MEMBER FIRM OF BAKER & MCKENZIE INTERNATIONAL Financial Services and Regulation Kuala Lumpur Client Alert July 2015 Amendments to the Securities Commission Act and Capital Markets and Services Act to Improve Governance, Promote Efficient Markets and Prevent Systemic Risks Both houses of Parliament had between mid-May 2015 and early July 2015 passed legislation to amend the Securities Commission Act ("SCA") and the Capital Markets and Services Act ("CMSA") to bring Malaysia in line with other financial markets - greater transparency over the governance structure of the Securities Commission, promoting an inclusive access to the capital markets through a new regulatory framework for recognised market, and preventing systemic risks through the ability of the SC to transfer operations of a market institution to a statutory manager and the ability to close a stock or derivative exchange. With the amendment to the SCA, the Board of Commission ("Board") is created to regulate and manage the SC. Candidates for appointment to the Board will generally be required to be fit and proper, and their duties are also statutorily enshrined. Board committees may also be established, subject to such committees acting in accordance with the direction of the Board. These changes herald transparency and accountability for the governance of the SC. Other ancillary changes to the SCA include the extension of the powers of the SC to supervise auditors of public interest entities ("PIEs"). Auditors of schedule funds, i.e., unit trust schemes and private retirement schemes, will also fall within the purview of the Audit Oversight Board. This is a recognition of the role of the auditors when carrying out audits on PIEs and the reliance placed by the public on them in respect of the financial statements issued by the PIEs. The changes to the CMSA were prompted by the need to widen access to the capital markets, particularly in respect of financial technologies. As such, a new regulatory framework for "recognised market" is introduced and allows for the establishment of trading platforms for shares or derivatives to facilitate capital raising through equity crowdfunding for new companies and small and medium enterprises. This will likely spur the growth in the Malaysian capital markets. With the introduction of equity crowdfunding and potentially other recognised markets, the SC is required to regulate a larger number of market intermediaries. Currently, there are no contingencies provided under the CMSA for the recovery and resolution of an exchange in the event of a crisis. The amendments to the CMSA seeks to remedy this by empowering the SC to transfer control and access of an exchange to a statutory manager for the purpose of managing systemic risk when the SC is of the opinion that it is necessary to ensure that investors and the economy protection are required. Such statutory manager will be empowered to step into the shoes of an exchange and to take possession of all property for the purpose of carrying on the business or operation of the exchange. The SC is also given the power to close a stock or derivative exchange. This change equips the SC with the powers to prevent a systemic risk to the financial markets. Financial Services and Regulation The Netting of Financial Agreements Act 2015 ("NFA") was introduced in Malaysia to provide legal certainty to the enforceability of close-out netting provisions in financial agreements under Malaysian law. However, the NFA is limited to over-the-counter derivatives and repurchase agreement and regulatory authorities are still empowered under legislation to restrict the enforceability of close-out netting provisions in certain circumstances. With the amendment to the CMSA, it safeguards the enforceability of netting provisions for contracts traded on the exchanges and contracts facilitated by clearing houses by providing that the SC powers in the management of systemic risk shall not affect the enforceability of netting provisions for such contracts. Other changes to the CMSA includes amendments to enhance the rights of offeree shareholders in a take-over. A broader category of persons will now be deemed to be acting in concert with an offeror ("PAC") - e.g., a person (not being a financial institution) who provides funding for a take-over offer would, unless he is able to rebut the presumption, be deemed a PAC. Minority offeree shareholders are assured that they will always be able to receive independent advice as a result of the changes to the CMSA since the SC has the power to appoint such an advisor if an offeree company that fails to do so. Offerors would also going forward be able to privatise a company with greater certainty as the squeeze-out provisions extend to convertible securities. Although Parliament has passed these amendments as of July 2015, the changes have yet to come into force. It will likely come into force by the third quarter of 2015. The changes are timely as it recognises the need to keep in step with financial innovation, and establishing a regime that will enable the regulator to detect and prevent systemic risks in the financial and capital market space. www.wongpartners.com For further information please contact: Brian Chia +603 2298 7999 email@example.com Sue Wan Wong +603 2298 7884 firstname.lastname@example.org Level 21, The Gardens South Tower, Mid Valley City, Lingkaran Syed Putra, 59200 Kuala Lumpur ©2015 Wong & Partners. All rights reserved. Wong & Partners is a member firm of Baker & McKenzie International, a Swiss Verein with member law firms around the world. In accordance with the common terminology used in professional service organizations, reference to a "partner" means a person who is a partner, or equivalent, in such a law firm. Similarly, reference to an "office" means an office of any such law firm.