Second Reading Speech By Mr Lim Hng Kiang, Minister for Trade and Industry and Deputy Chairman, Monetary Authority of Singapore
The Securities and Futures (Amendment) Bill 2008
Mr Speaker Sir, on behalf of the Senior Minister, I beg to move, "That the Bill be now read a second time".
2 The Securities and Futures Act (SFA) was enacted in October 2001. It seeks to provide a single comprehensive rulebook and legislative framework for regulating the activities and institutions in the securities and futures industry. This round of amendments aims to achieve greater consistency in Monetary Authority of Singapore’s (MAS) regulations and enable MAS to respond more quickly to new market developments. They also enhance the supervisory and enforcement powers of MAS.
3 The MAS consulted the industry and the public on the proposed amendments and draft Bill in 2006 and 2007. MAS has incorporated feedback received into the Bill where appropriate and in line with MAS’ regulatory objectives.
4 This Bill implements these amendments. In October, in response to questions by Members on the procedures to enhance safeguards for retail investors, I announced that MAS is conducting a separate review to examine the issues regarding the sales and marketing of structured products. MAS will conduct public consultation on the proposals arising from this review at a later date.
5 Mr Speaker Sir, I will now go through the key amendments in the Bill. I will begin with the changes to the rules on capital markets licensing and business conduct.
Capital Markets Licensing and Business Conduct
Continuing Licensing Regime for Corporate Licence Holders
6 Under the current SFA, capital markets services ("CMS") licence holders have to renew their licences every three years. The Bill introduces a continuing licensing regime for licence holders where licence holders will not have to renew the licences, to reduce administrative burden. However, MAS will supervise licence holders on a continual basis, and have the power to revoke licences, if necessary. This brings CMS licence holders in line with other MAS-regulated institutions, such as banks and insurance companies, which are already operating under a similar regime.
Representative Notification Framework
7 Currently, only representatives of CMS licence holders need to apply for a licence from MAS to conduct regulated activities. This is not a requirement for representatives of financial institutions exempted from holding a CMS licence, such as banks and insurance companies. This is not desirable as it creates distortion in the recruitment and retention of representatives. It is also difficult for consumers to check if an individual is allowed to conduct certain regulated activities.
8 To ensure that all representatives, regardless of the institution they work for, are placed under the same regime, the Bill introduces a Representative Notification Framework. This will apply equally to representatives of CMS licence holders and representatives of financial institutions exempted from holding a CMS licence. Under the Framework, financial institutions will have to notify MAS when they intend to employ someone to conduct a regulated activity. The financial institution will be responsible for ensuring and certifying to MAS that their representatives are fit and proper. Financial institutions and their directors can be held liable for making false or misleading statements.
9 As part of this Framework, MAS will maintain a public register of representatives on its website. This register will list information on representatives, including the type of regulated activities they are allowed to conduct, which financial institution they act for, and any formal regulatory action taken against them by MAS. Consumers will be able to use the public register to check on the individuals they deal with. Financial institutions can also use this public register to conduct reference checks on potential employees.
Control of Take-over of CMS Licence Holders
10 The Bill introduces a new requirement for potential controllers of a CMS licence holder. They will need to obtain MAS’ approval before entering into arrangements that could give them effective control of such licence holders. A person has effective control when he acquires directly or indirectly more than 20 per cent of a CMS licence holder’s shareholdings or voting power. Trust companies and insurance companies, which are regulated by MAS, are subject to similar requirements. MAS will also have powers under certain circumstances, to order persons to relinquish effective control, or stop a person from being a party to an arrangement that could result in the person obtaining effective control. For example, MAS would be able to exercise these powers where a person is not, or ceases to be, a fit and proper person.
Prohibition Order Regime
11 Under the SFA, MAS can issue prohibition orders to CMS licence holders and their representatives. This is to help ensure that only suitable persons conduct regulated activities. However, there are gaps as MAS is not able to issue prohibition orders to other persons. This will be remedied under the Bill. MAS will be empowered to issue prohibition orders to the following additional persons:
(i) exempt financial institutions and their representatives;
(ii) persons previously licensed or exempted from holding a CMS licence by MAS;
(iii) persons who were previously an appointed, provisional or temporary representative;
(iv) an officer or ex-officer of a CMS licence holder or exempt CMS licence holder; and
(v) persons convicted of conducting regulated activities illegally.
