Tightening Up the Act

Chan Su-Li summarizes the key amendments to be made to the Capital Markets and Services Act 2007


The Capital Markets and Services (Amendment) Act 2011 ("Amendment Act") became law on 16 September 2011. It will come into operation on a date to be appointed by the Minister of Finance ("Minister").

This article provides an overview of the key changes that will be made to the Capital Markets and Services Act 2007 ("CMSA") when the Amendment Act comes into operation.

REGULATORY MATTERS

Directorships

Presently, Section 10 of the CMSA empowers the Minister, in consultation with the Securities Commission ("SC"), to appoint one-third of the number of directors on the boards of directors of an exchange holding company and certain stock exchanges and derivatives exchanges as public interest directors ("PID"). The section also requires a person to obtain the concurrence of the SC before accepting an appointment or election as a director (other than a PID) of any of the afore-mentioned boards.

The Amendment Act expands and clarifies the supervisory powers of the SC in relation to board appointments in the following respects –

• the term of office of a PID, as determined by the Minister, shall not exceed 3 years but the person concerned shall be eligible for reappointment;

• the SC's concurrence is required before a person can accept an appointment, reappointment, election or re-election as a director (other than a PID); and

• the Minister may, on the recommendation of the SC, vary the number of PIDs to be appointed in place of the one-third presently prescribed.

The requirements of Section 10 will also apply to a chief executive of an exchange holding company or the relevant stock exchange or derivatives exchange.

Expansion of Powers to Compel Action

Section 26(1) of the CMSA empowers the SC to compel an exchange holding company, a stock exchange, a derivatives exchange, an approved clearing house, a central depository or a relevant body corporate to take action to resolve conflicts of interest.

The Amendment Act expands the SC's power under this provision to compel action to be taken where it is necessary or expedient to ensure fair and orderly markets, or to protect investors or in the public interest, or to ensure integrity of the capital markets, or for the effective administration of securities laws.

Assumption of Powers of an Exchange

A new Section 26(6) will confer power on the SC to discharge certain duties of a stock exchange or a derivatives exchange, namely the supervision of the capital market and market participants, the enforcement of the rules of a stock exchange that govern the quotation of securities on the stock market and the listing requirements or that govern compliance by participating organisations of the stock exchange or affiliates of the derivatives exchange.

The powers under this new provision are exercisable where the SC deems it necessary or expedient for the protection of investors or effective administration of securities laws or in the public interest.

Renewal of Licences

The requirement under the CMSA for a licensee to apply for renewal of a Capital Markets Services Licence ("CMS Licence") or a Capital Markets Services Representative's Licence ("CMSR Licence") is abolished under the Amendment Act. In other words, a licence once issued will remain in force until it is revoked in accordance with the CMSA.

Revocation and Suspension of licence

The power of the SC under Section 72 to revoke licences issued under the CMSA will be amended in the following respects –

• non-payment of licence fees will be an additional ground for revoking a licence;

• the revocation or suspension of a CMS Licence for dealing in securities or derivatives will no longer require the concurrence of the Minister;

• the SC is no longer obliged to give a licensee the right to be heard before it imposes restrictions on the activities of the licensee; and

• upon the revocation of a CMS Licence, the holder of a CMSR Licence will cease to hold its representative's licence for the holder of the CMS Licence and may apply for a variation of its licence.

Transfer of Licence

The Amendment Act confers power on the SC to approve the transfer of a CMS Licence after the licensee has obtained a court vesting order under Section 139 of the CMSA.

Chief Executive

Under the Amendment Act, the approval of SC will be required before a person can be appointed as a chief executive of a holder of a CMS Licence.

CONDUCT OF BUSINESS

Information on capital market products

A new Section 92A will be introduced to empower the SC to specify information that must be disclosed to investors in respect of a capital market product, such as an explanation of the key characteristics of the product, the nature and obligations assumed by the parties and the risks associated with the product.

