Explanatory Brief: Securities and Futures (Amendment) Bill 2016
1 The Minister for Education (Higher Education and Skills) and Second Minister for Defence, Mr Ong Ye Kung, on behalf of Mr Tharman Shanmugaratnam, Deputy Prime Minister and Minister in charge of the Monetary Authority of Singapore (“MAS”), today moved the Securities and Futures (Amendment) Bill 2016 (“Bill”) for First Reading in Parliament.
2 The MAS is introducing legislative amendments to the Securities and Futures Act (Cap. 289) (“SFA”) to implement policy proposals aimed at ensuring that the capital markets regulatory framework in Singapore keeps pace with market developments and is aligned to international standards and best practices.
3 The Bill completes MAS’ two-phase review to implement over-the-counter (“OTC”) derivatives regulatory reforms,1 in line with recommendations made by the Financial Stability Board (“FSB”) and the Group of Twenty (“G20”) to strengthen regulation of OTC derivatives markets following the 2008 global financial crisis. MAS is also introducing amendments aimed at enhancing regulatory safeguards for retail investors, enhancing the credibility and transparency of the capital markets, and strengthening MAS’ ability to take enforcement action against market misconduct.
4 MAS conducted public consultations on significant policy changes and the proposed SFA amendments between 2012 and 2015.2 MAS has further engaged key industry stakeholders where appropriate before finalising the Bill.
KEY PROVISIONS IN THE BILL
(I) Regulation of OTC derivatives
5 The Bill will extend the scope of the SFA to OTC derivatives by empowering MAS to regulate market operators and capital markets intermediaries in respect of their OTC derivatives activities. Regulatory oversight of commodity derivatives, currently under the Commodity Trading Act (Cap. 48A) administered by IE Singapore, will consequently be transferred to the SFA.
6 MAS will also be empowered to require derivatives contracts that meet prescribed criteria to be traded on organised trading facilities or exchanges, instead of over-the-counter (“trading mandate”). This complements MAS’ existing powers to require reporting of trade information and central clearing of certain OTC derivatives contracts, and is the last key component of OTC derivatives reforms recommended by the FSB and G20 to improve transparency in the derivatives market. MAS will take into account liquidity conditions in Singapore and international developments in determining whether any derivatives contracts should be subject to the trading mandate.
7 The Bill will introduce new terms such as “exchange-traded derivatives contract”, with consequential rationalisation in the definition of existing terms such as “securities”, “futures contract”, “debenture” and “derivatives contract”. Various SFA provisions will be consequentially amended or repealed based on the new and re-defined terms.
(II) Enhance regulatory safeguards for retail investors
(a) Widen regulatory perimeter to products that are in substance capital markets products
8 The Bill will extend the scope of the SFA to non-conventional investment products, so that investors in such products are accorded the same regulatory safeguards as investors in capital markets products.3 To this end, the Bill will:
(i) Empower MAS to prescribe products as “debentures”. This will allow MAS to subject precious metals buy-back arrangements,4 which are in substance equivalent to collateralised borrowing, to the regulatory framework for debentures; and
(ii) Amend the definition for a collective investment scheme (“CIS”) such that there need not be pooling of investors’ contributions and scheme profits for an arrangement to be regarded as a CIS, so long as the scheme property is collectively-managed. Exclusions will be provided to ensure that schemes which are predominantly for the consumption of property as opposed to investment purposes, are not brought within MAS’ regulatory ambit.
(b) Refine non-retail investor classes
9 The Bill will refine the accredited investors (“AIs”) and institutional investors (“IIs”) definitions, to better reflect categories of non-retail investors identified based on their wealth or income and financial knowledge respectively. Under MAS’ capital markets regulatory framework, the full suite of regulatory safeguards is aimed primarily at retail investors. Intermediaries are exempted from certain requirements when dealing with non-retail investors who are generally considered better able to look after their own interests.