12 Under the SFA, MAS may issue prohibition orders where MAS believes a person has contravened the SFA, or when a person has been convicted of an offence involving fraud or dishonesty. The Bill provides MAS additional grounds for issuing prohibition orders. MAS will be able to issue prohibition orders to persons who have been ordered by the court, or who have entered into a civil penalty settlement agreement with MAS, to pay a civil penalty for market misconduct. Prohibition orders can also be issued to persons who have been removed, at MAS’ direction, from the office or employment of a CMS licence holder. MAS will also be able to ban persons issued with prohibition orders from directly or indirectly managing or influencing the business of CMS licence holders or exempt CMS licence holders. For example, MAS will be able to prevent a person from acting as a director or being a substantial shareholder of these financial institutions. These amendments will better enable MAS to keep out unsuitable persons from the industry.
Regulatory Assistance to Foreign Regulators
13 A number of the CMS licence holders and exempt CMS licence holders conducting SFA regulated activities are part of larger foreign corporate groups. Foreign regulators may wish to inspect them as part of their consolidated supervision. The Bill will clarify that a foreign regulator that wants to inspect such financial institutions will have to obtain MAS’ approval. This will align the SFA with the Banking Act which has a similar requirement.
Market Misconduct Enforcement Framework
Transfer of Evidence between the Commercial Affairs Department of the Singapore Police Force ("CAD") and MAS
14 Mr Speaker, Sir, I would like to turn next to amendments related to the investigation framework for market misconduct. Currently, a market misconduct case is taken up by either CAD or MAS at the onset of an investigation, based on the prima facie evidence. The CAD investigates when criminal proceedings are likely, while MAS investigates cases when civil penalties appear appropriate. As the investigation progresses, it may sometimes be necessary for one agency to transfer the matter to the other, based on their preliminary findings. For example, during its investigation, if MAS finds that the case warrants criminal prosecution, MAS will transfer it to CAD. Similarly, CAD may refer cases where civil penalties are appropriate to MAS. The Bill provides for transfer of evidence between CAD and MAS, so that the agency taking over the investigation does not have to expend resources to re-investigate the case all over again. This will eliminate duplication of efforts.
Corporate Derivative Liability
15 The Bill will introduce a new concept of attributed liability for market misconduct offences. Currently, a company may not be liable when its employees commit market misconduct. For example, if an employee of an asset management company engages in insider trading using company funds, the company would be liable only if the employee was a director or a secretary of the company, or a person employed in an executive capacity. A company may therefore avoid liability by delegating decisions to lower level employees. The amendments address this by making a corporation, partnership or limited liability partnership liable in certain circumstances. Where it is proven that the market misconduct by an employee, officer, partner or manager has been committed with the consent or connivance of an entity, the entity may be subject to criminal liability. Civil penalty liability would be imposed where the entity has, through its negligence, failed to prevent or detect the employee’s market misconduct.
Disgorgement by Persons who Benefit from Contravening Trades Conducted on their Behalf
16 The Bill will also introduce a new remedy for affected investors of trades that contravene the market conduct provisions of the SFA. A person who is not party to such illegal trades may sometimes benefit from the profits made. Let me explain with an example. A broker may have used a client’s trading account without the client’s permission to conduct insider trading. The profits from this illegal trade are credited to the client’s account. The broker as the contravening party is liable to affected investors for losses incurred. However, he is not in possession of the profits made. It is the client that has the profits. The client should not be allowed to keep the profits, even though he was not party to the market misconduct. To do so would mean depriving affected investors of an opportunity to recover their losses. The new remedy will allow MAS or affected investors to apply to court to order a person not privy to the illegal trade or market misconduct to disgorge any gains made from the illegal trades. The gains will be paid into the court. The court will then assess all affected investors’ claims and distribute the sum equitably. However, a court will have the discretion not to order disgorgement if the court considers that the circumstances make it unfair to do so.
Notification of Changes in Shareholdings of Directors, Chief Executive Officers and Substantial Shareholders and Offers of Investments
17 Mr Speaker, Sir, I will now go through the amendments related to changes in the shareholdings of directors and offers of investments.
Notification of Changes in Shareholdings of Directors, Chief Executive Officers and Substantial Shareholders
18 The legal obligations for reporting of interests by directors and substantial shareholders of listed corporations are currently found in both the SFA and the Companies Act. Under the Companies Act, directors and substantial shareholders are required to notify the listed corporation of their interests and changes in interests. Under the SGX listing rules, the listed corporation is in turn required to notify investors. The aim of these reporting requirements is to ensure that the market and investors are kept informed of any changes in shareholdings of directors and substantial shareholders on a timely basis. There are also obligations for directors and substantial shareholders under the Companies Act and the SFA to notify the Singapore Exchange Limited (SGX).
