Speech by Deputy Prime Minister and Chairman, Monetary Authority of Singapore, for the Second Reading of the Securities and Futures Bill 2001 in Parliament on 5th October 2001
"Mr. Speaker Sir, I beg to move that the Bill be now read a second time."
2 Capital markets have become increasingly sophisticated, as a result of technological advances giving rise to competition and globalisation. In Singapore, we have seen the demutualisation and merger of the securities and futures exchanges, a proliferation of electronic business models, and a diversity of new products. Cross-selling has blurred sectoral boundaries whilst financial innovation has blurred product lines. Institutions no longer confine themselves to their domestic markets or their immediate hinterland, but reach out to pools of liquidity in other countries as well. The liberalization of the capital markets and increased competition has catalyzed these processes.
3 This fluid and rapidly-evolving financial landscape poses new demands on regulators. It is important that we create a sound and transparent legal framework within which players can operate. The framework must balance prudential concerns with market development. Moreover, it should be sufficiently flexible to allow, and even facilitate innovation.
4 Quite apart from these developments, there is a need to recast the existing legal framework in view of the shift in MAS' regulatory philosophy since the enactment of the Securities Industry Act (Chapter 289) (SIA). The SIA was drafted and enacted in the wake of the Pan-El crisis. The intent then was to tighten supervision of the then Stock Exchange of Singapore and the securities industry. However, MAS has, since 1997, embraced a different regulatory philosophy. We have moved from a merit-based regulation where the regulator decides what comes to the market to a disclosure-based regime which empowers investors to make informed decisions. We have also instituted a fundamental shift in emphasis away from one-size-fits-all regulation of institutions to risk-focused supervision.
5 The Securities and Futures Bill (SF Bill) responds to all these developments. It sets out, in a single rulebook, the legislative framework governing the securities and futures industry by consolidating the provisions in the SIA, the Futures Trading Act (FTA) (Chapter 116), as well as certain provisions in the Exchanges (Demutualisation and Merger) Act (Chapter 99B) and the Companies Act (Chapter 50).
6 The impetus for the SF Bill can be broadly described as follows:
- To redraft and update legislation to keep abreast of the many developments that have taken place in the capital markets since the enactment of the SIA and FTA;
- To create a flexible regulatory framework for intermediaries, to enhance competition and to reduce compliance cost;
- To enhance the regulatory framework for clearing and settlement activities, and to provide an exception to laws of insolvency for clearing and settlement activities to minimise any systemic risk to our clearing and settlement system;
- To provide a comprehensive rulebook on capital markets activities;
- To facilitate the development of a disclosure-based regime;
- To provide an enhanced market enforcement regime, which supports a disclosure-based regime; and
- To streamline the appeal processes.
7 In preparing the SF Bill, MAS has conducted a public consultation of an earlier draft of the Bill. The public has been supportive of the policies introduced by Bill, and has provided many comments. MAS has studied and incorporated some of these comments in the Bill.
8 Mr Speaker Sir, I will now go through the major policy reforms in the SF Bill:
UPDATING LEGISLATION TO CATER TO DEVELOPMENTS IN CAPITAL MARKETS
Recognised Trading System Providers (Part II); Redefinition of Markets (1st Schedule) and Dealing in Securities/Trading in Futures (2nd Schedule); Extra-Territorial Jurisdiction (Section 339)
9 Globalization and advances in telecommunication technology have led to more cross-border trade, especially in the electronic realm. Connectivity to overseas markets no longer requires the manual intervention by broker-dealers - it can instead be provided by passive Alternative Trading Systems (ATS). New electronic financial services also deconstruct traditional value chains, allowing market participants to offer services along specific segments of the value chains, and blurring the time-honoured concepts of either operating a market or acting as an intermediary.
10 The SIA and FTA were not drafted with these new business models in mind. The arrival of these business models call for greater clarification as to how these businesses would be regulated, i.e. whether as markets or intermediaries. MAS' policy intent is to only regulate as markets, facilities which bring together many buyers and many sellers, and allow the posting of sufficient information to result in a transaction taking place. The redefinitions of markets in the First Schedule of the SF Bill would provide clarity on this issue. We have refined the definition of markets to refer to a place or facility where offers to sell, purchase or exchange securities or futures contract are made on a centralised basis. Places or facilities which are used by one person to provide such offers are excluded from the definition of markets.
