aim of this attachment is to provide a brief summary of its ancestry.105

Sydney Stock Exchange

After three large failures of Stock Exchange members, the New South Wales Legislative Assembly in December 1936 pressed the then Premier to investigate the establishment of a government-supervised fund to reimburse clients of failed brokers.

However, the then Chairman of the Sydney Stock Exchange, Mr E.G. Blackmore grasped the public sentiment and determined that the Exchange must establish its own guarantee fund without delay thereby maintaining the right to regulate itself. Members expressed their approval of the guarantee fund at a general meeting in May 1937.

The fidelity fund was brought under government regulation by the Securities Industry Act 1970. The relevant provisions were carried over into the Securities Industry Act 1975 (see below).

Melbourne Stock Exchange

Following the unexpected collapse of a broking firm in June 1937, the then Chairman of the Melbourne Stock Exchange seriously considered setting up a fidelity fund. There was also pressure on the Victorian Government to introduce legislation that would require the stock exchange to establish a fidelity fund. Eventually the Melbourne Stock Exchange and the Victorian Government rejected the need for a fidelity fund and addressed the issue by introducing accounting reforms which required brokers to set up client trust accounts that were overseen by government regulators.

The Melbourne Stock Exchange established its fidelity fund after the Victorian Government introduced the Securities Industries Act in 1970 which required the stock exchange to establish a fidelity fund to compensate for losses from any defalcation committed by an Exchange member or his employee.

(The Perth Stock Exchange established its fidelity fund in 1968 during the nickel boom; while the Brisbane Stock Exchange established its fidelity fund in 1971.)

The Securities Industry Act 1975

The States that were parties to the Interstate Corporate Affairs Agreement enacted the Securities Industry Act 1975 (the 1975 Act) which required each stock exchange to establish a fidelity fund. In the case of exchanges that did not have a fund established under the 1970 Act, an amount of $100,000 was required.

The 1975 Act required that:

  • a person could only be admitted as a member of a stock exchange if he had made a contribution to the fidelity fund of the stock exchange of not less than $500;
  • the fidelity fund of a stock exchange be applied to compensate persons who suffered pecuniary loss by reason of a defalcation, or fraudulent misuse of money, securities or of other property by a member of the exchange (or its employees) where that property had been received in connection with the firm's business of dealing in securities.

In addition, the fidelity fund of a stock exchange could be applied to pay an official receiver or a trustee the amount required to make up or reduce the total deficiency arising because the available assets of a bankrupt member were insufficient to satisfy the debts arising from dealings in securities that have been proved in the bankruptcy. The 1975 Act limited payments out of the exchange's fidelity fund at $500,000 per member (for each type of claim). However, the exchanges had the power to increase this amount by a notice published in the Gazette.

The Act also provided that the stock exchange could impose a levy on each contributor if the fidelity fund became insufficient.

These provisions were largely replicated in the subsequent Securities Industry Act 1980 (which applied in all States and Territories by virtue of the Co-operative Scheme which existed through the 1980s). They are the ancestors of the provisions in Parts 7.9 and 8.6 of the Corporations Act 1989, and the Corporations Act 2001 prior to the commencement of the Financial Services Reform Act.

National Guarantee Fund - establishment

The National Guarantee Fund was established in 1987 by the Australian Stock Exchange and National Guarantee Fund Act 1987, which amended the Securities Industry Act 1980.

The 1987 Act provided legislative support:

  • for a reorganisation of the stock exchanges in Australia to establish a single national stock exchange; and
  • to create a national guarantee fund consisting of a portion of the pooled assets of the existing fidelity funds operated by the separate capital city exchanges;
    • the remainder was used to acquire the assets of the state stock exchanges and to finance innovations including the move to screen trading.

The Hon Lionel Bowen MP, in the second reading speech on 18 February 1987, stated:

      'The 1986 Australian Shareownership survey conducted by the [Australian Associated Stock Exchanges] indicated that almost 90 per cent of adult Australians do not own shares. One of the major reasons given by those surveyed was that they preferred safer, less risky, investments. The contract guarantee and insolvency protection afforded by the National Guarantee Fund may serve to alleviate some of these concerns. The no-fault contract guarantees will ensure that where a party to a securities transaction does not complete his obligations, those obligations will be met by the National Guarantee Fund. This no fault system of contract guarantees contrasts with claims against existing fidelity funds under the provisions of Part IX of the Securities Industry Act 1980 where defalcation or fraudulent misuse of property is required to establish a claim. Direct access to the National Guarantee Fund for compensation in respect of a dealer insolvency also contrasts with existing fidelity fund provisions which allow for compensation via formal Bankruptcy Act mechanisms.'106

National Guarantee Fund - operation

The initial grounds for claiming against the National Guarantee Fund provided a `contract guarantee' relating to reportable transactions and for loss where a broker became insolvent and therefore could not meet its obligations in respect of property entrusted to it in connection with its securities business. Additional grounds were subsequently included. The current grounds for claiming and other aspects of its operations are summarised in Attachment B.

105 This summary draws on The Bull, the Bear and the Kangaroo The History of the Sydney Stock Exchange, by Stephen Salsbury and Kay Sweeney, Allen & Unwin, Sydney, 1988; A Century of Change the First Hundred Years of the Stock Exchange of Melbourne by Graeme Adamson, Currey O'Neil, Melbourne, 1984; The Brisbane Stock Exchange 1884-1984 by AL Lougheed, Brisbane Stock Exchange, Brisbane, 1984 and Miners and Millionaires The first One Hundred Years of the People, Markets and Companies of the Stock Exchange in Perth, 1889-1989 by Graeme Adamson, Australian Stock Exchange (Perth) Limited, Perth, 1989.

106 Hansard, House of Representatives, 18 February 1987, page 269.