Unification

Liew Wei Ling presents a primer on the new Capital Markets and Services Act 2007 that consolidates the regulatory regime for the securities industry and the futures industry

 

 

INTRODUCTION

The Capital Markets and Services Act 2007 ("CMSA") came into force on 28 September 2007 with the exception of Part VI Division 2 relating to takeovers and mergers which will be enforced in 2008. A massive legislation, comprising 394 sections and 11 schedules, it is the result of the implementation of Recommendations 92, 118 and 123 of the Capital Markets Masterplan which advocate the consolidation of the securities and futures legislation and the creation of a single licensing regime.

 

The Capital Markets and Services Regulations 2007, the Licensing Handbook and the Guidelines on Regulation of Markets came into effect together with the CMSA.

 

The CMSA consolidates the provisions of Securities Industry Act 1983 ("SIA") and the Futures Industry Act 1993 ("FIA") and repeals those legislation. Certain provisions of the Securities Commission Act 1993 ("SCA") that have been incorporated into the CMSA have been repealed.

 

 

SECURITIES AND FUTURES MARKET

The establishment and regulation of stock exchanges, futures markets, exchange holding companies, and clearing houses for the securities market and the futures market were regulated separately under the SIA and the FIA. These provisions are now consolidated under Part II of the CMSA. The Guidelines on Regulation of Markets seek to provide a better understanding as to how the Securities Commission ("SC") will administer Part II of the CMSA.

 

Part II of the CMSA introduces new provisions to regulate electronic facilities (such as order routing facilities, market making facilities and electronic trading facilities) used to operate or maintain a stock market or futures market. The facilities operated by Bank Negara Malaysia for trading of unlisted debt securities are exempted from the CMSA.

 

 

CAPITAL MARKETS SERVICES

Part III of the CMSA sets out the licensing requirements in respect of capital market services and provides for the regulation of such services.

 

Any person who carries on a business in any "regulated activity" is required to hold a Capital Markets Services Licence ("Licence") or be a registered person. The regulated activities specified in Schedule 2 Part 1 of the CMSA are dealing in securities, trading in futures contracts, fund management, advising on corporate finance, investment advice and financial planning. These are essentially an amalgamation of the activities that were hitherto licensed separately under the SIA and the FIA.

 

Each Licence will specify the regulated activity which its holder may carry out. The activities that fall within the purview of each regulated activity are set out in Schedule 2 Part 2.

 

The various classes of registered persons, such as licensed commercial banks, licensed merchant banks, Islamic banks and other market intermediaries, and the activities which they may undertake are listed in Schedule 4.

 

 

COMPENSATION FUND AND FIDELITY FUND

Part IV of the CMSA incorporates, with some modifications, the provisions of the SIA and the FIA that relate to the compensation fund and fidelity fund respectively.

 

 

MARKET MISCONDUCT AND OTHER PROHIBITED CONDUCT

Part IX of the SIA relating to prohibited conduct, market manipulation, insider trading and liability for unlawful activity are reproduced in Part V of the CMSA. Similarly, conduct which is prohibited in relation to futures contracts, such as bucketing and false trading, under Part VII of the FIA is now incorporated into this Part of the CMSA.

 

 

OFFERING AND ISSUE OF SECURITIES

Part IV and Schedules 1 to 5 of the SCA which regulate the offering and issue of securities are reproduced, with modifications, as Part VI and Schedules 5 to 9 respectively of the CMSA.

 

Several significant changes are introduced in Part VI. First, the SC is authorised to publish a registrable prospectus submitted to the SC for public information before it is registered.

 

Second, new provisions have been introduced which empower the Minister and the SC to make changes to conventional securities laws and the roles of market participants to give effect to Shariah principles in transactions relating to Islamic securities. These provisions are introduced to further Malaysia's aim of becoming an international centre for the origination and trading of Islamic instruments.

 

Schedule 5 of the CMSA introduces the following additional categories of transactions that do not require SC's approval under Section 212(4):

 

  • the issue of securities by a Labuan incorporated or registered offshore company exclusively to persons outside Malaysia;
  • the offer of securities of a foreign corporation which is listed on a recognised foreign stock exchange to existing members or debenture holders by means of a rights issue;
  • the subdivision or consolidation of shares;
  • the issue, without consideration, of additional securities in respect of a warrant, option or right approved by the SC; and
  • the issue of non-transferable debentures by a corporation to its related corporation.

 

The categories of excluded offers or invitations or excluded issues have been expanded to include the issue of securities by a foreign corporation that is listed on a recognised foreign stock exchange to its existing members or debenture holders by means of a rights issue where such issue is accompanied by a prospectus or disclosure document approved by the foreign supervisory authority of such foreign corporation.

 

 

PROVISIONS APPLICABLE TO LISTED CORPORATIONS

The provisions of Sections 99B to 99F of the SIA which apply to listed corporations, such as disclosure of interests by the chief executive and directors, disqualification of a chief executive or director, submission of audited accounts and periodic financial reports, changes in chief executive or directors or registered address, duties of auditors and the protection of whistle-blowers, have been incorporated, with modifications, into Part VII of the CMSA.

 

 

SELF-REGULATORY ORGANISATIONS

One of the objectives of the Capital Markets Masterplan is the self-regulation of the capital markets and services industry. The platform to achieve this objective is contained in Part VIII which introduces new provisions for the establishment, recognition, withdrawal and protection of self-regulatory organisations and the duties and rules of such organisations.

 

 

CAPITAL MARKET DEVELOPMENT FUND, DISCLOSURE OF INFORMATION, ADMINISTRATIVE AND CIVIL ACTIONS AND GENERAL PROVISIONS

The provisions relating to the Capital Market Development Fund, Disclosure of Information and General Matters contained in Parts IX, X and XII respectively of the CMSA incorporate, with modifications, certain provisions of Parts VIIIA, X and XI of the SIA and Parts VII and IX of the FIA.

 

Part XI of the CMSA sets out the powers conferred on the SC to take administrative actions against market participants for breach of the CMSA and securities laws and the right of aggrieved parties to take civil actions (and the right of the SC to do so on their behalf) against another person who has contravened Part VI of the CMSA. These provisions are derived from the corresponding provisions of the SCA, SIA and the FIA.

 

 

REPEAL, SAVINGS AND TRANSITIONAL PROVISIONS

The subsidiary legislation contained in Schedule 11 have been repealed upon the coming into force of the CMSA. These include the Securities Industry Regulations 1987 and the Futures Industry Regulations 1995 which have been replaced by the Capital Markets and Services Regulations 2007.

 

Save as provided in Part XIII and Schedule 11, all subsidiary legislation, orders, directions, approvals, decisions notifications, exemptions and other executive actions made under the SIA and the FIA remain in force and effect until they are amended, repealed, rescinded, revoked or replaced under the CMSA.

 

Similarly, all actions, rules, regulations, orders, directions, notifications, approvals and decisions and other executive acts made under Section 2B and Part IV of the SCA are deemed to have been made under the CMSA.

 

Licences issued under the SIA and the FIA are deemed to have been issued under the CMSA in respect of the regulated activity which each licensee was carrying on under the original licences.

 

 

CONCLUSION

The CMSA is a significant milestone in the development of the capital markets in Malaysia. The introduction of the single licensing regime for the securities industry and the futures industry may spur the growth of capital market products.

 

 

Liew Wei Ling ( This e-mail address is being protected from spambots. You need JavaScript enabled to view it )

 
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