Speeches
Published Date: 16 October 2012

Explanatory Brief: Securities and Futures (Amendment) Bill 2012 and Financial Advisers (Amendment) Bill 2012

1   The Minister for Trade and Industry and Deputy Chairman of the Monetary Authority of Singapore (MAS) today moved two Bills for first reading in Parliament, namely:

2   The Amendment Bills represent the first of a two-phase review of the Securities and Futures Act (“SFA”) and Financial Advisers Act (“FAA”).1 The Bills implement policy proposals to increase safeguards for the investing public and to regulate over-the-counter (“OTC”) derivatives.

3   MAS has conducted public consultations on the policy reforms and the draft Amendment Bills. Comments received have been incorporated, where appropriate, into the Amendment Bills. MAS’ responses to the public consultations are published on its website at www.mas.gov.sg.

KEY AMENDMENTS IN THE SF(A) BILL

4   Key amendments have been made in five broad areas:

(i) Imposing obligation on issuers to classify investment products;
(ii) Promoting more effective disclosure for retail investment products;
(iii) Safeguarding the interests of investors in unlisted debentures;
(iv) Enhancing and refining enforcement and market conduct provisions; and
(v) Regulating OTC Derivatives.

(I) Imposing obligation on issuers to classify investment products (Section 309B)

5   From 1 Jan 2012, MAS has introduced additional safeguards for the sale of more complex investment products, termed Specified Investment Products (“SIPs”),2 to retail investors. The amendments will formalise the obligations of issuers in relation to the classification of capital market products, to provide certainty on the products caught as SIPs. Issuers will be required to notify the relevant approved exchange, in the case of listed products, and/or intermediaries through which the products are offered of this classification.

(II) Promoting more effective disclosure for retail investment products

(a) Product Highlights Sheet (Sections 240AA and 296A)

6   Under Part XIII of the SFA, offers of shares and debentures, business trusts (“BT”) and collective investment schemes (“CIS”) to retail investors must be accompanied with a prospectus that is registered by MAS, unless otherwise exempt. To enhance the quality of disclosure, the amendments will require issuers to give investors a Product Highlights Sheet (“PHS”) for offers of debentures in the form of asset-backed securities and structured notes, unlisted CIS and exchange-traded funds that are made with a prospectus. The PHS highlights key information contained in the prospectus in clear, objective and simple language; it is intended to supplement and not replace the prospectus as the primary disclosure document.3

(b) Ongoing Disclosure Requirements for unlisted debentures (Sections 286 and 268A)

7   The amendments will require issuers of unlisted debentures with tenure of 12 months or longer to immediately disclose to debenture holders any information which may materially affect the risk and returns or the price or value of the debentures. Issuers will also be required to make available semi-annual reports as well as semi-annual and annual financial accounts to holders of the debentures and lodge them with the trustee.4 Where the terms of the unlisted debentures allow for redemption at the option of the holder of the unlisted debenture, issuers will also be required to make available, publicly and regularly, bid or redemption prices.

(c) Restrictions on advertisements (Sections 251, 282L)

8   Currently, advertisements for securities must not provide information which is not included in the prospectus, and must not be false or misleading. The amendments will enhance the regime governing advertisements by empowering MAS to prescribe additional requirements and restrictions on advertisements in relation to certain offers of shares, debentures, BT and CIS.5

(d) Prohibition on use of terms “capital/principal protected” (Section 309C)

9   To prevent investors from mistaking a product that may be capital/principal protected as being “capital/principal guaranteed”, the amendments will prohibit the use of the term “capital/principal protected” and any other derivative or form of this term in all disclosure documents (including the PHS), and advertising materials, in respect of an offer of a capital markets product.