10 The wealth criteria for an individual to qualify as an AI will be tightened such that the net equity of the individual’s primary residence can only contribute up to S$1 million of the current S$2 million net personal assets threshold. Alternatively, individuals will be able to qualify as an AI if they have S$1 million of financial assets (net of any related liabilities). Individuals whose wealth is concentrated in their primary residence and have little liquid assets otherwise will no longer qualify as AIs. An “opt-in” regime will also be introduced to give investors who meet the prescribed AI wealth or income thresholds the choice of benefiting from the regulatory safeguards afforded to retail investors.5
11 The II definition will be widened to include persons professionally active in the capital markets such as financial institutions regulated by foreign regulators, foreign central governments and sovereign wealth funds. However, statutory bodies, other than prescribed statutory boards, will no longer be deemed as IIs.6
(III) Enhance credibility and transparency of capital markets
(a) Securities short-selling requirements
12 The Bill will introduce requirements to enhance transparency on the level of short-selling in securities listed on Singapore’s approved exchanges. Market participants will be required to specifically indicate short-sell orders to the relevant exchange.7 They will also be required to report short positions above a prescribed threshold amount to MAS. Aggregate information on the level of short-sell orders and short positions will be published. The requirements are in line with the principles on regulation of short-selling set by IOSCO, the international standard setting body for the securities market.
(b) New regulatory framework for financial benchmarks
13 The Bill will introduce a new regulatory framework for financial benchmarks. Financial benchmarks play an important role in the pricing of financial instruments and contracts. The framework will strengthen the governance processes and accountability mechanisms in the determination of financial benchmarks.
14 The Bill will empower MAS to designate key financial benchmarks and to regulate administrators of, and submitters who contribute information required to compute, such designated benchmarks. The MAS will also have powers to direct specified persons, such as banks, to submit information required to compute the designated benchmark to the administrator of such benchmark. This is to ensure that there is a sufficient pool of submitters to provide information to the administrator of a systemically-important designated benchmark, to enable an accurate and representative computation of the benchmark. The Bill further introduces criminal sanctions and civil penalties to deter manipulation of financial benchmarks.
(IV) Strengthen enforcement regime against market misconduct
(a) Clarify scope of prohibition against false or misleading disclosures (section 199)
15 The Bill will clarify that the SFA prohibits disclosures where a material aspect of the statement is false or misleading and is likely to have an effect on the market price of the securities, securities-based derivatives contract or CIS unit, regardless of the significance of the price effect. Disclosures where a material aspect of the statement is false or misleading may not necessarily result in significant price movements because of other contemporaneous and irrelevant market factors such as general market sentiment or market liquidity, and yet may wrongly influence investors to trade in the market. The word “material” in section 199 is meant to only describe the nature of the false or misleading particular, in the sense that what is false or misleading must not be minor or unimportant. The word does not describe the extent of the market effect that the statement has on the price of securities, securities-based derivatives contract or CIS unit.
(b) Introduce statutory definition of “persons who commonly invest” for prohibitions against insider trading
16 The Bill will introduce a statutory definition of “persons who commonly invest” to better reflect market participants who are accustomed to or likely to invest in the particular product in question. In determining liability for insider trading, the term acts as a reference point for assessing whether a particular information is generally available and whether it is likely to have a material price impact by influencing the behaviour of common investors.
17 In Lew Chee Fai Kevin v MAS  2 SLR 913, the Court of Appeal held that “persons who commonly invest” in securities were the “reasonable investors” who possessed general professional knowledge about when to buy or sell securities. However, the Court’s definition of “general professional knowledge” was of a very high standard and not reflective of the average investor in the market. The Court had also excluded the daily retail investors and the expert investors who specialize in the research of investing in securities.
18 This statutory definition will strengthen MAS’ ability to pursue insider trading cases without having to meet an unrealistically high standard for “persons who commonly invest”. The definition would also allow the Court to take into account the reality that there can be different classes of “persons who commonly invest”, each with a different level of knowledge and expertise. A set of guidelines would be issued to elaborate on MAS’ policy stance behind the statutory definition and to provide guidance on its interpretation.