Protection of client's assets

Section 125 of the CMSA empowers the SC to direct a licensed person or an approved trustee (i.e. a trustee which has been approved by the SC to act as a trustee for debentures or for unit trusts and prescribed investments schemes) to take such action or prohibit such person from taking such action as may be specified by the SC.

The Amendment Act will expand the categories of market participants who may be subject to such directives or prohibitions by the SC to include a custodian of assets held in trust by a holder of a Fund Management Licence on behalf of its clients, an approved private retirement scheme administrator, a registered person and any person who maintains a trust account for clients' assets.

MANAGEMENT OF SYSTEMIC RISK

The Amendment Act introduces a new Part IXA (Sections 346A to 346D) to address systemic risks. A "systemic risk in the capital market" refers to a situation when one or more of the following events occur, or is likely to occur, namely (a) financial distress in a significant market participant or in a number of market participants; (b) an impairment in the orderly functioning of the capital market; or (c) an erosion of public confidence in the integrity of the capital market.

The SC may require a person to submit to the SC any information or document which the SC considers necessary for the purposes of monitoring, mitigating and managing systemic risks in the capital market or where the SC receives a request from Bank Negara Malaysia. The person concerned must submit the information or document requested notwithstanding any obligation under any contract or arrangement to the contrary.

The SC may issue a directive to any person under a new Section 346C to take such measures as the SC considers necessary in the interest of monitoring, mitigating or managing systemic risk in the capital market.

The SC is required to give the relevant person an opportunity to be heard before it issues a notice under Section 346C unless the delay in issuing the directive would aggravate the systemic risk. In the latter event, the person is to be given an opportunity to be heard after the directive has been issued. A directive may be amended or modified.

PRIVATE RETIREMENT SCHEMES

The Amendment Act will introduce a new Part IIIA (Sections 139A to 139ZM) to the CMSA. This Part provides a framework for the establishment of private retirement schemes and is the subject of a separate article of our newsletter.

DERIVATIVES

Futures contracts in the CMSA will be replaced by two categories of derivatives, namely standardized derivatives and over-the-counter derivatives. Standardized derivatives will be governed by sub-division 3 of Division 3 of Part III (Sections 99 to 107).

The Amendment Act will introduce a new sub-division 4 of Division 3 of Part III (Sections 107A to 107J) to the CMSA to regulate over-the-counter derivatives. This new sub-division will establish a trade repository. Persons dealing with over-the-counter derivatives can be required to provide the trade repository with such information relating to those derivatives as may be specified by the SC and the repository may, in turn, be required to furnish the information to the SC.

VESTING

Section 139 of the CMSA requires a holder of a CMS Licence for dealing in securities or dealing in derivatives to obtain the approval of the Minister (acting on the recommendation of the SC) for any agreement or arrangement for the sale or transfer of the whole or any part of its business or for any amalgamation, merger or reconstruction of such holder.

The Amendment Act transfers the foregoing power of approval from the Minister to the SC. With this amendment, the SC will be the sole approving authority for all such agreements or arrangements entered into by a holder of any category of CMS Licence.

ENHANCED SANCTIONS

The Amendment Act will introduce a mandatory term of imprisonment for certain offences under the CMSA. A person who commits an offence under Section 317A (causing wrongful loss to a listed corporation or any of its related corporations by a director or officer) or Section 320A (causing financial statements or the audited financial statements to be false or misleading) will be liable to a mandatory term of imprisonment of not less than 2 years.

A mandatory term of imprisonment will also be imposed for an offence under Section 71 (false statements in relation to an application for licence), Section 368 (falsification of records), Section 369 (false reports to SC, exchange or clearing house) and Section 371 (destruction, concealment, mutilation and alteration of records).

CONCLUSION

The Amendment Act streamlines certain administrative procedures in the CMSA and confers greater regulatory powers on the SC. It also introduces new provisions on systemic risks and private retirement schemes.

The amendments will go some way towards achieving the objectives set out in the Capital Market Masterplan 2 and address concerns about the efficacy of markets in the aftermath of the last global financial crisis.


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