(III) Safeguarding the interests of investors in unlisted debentures

10   To ensure that there is an independent party vested with the legal right and obligation to take timely collective action on behalf of retail investors in the event of default, the amendments will require issuers of debentures offered with a prospectus to appoint a trustee, with specified duties, for the entire tenure of the debentures (Sections 265A and 266).6 To further safeguard investors’ interests, MAS will be empowered to issue directions to trustees to act in the public interest, as well as to issue directions to offerors of unlisted debentures (Section 282AA).7

(IV) Enhancing and refining enforcement and market conduct provisions

(a) Enhancing MAS’ powers to investigate and take regulatory action

11   To enhance overall compliance with the SFA regime, the amendments will strengthen MAS’ powers to investigate and take regulatory action. These include the following:

12   Extending power to revoke licences and impose prohibition orders (“POs”) (Section 95, 99M and 101A) – The amendments will enable MAS to issue POs against employees of licensed holders and exempt entities who are not required to notify MAS of their conduct of regulated activities under the Representative Notification Framework. The amendments will also extend MAS’ powers to (i) revoke capital markets services licences; (ii) revoke status of an individual as a representative on the Public Register and (iii) impose POs to a wider range of situations, such as where directions issued under the SFA have been breached or where the licensee or representative has not acted in the client’s best interests.

13   Enhancing MAS’ search and investigation powers (Section 163A, 164 and 165) – The amendments will allow MAS to enter premises without a warrant in connection with an investigation under the SFA. MAS will also be able to apply for search warrants without having to first issue a production order, if there are reasonable grounds for suspecting that the documents would be concealed, removed, tampered with or destroyed.

(b) Enhancing safeguards for retail customers’ moneys held with financial institutions (Section 104)

14  Currently, holders of capital markets service licence are permitted to withdraw customers’ moneys maintained in segregated trust accounts, subject to customers’ written authorisation.  Such arrangements may not be in the best interest of retail investors, as they will lose the trust protection accorded under the SFA should the licensee default.  The amendment will tighten the regime to disallow such arrangements as MAS may prescribe.

(c) Enhancing civil remedies for market misconduct (Sections 234, 236, 236D, 236G, 236I, 237 and 238)

15   The amendments will expand the market conduct provisions to allow investors who have suffered loss as a result of relying on false or misleading statements or omissions to obtain compensation.

16   For insider trading cases, the compensation which a claimant may recover from the contravening person is currently based on the difference between the price transacted by the claimant and the notional price if the contravention had not occurred. To more accurately reflect the damages that should be paid in insider trading cases, the amendments will provide for compensation to be based on the difference between the price transacted by the claimant and the notional price if the inside information had been generally available. 

(d) Refinement of false trading and market rigging provisions (Sections 197 and 206)

17   Pursuant to a suggestion from the Court of Appeal in Tan Chong Koay & anor v Monetary Authority of Singapore [2011] SGCA 36, the amendments will clarify the state of mind which a person must possess in order to be liable for false trading or market rigging. A person will be liable if the act is done knowingly or recklessly, or with the purpose of creating a false or misleading appearance.

(V) Regulation of OTC Derivatives

18   The amendments will strengthen the regulation of OTC derivatives markets, in line with recommendations by the G20 and the Financial Stability Board (“FSB”).8

(a) Introduce new regulatory regime for trade repositories (New Part IIA)

19 Part IIA will introduce a new regulatory regime for trade repositories, which collect and maintain information on “securities”, “futures contracts” or “derivatives contracts”9. Trade repositories licensed by MAS will be subject to regulation10, including obligations on the safe and efficient operation of trade repositories, and obligations to provide MAS, and other relevant authorities, access to information maintained by the trade repositories.

(b) Extension of current regulatory regime for clearing facilities to OTC derivatives (New Part III)

20   The existing Part III requires any clearing facility that intends to clear or settle transactions in “securities” or “futures contracts” to notify MAS before such establishment or operation; MAS is able to designate those assessed to be systemically-important to be subject to regulation under the SFA. The amendments will introduce an authorisation approach for all clearing facilities that clear or settle transactions in “securities”, “futures contracts” and “derivatives contracts”. A corporation seeking to establish or operate a clearing facility for such transactions may do so only if it is either approved as an approved clearing house (“ACH”) or recognised as a recognised clearing house (“RCH”) by MAS, and will be subject to regulation under the SFA.

