On 11 February 2015, the Monetary Authority of Singapore (“MAS”) issued a Consultation Paper on Proposed Amendments to the Securities and Futures Act (“SFA”), together with detailed mark-ups of the provisions of the SFA showing proposed amendments. The proposed changes fall into two broad areas:
- Draft amendments to legislation needed to complete MAS’ regulatory oversight over OTC derivatives; and
- Policy proposals to amend the regulatory regime in the SFA with respect to market misconduct, short selling, and the recognition of foreign collective investment schemes.
Our update, “Draft Legislation to Complete MAS’ Oversight over OTC Derivatives”, deals with the proposed legislative amendments in relation to OTC derivatives trading. This Update will look at the policy changes with respect to the market misconduct provisions.
In addition to the market misconduct provisions, there are also proposed amendments to Part VII of the SFA relating to Disclosure of Interests, which will be of interest to listed corporations, REITs, and Business Trusts. The provisions are proposed to be amended to reflect the requirement on the part of directors or chief executive officers of listed corporations, managers of REITs, and trustee-managers of Business Trusts, and such managers and trustee-managers, to disclose interests in such securities-based derivative contracts as the MAS may prescribe, and to allow the MAS to extend the scope of the Division to any class of persons, securities, and interests, if it thinks it necessary in the public interest or to protect investors or enhance market transparency.
Policy Proposals to Amend the Market Misconduct Regime
Extension of market misconduct provisions to new instruments
The MAS has proposed changes to sections 199, 215, and 216 of the SFA, amongst others.
The Market Conduct provisions in Part XII are proposed to be extended to acts not just in relation to securities but also in relation to securities-based derivative contracts, units in collective investment schemes, and derivative contracts, and this affects quite a few of its provisions (including the insider trading provisions). New offences in relation to derivative contracts such as bucketing, manipulation and cornering, have also been included.
Madhavan Peter v PP reversed
Section 199 of the SFA: False or Misleading Statements
Section 199 makes it an offence to make a statement, or disseminate information, that is false or misleading in a material particular. In Madhavan Peter v PP (2012), the Singapore High Court had to consider whether a market announcement released by the directors of a public listed company was false or misleading in a material particular. The Court drew a distinction between information that is material because it is likely to influence an investor in his decision making process and information that is material because it is likely to effect a significant change in the price of securities. The latter is a higher threshold. The Court held that in order to establish an offence under section 199, the false or misleading particular had to be material in the sense of significantly affecting the price or value of the securities in question. Accordingly, it found that there had not been a false or misleading statement in that case because, among other things, it had not been proved that the material particular in question had had an effect on the share price of the company’s shares.
Threshold of materiality lowered
The MAS intends to amend section 199 to clarify that there is no requirement of material price impact under the section before a contravention can be established. It has explained that section 199 ought to protect against any false or misleading disclosures that are likely to affect the market, regardless of whether that price effect is significant. Section 199 as presently drafted requires it to be shown that a false or misleading disclosure is likely to, inter alia, induce other persons to deal in securities. The Consultation Paper states that the term “material” is attached to the word “particular” and describes the false and misleading particular vis-a-vis the rest of the statement i.e., an important or significant aspect of the statement must be false or misleading; it does not refer to the price impact of the disclosure. It remains to be seen how the MAS proposes to amend section 199 and what the prosecution has to prove in order to establish an offence under section 199. The likely practical effect of the amendment is to lower the threshold of when information is considered material for the purposes of the prohibition against making false or misleading statements.
Materiality of information for insider trading purposes
Sections 215 and 216 of the SFA: Insider Trading
The issue of materiality of information is also the focus of the next proposal by the MAS. Under the insider trading provisions of the SFA, insider trading on the basis of inside information that is material is an offence. Information is considered material if it would, or would be likely to, influence persons who commonly invest in securities in deciding whether or not to subscribe for, buy, or sell securities.
Lew Chee Fai Kevin v MAS
In Lew Chee Fai Kevin v MAS (2012), the Court of Appeal accepted the definition of the common investor for purposes of Sections 215 and 216 of the SFA as someone who possesses general professional knowledge such as the ability to do technical and fundamental analysis on information freely available on the shares. This has the effect of setting a higher threshold of materiality than if the investor was someone less educated or simply a speculator.
Standard of materiality for insider trading purposes to be lowered
The MAS has stated that it does not think this hypothetical standard of market knowledge reflects the realities of the Singapore market. It proposes defining what constitutes “persons who commonly invest in securities” and issuing guidelines to set out its policy intent and guidance as to the interpretation of that definition. It has not stated in this consultation paper what it considers to be appropriate standard and this may be the subject of a subsequent consultation. Clearly, the definition of a common investor must be sufficiently specific, given that the range of investors in the market, their motivations for investing in particular securities, and their responses to particular information concerning those securities, are infinitely diverse, and investment decisions made by different investors run the gamut from reasoned to eccentric. In conclusion, it seems likely that the proposed appropriate standard will have the effect of lowering the threshold at which information will be considered material for the purposes of the insider trading offence.
Current ceiling for civil penalties
Ceiling for Civil Penalty Quantum to be Revised Upwards
The MAS proposes to raise the ceiling for the amount that may be imposed as a civil penalty. Currently, where a contravening person has not obtained a benefit from his breach of the market conduct provisions in the SFA, the maximum amount payable as a civil penalty is S$2 million. Where he has obtained a benefit (either by making a profit or avoiding a loss), the maximum amount payable as a civil penalty is the higher of S$50,000 or three times the profit made/loss avoided. Hence, a contravening person who has only obtained a very small benefit from his contravention may only be subject to a small civil penalty regardless of how egregious his acts were.
Proposed new civil penalty benchmark
The proposal is to subject all contravening persons to a civil penalty benchmark of between S$50,000 to S$2 million, unless the benchmark of three times the amount of profit made/loss avoided is greater than S$2 million, in which case that higher amount applies. Hence, a contravening person who has only obtained a small benefit from his contravention may, under the proposed regime, be made to pay a civil penalty of up to S$2 million, the same maximum amount as a contravening person who has not obtained a benefit at all. The amount of the civil penalty may therefore be more closely aligned with the egregiousness of his actions.
Preference as against other claims
Preference for Civil Penalty Claims
The MAS proposes that any sums imposed as civil penalties should take preference of payment over any other debts owed by the person upon whom the civil penalty has been imposed. This brings the position for civil penalties in line with the position for all other government claims made pursuant to the Government Proceedings Act.