Introduction
Regulatory matter
Conduct of business
Management of systemic risk
Further amendments
Comment
On September 16 2011 the Capital Markets and Services (Amendment) Act 2011 became law. It will come into operation on a date yet to be appointed by the minister of finance. This update offers an overview of the key changes that will be made to the Capital Markets and Services Act 2007 when the amended act comes into operation.
Directorships
Section 10 of the 2007 act empowers the minister, in consultation with the Securities Commission, to appoint one-third of the directors that sit on the boards of directors of exchange holding companies, and certain stock exchanges and derivatives exchanges, as public interest directors (PID). The section also requires a person to obtain the commission's consent before accepting an appointment or election as a director (other than a PID) of any of the aforementioned boards.
The amended act expands and clarifies the supervisory powers of the commission in relation to board appointments in the following respects:
- The term of office of a PID, as determined by the minister, must not exceed three years (although the person concerned will be eligible for reappointment);
- The commission's consent must be obtained 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 commission, vary the number of PIDs to be appointed in place of the one-third prescribed at present.
The requirements of Section 10 will also apply to a chief executive of an exchange holding company, or of the relevant stock exchange or derivatives exchange.
Expansion of powers to compel action
Section 26(1) of the 2007 act empowers the commission 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 amended act expands the commission's power under this provision to compel action to be taken where it is necessary or expedient in order to:
- ensure fair and orderly markets;
- protect investors (or the public interest);
- ensure the integrity of the capital markets; or
- facilitate the effective administration of securities laws.
Assumption of powers of an exchange
A new Section 26(6) will confer power on the commission to discharge certain duties of a stock exchange or a derivatives exchange, namely:
- the supervision of the capital markets and market participants; and
- 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 commission deems it necessary or expedient for the protection of investors or the effective administration of securities laws, or in the public interest.
Licences
Renewal of licences
The requirement under the act for a licensee to apply for renewal of a capital markets services (CMS) licence or a capital markets services representative's (CMSR) licence is abolished under the amended act. Therefore, once issued, a licence will remain in force until it is revoked in accordance with the act.
Revocation and suspension of licences
The power of the commission under Section 72 to revoke licences issued under the 2007 act 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 consent of the minister;
- The commission is no longer obliged to give a licensee the right to be heard before it imposes restrictions on the activities of the licensee; and
- On 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, but may apply for a variation of its licence.
Transfer of licences
The amended act empowers the commission to approve the transfer of a CMS licence after the licensee has obtained a court vesting order under Section 139 of the act.
Chief executive
Under the amended act, the approval of commission will be required before a person can be appointed as a chief executive for a holder of a CMS licence.
Information on capital market products
A new Section 92A will be introduced to empower the commission to specify information that must be disclosed to investors in respect of a capital markets 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 clients' assets
Section 125 of the 2007 act empowers the commission to direct a licensed person or an approved trustee (ie, a trustee that has been approved by the commission 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 commission.
The amended act will expand the categories of market participant that may be subject to such directives or prohibitions by the commission, 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
- anyone that maintains a trust account for clients' assets.
The amended 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 occurs, or is likely to occur:
- financial distress in a significant market participant or in a number of market participants;
- an impairment in the orderly functioning of the capital markets; or
- an erosion of public confidence in the integrity of the capital markets.
The commission may require a person to submit to it any information or document that it considers necessary for the purposes of monitoring, mitigating and managing systemic risks in the capital markets or where the commission 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 commission may issue a directive to any person under a new Section 346C to take such measures as the commission considers necessary in the interests of monitoring, mitigating or managing systemic risk in the capital markets.
The commission must 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 amended act will introduce a new Part IIIA (Sections 139A to 139ZM) to the 2007 act. This part provides a framework for the establishment of private retirement schemes.
Derivatives
Futures contracts in the act will be replaced by two categories of derivatives:
- standardised derivatives; and
- over-the-counter (OTC) derivatives.
Standardised derivatives will be governed by Part III(3)(3) (Sections 99 to 107).
The amended act will introduce Part III(3)(4) (Sections 107A to 107J) to the act to regulate OTC derivatives. This new subdivision will establish a trade repository. Persons dealing with OTC derivatives can be required to provide the trade repository with such information relating to those derivatives as may be specified by the commission, and the repository may in turn be required to furnish the information to the commission.
Vesting
Section 139 of the 2007 act requires that a holder of a CMS licence for dealing in securities or dealing in derivatives obtain the approval of the minister (acting on the recommendation of the commission) 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 amended act transfers the foregoing power of approval from the minister to the commission. With this amendment, the commission will be the sole approving authority for all such agreements or arrangements entered into by a holder of any category of CMS licence.
Enhanced penalties
The amended act will introduce a mandatory term of imprisonment for certain offences under the act. 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 two 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 the commission, exchange or clearing house) and Section 371 (destruction, concealment, mutilation and alteration of records).
The amended act streamlines certain administrative procedures in the act and confers greater regulatory powers on the commission. 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 addressing concerns regarding the efficacy of markets in the aftermath of the global financial crisis.
For further information on this topic please contact Chan Su-Li at Skrine by telephone (+60 3 2081 3999), fax (+60 3 2094 3211) or email ([email protected]).