(c) Mandatory Reporting and Clearing of Certain OTC Derivative Transactions (New Parts VIA and VIB)

21   The new Parts VIA and VIB will introduce requirements concerning mandatory reporting and clearing of certain derivatives contracts prescribed by MAS respectively. Mandatory reporting will apply to financial institutions and large non-financial entities, for transactions in prescribed derivatives contracts which are either booked or traded in Singapore. Entities subject to the reporting obligation will be required to report information regarding such transactions to a trade repository licensed by MAS. Mandatory clearing will apply to financial institutions and large non-financial entities, for transactions in prescribed derivatives contracts which are booked in Singapore.  Entities subject to the clearing obligation will be required to clear such transactions on a clearing facility regulated by MAS which performs the role of a central counterparty. To address potentially overlapping obligations in cross-border transactions, MAS may consider the above requirements met if a party is subject to comparable obligations and requirements under the laws and practices of a foreign jurisdiction.

KEY AMENDMENTS IN THE FA(A) BILL

22 Key amendments have been made in four broad areas:

(i) Enhancing MAS’ powers to investigate and take regulatory action;
(ii) Widening scope of provision on false and misleading statements;
(iii) Extending civil liability to the financial adviser’s (FA’s) obligations to furnish product information to investors; and
(iv) Empowering court to have regard to claimant’s reasonable effort in resolving dispute before commencing civil action in court.

(I) Enhancing MAS’ powers to investigate and take regulatory action

23   The amendments in the FA(A) Bill are similar to those in the SF(A) Bill under section (IV) titled “(IV) Enhancing and refining enforcement and market conduct provisions” and outlined in paragraphs 11-14 of that section.

24   Specifically, these are in relation to:

(a) Extending power to revoke licences and impose prohibition orders (Sections 19, 23J and 59); and

(b) Enhancing MAS’ search and investigation powers (Section 72A, 73 and 74).

(II) Widening scope of provision on false and misleading statements (Section 26)

25   The amendments will make it an offence to make a false or misleading statement in connection with the provision of any financial advisory service if the FA makes the statement without caring whether the statement is true or false or if the FA knows or ought reasonably know that the statement is false or misleading. It will also be an offence to use manipulative or deceptive devices to perpetrate fraud or deception in connection with the provision of any financial advisory service. Investors who have suffered loss will also be allowed to claim damages from the contravening person.

(III) Extending civil liability to the FA’s obligations to furnish product information to investors (Section 25)

26   The amendments will impose civil liability on an FA who fails to disclose to its client all material information relating to any designated investment product.

(IV) Empowering court to have regard to claimant’s reasonable effort in resolving dispute before commencing civil action in court (Section 98C)

27   The amendments will enable a court, in a civil action commenced by an investor, to have regard to whether the investor had made a reasonable effort to minimise his loss and resolve the dispute before commencing the action in court. Apart from resolving the dispute directly with the FA, an investor may also go through an approved dispute resolution scheme.

1 The second phase of amendments for the SFA and FAA is targeted to be carried out in the second half of 2013. This will include amendments to extend the current regulatory regimes for market operators and capital market intermediaries to OTC derivatives, as well as amendments arising from broader policy reviews.
2 SIPs are defined as any capital markets product other than Excluded Investment Products (EIPs), which comprise simpler products such as shares, plain vanilla bonds, units in business trusts and units in real estate investment trusts.
3 In the interim, the Guidelines on the Product Highlights Sheet (SFA G13-10) has been issued to provide guidance to issuers and their professional advisers on the form and content of the PHS. 
4 The current requirement to lodge these documents with MAS will be removed.
5 Pursuant to this power, MAS will prescribe requirements for advertisements to present a fair and balanced view of the product and not describe a product as being comparable to a bank deposit in subsidiary legislation.
6 SGX Listing Rules already impose requirements on issuers of listed debentures to appoint a trustee.
7 MAS will impose obligations on offerors of unlisted debentures to provide a cooling-off period for offers of unlisted debentures, similar to that imposed on distributors of unlisted debentures contained in the Notice on the Cancellation Period of Unlisted Debentures

[SFA 04/13-N02]

.
8 Other legislative amendments which require further study and consideration will be proposed and implemented in phases, in line with international developments. 
9 “Derivatives contracts” is defined in Section 2 of the SFA and is intended to broadly apply to OTC derivatives as understood by the industry, for example, equity and interest rate swap, option and forward contracts.
10 Regulation will be in line with international standards, i.e. The Principles for Financial Market Infrastructure, issued by the Committee of Payment and Settlement Systems and the Technical Committee of the International Organization of Securities Commissions, April 2012.