11 The present regulatory framework in the SIA and FTA only allows for markets operators to operate in Singapore as either approved exchanges, or exempt markets. Neither is appropriate for the regulation of the majority of markets maintained by ATS, for which the imposition of the full gamut of exchange requirements is inappropriate, but for which MAS still wishes to retain a reasonable extent of regulatory oversight. The SF Bill will introduce a new recognition regime for such markets. ATS operators who operate facilities which are predominantly providing market-like services will require authorization to operate in Singapore as Recognised Trading System Providers (ReTS Providers). This is found in Part II, Division 4 of the Bill. The regulatory requirements to be imposed on ReTS Providers, to be spelt out in Regulations, would commensurate with the nature and scale of risks posed by these market models.
12 To facilitate the regulation of cross-border financial services that target or are made accessible to Singaporeans, Section 339 of the Bill will introduce an extra-territorial jurisdiction provision for offences. This is a codification of judicial pronouncements in common law jurisdictions that a foreign act is justiciable in a country if it has an effect in that country. This is the practice in other major financial centres. Section 339 will confer jurisdiction on acts outside Singapore that have substantial and reasonably foreseeable effects in Singapore.
CREATING A FLEXIBLE REGULATORY FRAMEWORK FOR INTERMEDIARIES, TO ENHANCE COMPETITION AND TO REDUCE COMPLIANCE COST
Single Licensing Framework for Securities and Futures Market Intermediaries (Part IV)
13 The existing licensing framework under the SIA and the FTA is characterized by the issuance of multiple licences to market intermediaries according to their business activities within the securities, futures and asset management industry. With the blurring of boundaries between securities and futures products, and the breaking down of the value chain in the financial services industry, such multiple licensing structure has increasingly become less flexible in meeting the business needs of intermediaries.
14 To keep pace with market developments and to better accommodate changes in the business models of market intermediaries, the SF Bill will introduce a single modular licensing framework for the securities and futures intermediaries, to replace the current multiple licensing structure.
15 Part IV of the SF Bill will require an intermediary to hold only a single licence, known as a Capital Markets Services licence, to conduct one or more regulated activities. These regulated activities will include securities dealing and futures trading, leveraged foreign exchange trading, advising on corporate finance, fund management, securities financing and custodial services for securities.
16 The single licencing regime will reduce both capital and compliance cost, and allow our intermediaries to be competitive across a broader spectrum of financial services.
17 The SF Bill will provide for licensing exemptions so long as these do not compromise the standard of investor protection. Banks, merchant banks, finance companies and insurance companies are already supervised by MAS under other principal legislation. They will be exempted from licensing for any regulated securities and futures activities so long as they are not prohibited from undertaking such activities under those principal legislation . This will reduce regulatory overlap and save on compliance costs. However, to level the playing field, these institutions will be subject to the same business conduct rules and regulatory requirements, where appropriate.
ENHANCING THE REGULATORY FRAMEWORK FOR CLEARING AND SETTLEMENT ACTIVITIES, CREATING AN EXCEPTION TO LAWS OF INSOLVENCY FOR CLEARING AND SETTLEMENT ACTIVITIES TO MINIMIZE SYSTEMIC RISKS
Regulation of Clearing and Settlement Activities (Part III)
18 The SF Bill will introduce a legal framework for the regulation of clearing and settlement institutions in the securities and futures markets. Such institutions will require MAS' approval. Part III, Division 2 of the Bill will introduce provisions for MAS to approve and regulate clearing houses separately from exchanges.
19 To protect a clearing house that operates in Singapore, and thereby all the participants that utilise its facilities, the Bill in Part III, Division 3 also provides an exception to the laws of insolvency where a participant of a clearing house defaults on its obligations. By giving primacy to the default rules of the clearing house over the rules of insolvency, the SF Bill will ensure that the insolvency of a member will not disrupt the clearing and settlement of trades already executed. Such giving of priority to systemic stability is consistent with the practice in other financial centres.
PROVIDING A COMPREHENSIVE RULEBOOK ON CAPITAL MARKETS ACTIVITIES IN SINGAPORE
Migration of Capital Raising Provisions from the Companies Act -Shares and Debentures (Part XIII, Division 1)
20 The SF Bill migrates the capital raising provisions in the Companies Act (CA) into a comprehensive rulebook on capital markets activities in Singapore. This is to implement a recommendation of the Corporate Finance Committee.