19 The Bill streamlines and consolidates all notification requirements for directors and substantial shareholders in relation to their interests in listed corporations in the SFA. Directors and substantial shareholders will need to report their interests or changes in interests to the listed corporation, which in turn will inform investors of any such changes. The notification requirement is extended to any CEO who is also not a director. The current obligation for directors and substantial shareholders to separately report changes to the SGX will be removed. While these amendments streamline the current requirements, they will not reduce the amount of information disclosed to the market and investors. Similar amendments are being made to the disclosure requirements for interests in listed business trusts and real estate investment trusts.
Lowering Minimum Investment Threshold Amount for Prospectus Exemption
20 Currently, offers of investment must be accompanied by a prospectus. The SFA allows offers to be made without a prospectus if the minimum investment amount for the offer is at least S$200,000. This means that for each and every investor must invest at least S$200,000 for each transaction before the offer can be made without a prospectus. In response to industry feedback, MAS will lower this minimum investment amount to S$100,000. S$100,000 is a significant sum of money. MAS considers that a person who is willing to invest S$100,000 or more in a single transaction would possess, or have the ability to get access to, sufficient financial information to protect his own interests. The S$100,000 minimum investment amount is in line with thresholds set in other jurisdictions. The European Union’s threshold is set at EUR50,000, while Hong Kong’s is HK$500,000.
Enhancements to the Real Estate Investment Trusts (“REIT”) Regime
21 I now turn to the enhancements being made to the REIT regime. Singapore’s REIT market has developed substantially in recent years. Amendments are being made to ensure appropriate rules are in place to govern mergers and privatisations of REITs. With these amendments, the Takeover Code will apply to REITs. The Bill will also allow an offeror making a general offer for units in a REIT to compulsorily acquire the units of the dissenting minority. The offeror can do so if he has obtained acceptances of 90% or more of the units offered. Minority unitholders will also be able to require an offeror to acquire their units if the offeror has acquired 90% or more of the total units in the REIT. Similar amendments will be made for business trusts in the Business Trusts Act. These provisions being introduced mirror the compulsory acquisition provisions in the Companies Act.
22 The Bill also introduces a new provision to protect REIT unitholders. A REIT unitholder will be able to apply to court for an order to seek judicial redress in cases of oppression, unfair discrimination or prejudice. This remedy is currently available in the Companies Act and the Business Trusts Act, and should be similarly afforded to REIT unitholders.
Markets and Clearing Facilities
23 Sir, let me now turn to the amendments that deal with Singapore’s markets and clearing facilities.
Extending the Emergency Powers of MAS
24 Approved exchanges and designated clearing houses are systemically-important parts of our financial system. Any failure or disruption in these markets and clearing facilities would undermine financial stability and public confidence. Following a general review of its powers to deal with emergencies across the financial sector, MAS has assessed that it is important to extend its existing emergency powers under the SFA to deal with events that would impact approved exchanges and designated clearing houses.
25 First, MAS will be allowed to appoint statutory advisers. These advisors are to provide advice to an approved exchange or designated clearing house on the proper management of its business. The power to appoint statutory advisers can be triggered in emergency circumstances. One such circumstance would be where the exchange or clearing house is likely to become insolvent. Another would be where the entity is being mismanaged to the detriment of MAS’ regulatory objectives.
26 Second, MAS will be given powers to obtain information from any person in emergency circumstances to maintain the safe and efficient operation of a designated clearing house. For example, MAS may require information necessary for it to order the liquidation of positions held with a clearing house. This will complement MAS' existing powers in respect of approved exchanges.
Regulatory Flexibility to Deal with Market Innovation
27 Sir, allow me to now turn to the last category of amendments to the SFA. This touches on enhancing regulatory flexibility.
Definition of "Securities" and "Futures Contract"
28 The definitions of "securities" and "futures contract" are being amended. MAS will have the power to prescribe or exclude products as securities. The power to prescribe products as securities, in particular, will allow MAS to bring new products within its regulatory ambit under the SFA in a timely manner. MAS currently has the power to prescribe new contracts as “futures contracts”. The proposed amendments will give MAS the power to also exclude contracts from the definition of “futures contract”. These amendments will enable MAS to act more efficiently on market developments.
29 To conclude, the financial landscape is constantly changing. Good regulation is about balancing the needs of financial markets and the investing public. MAS will keep our regulatory regime under review to ensure that the transparency and integrity of Singapore’s financial system is upheld.
30 Sir, I beg to move.