The Monetary Authority of Singapore (MAS) has issued Consultation Paper I on Draft Notices and Guidelines Pursuant to the Securities and Futures Act (Consultation Paper). Its key takeaways are as follows:
- The Securities and Futures (Amendment) Act 2017 (Amendment Act) (not yet in force) amends the insider trading provisions to provide a statutory definition of the phrase “persons who commonly invest”. In 2012, the Singapore Court of Appeal had held that this phrase should be construed as referring to a single class of investors that possess general professional knowledge. The draft Guidelines on the Interpretation of “Persons Who Commonly Invest” explains that the MAS would consider “persons who commonly invest” as comprising various classes of investors, namely, institutional, accredited, expert and retail investors. Retail investors would be persons who are, among other things, rational and have some experience and knowledge but may not be investment professionals. The main effect is to lower the threshold of what would be considered price sensitive information for the purposes of insider trading.
- Capital Markets Services (CMS) licensees and Financial Institutions (FIs) that market Contracts for Differences to retail investors must issue a Risk Fact Sheet to these investors. The draft Notice and Guidelines for the Risk Fact Sheet require that the Risk Fact Sheet highlight, among other things, that the investor can lose more than the initial margin deposit. The worked example in the Guidelines makes clear that the investor can lose the entire contract value.
A more detailed summary is set out below.
Proposed Guidelines on “Persons Who Commonly Invest”
The offence of insider trading is committed when an insider or a tippee is in possession of information that is materially price sensitive and that is not generally available, and makes use of this information to trade in the relevant securities. In determining whether information is materially price sensitive, the benchmark of the “person who commonly invests” is used. Information is materially price sensitive if it would influence the trading decisions of such a person. In the 2012 Singapore Court of Appeal decision of Lew Chee Fai Kevin v MAS, the Court held that “persons who commonly invest” should be understood as referring to investors that, among other things, possesses general professional knowledge. This would include the ability to do technical and fundamental analysis. The Amendment Act amends the Securities and Futures Act (SFA) to provide a statutory definition of the phrase “persons who commonly invest” that statutorily amends this part of the decision. The changes to the SFA and the proposed guidelines are intended to make clear that the threshold for who is a person who commonly invests in securities is a lower threshold. The MAS is of the view that the decision of Lew Chew Fai Kevin v MAS set the threshold too high for the Singapore market. Its proposed Guidelines on the Interpretation of “Persons Who Commonly Invest” explain that the MAS considers classes of investors as covering “accredited investors”, “expert investors”, “institutional investors” and “retail investors”. The phrase “persons who common invest” includes all of these four classes. Retail investors would display the following characteristics:
- They would be rational and economically motivated investors with at least some experience and knowledge of investing in the relevant financial product, but may not be investment professionals;
- They would be aware of the prevailing price of the relevant financial product from time to time; and
- They would have knowledge of or the ability to obtain, generally available information concerning the company or issuer in question, and would have the ability to draw inferences from and assess the credibility of the information in question.
It should be noted that these listed characteristics do not include the ability to do technical and fundamental analysis. The revised meaning of the term potentially captures a wider range of information as information that is materially price sensitive. A further change introduced by the Amendment Act is to stipulate that for the purposes of the offence of insider trading, for information to be generally available it must be generally available to all classes of investors. Hence, if information is available only to, say, institutional investors, but not to retail investors, it would not be considered to be generally available. From the perspective of making out the offence, the changes make prosecution of the offence of insider trading less onerous. Persons who occupy positions that put them in possession of insider information should, in any event, err on the side of caution to avoid trading when in possession of information that has not been generally released to the market.
Risk Fact Sheets for Contracts for Differences: Only Applies to Transactions with Retail Investors
The Consultation also sets out:
- A draft Notice on Risk Fact Sheet for Contracts for Differences (CFD Notice); and
- A draft set of Guidelines to MAS Notice on Risk Fact Sheet for Contracts for Differences (CFD Guidelines).
The requirement to provide a Risk Fact Sheet will apply only when CMS licensees and FIs deal with retail investors. Before opening an account for a retail investor to transact in contracts for differences, a CMS licensee/FI must provide the customer with a Risk Fact Sheet in accordance with the requirements set out in the CFD Notice. The proposed Risk Fact Sheet highlights, among other things, the customer’s potential loss when trading on margin and explains with worked examples what happens if the customer does not have enough margin to cover a margin call. The MAS prepared the draft in earlier consultation with members of the industry.
The Consultation Paper also deals with the amendments to the following documents consequential on the changes to be effected by the Amendment Act:
- Notice for Risk-Based Capital Adequacy Requirements; and
- Notice 757 Lending of Singapore Dollar to Non-Resident Financial Institutions.