(c) Confer priority on MAS’ civil penalty claims
19 The Bill will confer priority on MAS’ civil penalty claims over private unsecured claims that accrue subsequent to the contravention of the SFA, in alignment with the priority that is accorded to government claims under section 10(1) of the Government Proceedings Act (Cap. 121). Such priority will strengthen MAS’s ability to resist attempts to divert funds frozen by MAS for satisfaction of civil penalties imposed under the SFA towards satisfaction of the contravening person’s private debts.
(d) Standardisation of civil penalty ceiling
20 The Bill will standardise the maximum penalty that can be awarded to the greater of (i) S$2 million, or (ii) 3 times the amount of benefits gained or losses avoided (“Benefit”) for all civil penalty cases.
21 Currently, in cases where a Benefit is obtained, the maximum civil penalty available is capped at the greater of (i) S$50,000 (or S$100,000 for corporation), or (ii) 3 times the Benefit obtained. Where the value of Benefit obtained is small, this may not adequately reflect the culpability of the offender or achieve sufficient deterrence. This is also incongruent with the maximum civil penalty of S$2 million that can be awarded for cases where no Benefit is obtained. A consistent civil penalty ceiling will ensure that the civil penalty quantum is commensurate with the gravity of the misconduct.
(V) Other technical amendments
22 The Bill will also introduce several technical amendments aimed at effecting revisions relating to operational matters, such as:
1 The first phase of legislative amendments were passed by Parliament in November 2012. The Securities and Futures (Amendment) Act 2012 extended the capital markets regulatory framework to OTC derivatives activities of clearing houses and trade repositories, and provided for mandatory trade reporting and central clearing of certain OTC derivatives contracts.
(i) Streamlining the process by which investors can pledge their securities as collateral with intermediaries, to support a requirement for investors to cover at least 5% of their net open positions by the end of each trading day;
(ii) Enabling MAS to take into account a wider range of factors beyond the laws and practices of a foreign jurisdiction when deciding whether to recognise a CIS constituted in that foreign jurisdiction for offer to retail investors in Singapore;
(iii) Enhancing the regulatory regime governing real estate investment trusts (“REIT”) and their managers to reduce potential conflicts of interest with REIT unitholders; and
(iv) Clarifying that court orders sought under section 324 of the SFA are available to support any investigation conducted by MAS, regardless of whether the investigation is carried out under the SFA or the Criminal Procedure Code.
2 Public consultations conducted on the proposed SFA amendments, to which MAS will be publishing its response to feedback received today, can be found at the following links: (i) Consultation Paper on Proposals to Enhance Regulatory Safeguards for Investors in the Capital Market (P012-2014); (ii) Consultation Paper on Proposed Amendments to the Securities and Futures Act on Regulation of Financial Benchmarks (P013-2014); (iii) Consultation Paper on Proposed Amendments to the SFA (P004-2015); (iv) Consultation Paper on Proposed Amendments to the Securities and Futures Act (Part XII & Section 324) (P013-2015); and (v) Consultation Paper on Proposed Amendments to the Securities and Futures Act, Financial Advisers Act and Trust Companies Act (P015-2015).
3 MAS’ capital markets regulatory safeguards are aimed at ensuring investors are provided with timely and adequate information to make informed investment decisions, and are dealt with fairly by capital markets intermediaries.
4 Such arrangements generally involve the sale of gold, silver or platinum with a guaranteed buy-back at an agreed price that is higher than the original sale price at a future date.
5 This will be introduced via subsidiary legislation. AI-eligible customers would have to make a conscious choice to opt-in for the AI status. An AI-eligible customer may opt for AI status and willingly forgo the higher level of regulatory safeguards that are afforded to retail investors, to more easily access a wider range of financial products that may be riskier or more complex.
6 Statutory bodies that fall out of the revised II definition (e.g. town councils) may nonetheless be eligible to opt in to AI status under the AI regime instead.
7 This will give statutory backing to the Singapore Exchange’s current trading rules.