Collective Investment Schemes (Part XIII, Division 2)
21 As recommended by the Corporate Finance Committee, the provisions in the CA relating to public offers of interests other than shares and debentures are migrated to the SF Bill. The SF Bill has replaced the concept of interests under the CA, which governs unit trusts, and replaced it with that of collective investment schemes - The SF Bill requires all collective investment schemes to be approved by MAS before they can be offered to the public. MAS is empowered to suspend or revoke schemes detrimental to the public interest even after their approval. The SF Bill provides an additional option for foreign funds to be offered directly to the public, instead of only through feeder funds, which entail additional costs.
22 The SF Bill provides for the offer of collective investment schemes to sophisticated investors without prospectuses, as is the case for shares and debentures. The criteria for approval of such schemes is less stringent than that for retail schemes, as sophisticated investors are in a better position to fend for themselves.
23 Under the SF Bill, trustees for collective investment schemes will be approved on a one-off basis, instead of the current cumbersome practice of fund-by-fund approvals. MAS will be given the power to inspect such trustees, to check that they perform their statutory duties properly and safeguard the interests of investors.
24 MAS will also introduce an industry Code setting out investment and operational requirements for collective investment schemes. Examples are the investment guidelines for various types of funds, rules governing soft commission practices and disclosures, and contents of semi-annual reports to investors.
FACILITATING THE DEVELOPMENT OF A DISCLOSURE-BASED REGIME
25 The SF Bill seeks to create a legal framework that facilitates the development of a disclosure-based capital markets in Singapore. To this end, several reforms have been put in place.
Enhancement in Prospectus Regime (Part XIII, Division 1)
26 First amongst these are the refinements made to the prospectus regime. To deter inadequate or misleading disclosures and material omissions from prospectuses, issuers and their advisers will be subject to greater accountability for prospectus disclosure.
27 The procedures for registering prospectuses have been refined. Prospectuses lodged with MAS will be subject to a 2-week holding period, during which MAS will conduct the necessary review for compliance with the prospectus law. At the same time, the lodged prospectuses will be put on the MAS website and made accessible to the public. The public can scrutinise and give comments on the lodged prospectuses to MAS. MAS may refuse to register a prospectus if it is not in compliance with statutory disclosure requirements or if its registration is not in the public interest.
28 Where a registered prospectus is later found to be misleading or deficient, MAS is empowered to serve a stop order to prevent the issuance or sale of securities to the public.
29 The SF Bill will provide for the return of monies to investors who have bought or subscribed for securities, after a stop order has been served or the issuer has lodged a supplementary or replacement document. This is also the practice in Australia. These legal remedies are necessary to protect the investing public in the few instances where serious breaches of the law occur.
30 To enhance regulatory transparency, the SF Bill will clarify that preliminary prospectuses, used for book-building to ascertain the level of market interest in securities, can be distributed only to sophisticated and institutional investors. In addition, the SF Bill will allow issuers and their advisers to conduct roadshow presentations to sophisticated and institutional investors before registering a prospectus.
Continuing Disclosure Requirements by Listed Companies (Section 203)
31 The SF Bill will give legal teeth to the continuous disclosure of material information by listed corporations. Presently, listed corporations are required to make disclosure of material information, on a continuous basis, under the Singapore Exchange's Listing Manual. Section 203 of the Bill will make this continuous disclosure requirement a statutory one. Failure by companies to make disclosure of material information could render it liable to the payment of civil fines or criminal prosecution (where the failure is intentional or reckless).
Notification of Substantial Shareholding in Listed Companies (Section 137)
32 In line with international practice, Section 137 of the SF Bill will require persons to disclose their shareholdings to the securities exchange within 2 days of their becoming substantial shareholders of listed companies and subsequent changes in their shareholdings. This will improve on the current two-stage process where substantial shareholders disclose their ownership interests to the listed company (as required by the Companies Act), which in turn relays the information to the Singapore Exchange, as required by its rules.
Takeovers (Part VIII)
33 The provisions in the Companies Act governing company take-overs and mergers are migrated to the SF Bill and rationalised. Part VIII of the Bill will empower MAS to promulgate, and the Securities Industry Council to administer, the Singapore Code on Take-overs and Mergers. The SF Bill also makes false or reckless take-over announcements, criminal offences.
ENHANCING MARKET ENFORCEMENT
34 A disclosure-based regime demands an effective market enforcement regime. Any transgressions must be swiftly and firmly dealt with, in order to preserve investor confidence in Singapore's capital markets. The SF Bill therefore introduces provisions that enhance market enforcement.
Review of Insider Trading Provisions (Part XII Div 3)
35 The SF Bill redefines the laws on insider trading. The present provisions are based on the defendant's connection with the company and make only the insider and the tippee (a person acting in concert with the insider) liable for insider trading.
36 To prove a case against tippees, the Prosecution has to firstly show that the tippee has received information from an insider. Secondly, it has to show that the tippee had an arrangement or association with the insider. Thirdly, the tippee must be aware that the insider himself is precluded from dealing. The balance is tilted too much in favour of tippees, to the detriment of other market participants.
37 Furthermore, there is difficulty in extending liability to others who are further down the information chain. Where the tippee himself does not trade but communicates price-sensitive information to another person (the secondary tippee), who then trades in securities, it may be difficult to prove any "arrangement" or "association" with the insider. This is unsatisfactory, as the secondary tippee (or other persons further down the information chain ) would have traded with an unfair information advantage.
38 A person who receives inside information from sources other than a connected person is also not caught under the present approach, which requires the tracing of information back to the connected person. This needs to be remedied.
39 At the core, the mischief of insider trading lies in tilting the playing field unfairly against other market participants. Those who knowingly have inside information should be prohibited from trading, whether or not they are connected with the company. The intent is to address the core evil of trading while in possession of undisclosed market sensitive information, instead of having liability depend on a person's connection with the company.
40 The new insider trading provisions in Part XII, Division 3 of the SF Bill will no longer depend on the proof of a person's connection with the company. The test will instead shift to the core of the offence, i.e. trading while in possession of undisclosed price-sensitive information by the defendant. The new provisions will also tighten the mens rea (mental intent) test for directors and connected persons. Section 218(4) creates a rebuttable presumption that connected persons with possession of inside information, are deemed to know that the information is undisclosed and is price-sensitive. This will introduce greater discipline for those in fiduciary positions.
41 The present Section 103 SIA is silent on any mental intent or mens rea requirement. The High Court in PP v. Ng Chee Kheong & Tang Siu Shing (June 1999) imposed a 3-tier mens rea test for insider trading, requiring the Prosecution to show that the Accused:
- knew that the information was price-sensitive;
- knew that the information was undisclosed; and
- intended to use the information.
42 When Section 103 SIA was introduced in 1986, it was meant to remedy the shortcomings of Section 158 of the Companies Act. Dr Richard Hu, in the 2nd reading of the Securities Industry Bill 1986, stated that this was the mischief that Section 103 SIA was meant to address.
43 The decision in PP v Ng Chee Kheong, by introducing the "intent to use" test, effectively brings our insider trading laws to the position in the repealed Section 158 of the Companies Act. This interpretation of Section 103 SIA negates the very intent it was meant to remedy. The requirement of proof of "intent to use" information by the Prosecution makes it too onerous and reduces the effectiveness of our insider trading laws.
44 Section 220 of the SF Bill therefore makes it clear that it is not necessary to prove any intent to use inside information by the defendant.
45 The insider trading provisions will also be extended to cover futures and options contracts on stocks and stock indices which are extensions of the underlying product. This approach is consistent with international best practice.
Extension of Civil Fines/Civil Remedies to Other Forms of Market Misconduct (Part XII Div 4)
46 The SF Bill will extend the civil fine/civil remedy regime (presently available only for insider trading) to other forms of market misconduct found in Part XII - e.g. market rigging, market manipulation, the publishing of false or misleading information, and the employment of fraud and deceit in dealing. The advantage of a civil remedy regime lies in its lower burden of proof. The extension of the civil remedy regime to all forms of market misconduct will complement the present framework of criminal offences for such misconduct.
47 MAS will be empowered to bring an action in Court against a defendant for a civil penalty. The offender will also be liable for civil damages to investors who suffer losses as a result of the contravening act.
Enforcement Powers for MAS Officers (Part IX Div 3)
48 The SF Bill provides enhanced investigative powers for MAS officers to enforce the civil penalty regime for market misconduct. MAS will be given powers to compel the production of relevant documents and records, to conduct search and seizure with a warrant from the Court and to record statements.
Fines for Offences
49 The penalties for non-compliance with provisions of the SIA and FTA have remained largely unchanged since their enactment - except for penalties relating to market misconduct offences, which were increased in March 2000 by a factor of five. There is a need to revise the fines for other offences under the SF Bill in order to provide a deterrent effect.
50 The SF Bill will therefore update and align the penalties for offences. It will introduce penalties for continuing offences, where appropriate. The fines in most cases (except for Part XII offences) will be raised by a factor of five while those for continuing offences will be ten percent of that for the main offences. Section 333 of the Bill introduces higher fines for corporations - a maximum of twice the amount imposed for individuals.
Extra-Territorial Jurisdiction Clause for Market Misconduct
51 Other than Section 339, Sections 196, 205 and 213 in Part XII (Market Misconduct) will specifically confer jurisdiction over:
- conduct within Singapore in relation to securities or futures contracts listed and traded overseas; and
- conduct outside Singapore in relation to securities or futures contracts listed or traded in Singapore.
52 The first limb will deter perpetrators of market misconduct from using Singapore as a "haven" for their illegal activities. The second aspect will confer our Courts extra-territorial jurisdiction over foreign acts that affect the integrity of Singapore's markets. The enforcement of these provisions will be facilitated by various regulatory Memoranda of Understanding entered between MAS and foreign regulators.
STREAMLINING APPEAL PROCESSES
Rationalization of Appeal Processes (Part XIV)
53 There is some inconsistency, under the SIA and FTA, in the provisions relating to appeals (by licencees, exchanges or aggrieved persons) against decisions made by MAS. Under the present SIA/FTA, most appeals are heard by the Minister. However, in the revocation of a dealer's licence under the SIA, an appeal to the High Court is allowed.
54 The SF Bill streamlines the appeal processes by having the appeals heard by the Minister. The SF Bill creates an independent advisory panel, comprising industry representatives and lawyers, to advise the Minister. This new approach allows MAS to tap on the expertise of practitioners to evaluate MAS' decisions objectively and impartially, before presenting their recommendations to the Minister.
"Mr. Speaker Sir, I beg to move."
1 Currently, these regulated activities are already governed under the current legislation, except for margin financing and custodial services for securities. It is necessary to bring Intermediaries providing margin financing and custodial services for securities within the regulatory ambit as they will be holding customers' securities in their custody in the course of their business. This will provide greater protection to the investors.
2 Under Section 99 of the Bill, banks will be given full licensing exemption, while merchant banks would be exempt from licensing in respect of any regulated activity which it is approved to carry out under the Monetary Authority of Singapore Act. Finance companies would be exempt from licensing in respect of a regulated activity which is not prohibited under the Finance Companies Act or for which an exemption from Section 25(2) of that Act has been granted, and Insurance Companies would be exempt from licensing in respect of fund management for the purpose of carrying out their insurance business.
3 In conjunction with the single licensing framework, MAS intends to revise the examination requirement for the representatives of market intermediaries, and extend such requirement to the employees and agents of the banks and other financial institutions, who conduct similar regulated activities.
5 Reprint of the Companies Act (Cap 50, 1985 Revised Edition). The provision read:
An officer, agent, employee or substantial shareholder of a corporation who is or in relation to a dealing in securities of the corporation by himself or any other person makes use to gain, directly or indirectly, an advantage for himself or any other person of specific confidential information acquired by virtue of his position as such officer, agent, employee or substantial shareholder, which if generally known, might reasonably be expected to affect materially the price of the subject-matter of the dealing shall, in addition to any penalty imposed under subsection (9), be liable to a person for loss suffered by that person by reason of the payment by him or to him of a consideration in respect of the securities greater or lesser, as the case may be, than the consideration would have been reasonable if the information had been generally known at the time of the dealing.
6 Part IX of the Bill contains revised provisions dealing with trading in securities. The significant feature of this Part is the new provision for dealing in securities by insiders, ie persons with access to price-sensitive information. A notable difference under the new provision is that an offence is committed whether or not the dealing is undertaken with the intention of using information to gain an advantage; the purpose of dealing is irrelevant.