Regulatory Discipline Fostering Enforcement Mechanism

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Regulatory Discipline Fostering Enforcement
Mechanism
2006 OECD Asian Roundtable on Corporate
Governance Seminar on Corporate Governance
Development in Thailand
Bangkok, 13 September 2006

• The Regulatory Challenge in Malaysia

Nik Ramlah Mahmood
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In developing markets, regulatory discipline is
key

• Legal and institutional reforms must be backed by
  regulatory enforcement
• International community increasingly look to
  enforcement as the main measure of corporate
  governance
• Developing countries need time to promote
  corporate governance awareness and strengthen
  private enforcement
• Shareholder activism at nascent stage
• Strong public enforcement is crucial

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Effectiveness of regulatory discipline depends on
a variety of factors

• Availability of a wide array of enforcement tools
• Regulators that are well-resourced
• Strong coordination where multiple agencies are
  involved
• Appropriate legal framework and judicial process

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Enforcement tools available to the Securities
Commission
Malaysias securities laws seek to achieve an
optimal mix of criminal, civil and administrative
powers

• Criminal action
• Civil action
• Administrative action

• Fines
• Imprisonment
• Compounds
• Civil Relief
• Civil Recovery and Penalty
• Power to disqualify CEO and directors
• Warnings and cautions
• Revocation of approvals
• Stop orders
• Revocation/Non-renewal of licence
• Barring of submissions
• Private Reprimand
• Public Reprimand
• Penalties

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Criminal prosecution may not always be appropriate

• High burden of proof results in inordinate delays
• Costs and resources may be disproportionate to
  the results
• Legal and judicial process may be cumbersome
• Reactive, focuses on punishing wrongdoers and not
  on compensating victims

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Power to compound provides an alternative to
criminal prosecution

• Power is exercisable by the Chairman with the
  written consent of the Public Prosecutor
• Accepting a sum of money not exceeding the
  prescribed limit
• Thereafter no further action can be taken against
  the same person for the same offence
• Not applicable for serious offences like
  manipulation and insider trading

Section 124 Securities Industry Act 1983 Section
139 Securities Commission Act 1993
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SC has powers to apply to court for various orders

• Powers allow for pre-emptive action
• Orders include injunction, receivership, Vesting
  Order and removal of director from a public
  company
• A person who disobeys would be in contempt of
  court and liable to imprisonment or fine or both

Section 100 Securities Industry Act 1983
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and can institute civil proceedings for market
offences

• False trading and market rigging
• Market manipulation
• False or misleading statements
• Fraudulent inducement
• Insider trading

Section 90 Securities Industry Act 1983
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Persons suffering loss as a result of certain
securities offences can also bring civil action

• Available for both primary and secondary market
  offences
• Criminal conviction is not a prerequisite
• Must prove loss which can include unrealised loss
• Exercise of power dependent on other factors

Section 90A Securities Industry Act
1983 Section 153 Securities Commission Act 1993
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SC can also seek redress on behalf of aggrieved
persons if it is in the public interest to do so

• In relation to primary market offences
• In relation to insider trading
• There is no need for a criminal action to precede
  such civil action

Section 90 Securities Industry Act 1983 Section
155 Securities Commission Act 1993
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SC can exercise various administrative powers

• Require compliance with notices, circulars,
  guidelines etc
• Impose penalty not exceeding RM1 million
• Issue public reprimand
• Refuse to accept submissions
• Issue public statements on certain matters
• Appoint independent auditor for licensed persons
• Issue directions to stock exchange or clearing
  house
• Ensure compliance with conditions of licence

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Regulatory enforcement must be complemented by
other initiatives

• High quality information disclosure
• Those with poor records restricted from seeking
  funds from public

Disclosure-Based Regulation

• Mandatory duty for auditors
• Protection against retaliation

Whistleblowing provisions

• Statement of Principles and Code of Best
  Practices to Institutional Shareholders
• Enhance institutional shareholders activism

Shareholder activism
Education /Training

• Directors mandatory accreditation programme
• Voluntary CPE programmes

Investor Alerts

• Warnings posted on website
• Wanted persons
• Persons to assist with investigations

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The media has a key role

• