Better investor protection

23-08-2007: Better investor protection
by Surin Murugiah
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KUALA LUMPUR: A new law will give the Securities Commission (SC) more clout to take civil action against perpetrators of a wider range of market misconduct when it comes into effect next month.

The Capital Markets and Services Act 2007 (CMSA), which is a consolidation of Part IV of the Securities Commission Act 1993, Securities Industry Act (SIA) 1983 and Futures Industry Act 1993, provides civil remedies for offences in breach of Sections 175, 176, 177, 178, 179 and 181 of the CMSA on top of the prescribed criminal penalties.

The offences are false trading and market-rigging transactions, stock market manipulations, false or misleading statements, fraudulently inducing persons to deal in securities, use of manipulative and deceptive devices, and dissemination of information about illegal transactions.

Previously, the SC could only take civil action against insider trading offences under Section 89E of the SIA 1983.

Under Section 200, paragraphs (1), (2) and (3) of the CMSA, the SC may obtain up to three times compensation of the pecuniary gain made or loss avoided, and claim civil penalty not exceeding RM1 million which will be used to compensate persons who have suffered losses or damages as a result of the contravention.

The SC yesterday at a background briefing on the CMSA told the media that this part of the legislation was an important and positive development as it offered added protection for investors.

Other changes the CMSA will bring include the establishment of a single licence regime that allows for dealing in securities and trading in futures contracts, and a single guideline governing different intermediaries as opposed to seven currently.

The SC said intermediaries would only require one capital markets services licence to carry out one or more regulated activities, which include dealing in securities, trading in futures contracts, fund management, advising corporate finance, investment advice and financial planning.

“There is no need for an existing licence holder under any of the three legislation to apply for a new one as it would be deemed to hold a CMSA licence when the Act comes into force,” said the SC.

Another major change brought about by the CMSA is that financial institutions undertaking capital market activities will now have to comply with specific investor protection provisions from which they were previously exempted.

The investor protection provisions that apply to financial institutions are disclosure of interest in securities, reasonable basis to make recommendations to clients, priority to client’s order and regulation of dealings in securities as principal.

As part of the changes in the law with regards to financial institutions, and to promote Malaysia as a global Islamic financial hub, the CMSA lists clear statutory provisions recognising Islamic products.

“The CMSA provides power to the Minister (of Finance) to prescribe modifications to give full effect to the principles of Syariah in respect of Islamic finance,” said the SC.

The CMSA also accords investors wider access to products, enhances protection for bond investors, promotes greater responsibility among industry players, and requires private placement monies to be ring-fenced via a trust account.

“The requirement for private placement monies to be ring-fenced is for cases where the exercise does not require a prospectus. If these corporate exercises do not proceed, then the monies can be returned to the applicants or placees,” said the SC.

Also, as part of investor protection, the CMSA clarifies that the effective period for an interim stop order is 21 days or the conclusion of a hearing to determine whether a prospectus has contravened any securities laws or contains false or misleading statements, among others.

The law now also covers cases where shares have been issued, and provides that monies be returned to applicants within 14 days of a stop order being made, and for appropriate steps to be taken to effect a share cancellation.

The CMSA creates a new category of markets called the registered electronic facility that caters to products offered electronically, said the SC.

The Act will also provide a framework for the recognition and oversight of self-regulatory organisations (SRO), which lay down the prerequisites for recognition, statutory duties of SRO and withdrawal of such recognition.

To promote investor protection, the CMSA requires approval by the SC for a person to act as a trustee for debenture holders, as the legislation intends to upgrade the role of trustees as “gatekeepers” of bonds, said the SC.

“Past experience shows that the trustees in some cases don’t even know the laws relating to debentures, which leads to bonds that default,” it said.

The CMSA also extends the range of corporate exercises that will not require the SC’s approval in future to facilitate fund raising activities, including issuance of securities by offshore companies exclusively to persons outside Malaysia, share splits or share consolidation, entitlements in respect of warrants, options or rights and issuance of securities of a foreign company to an offshore company.

Source: Osk Wirenews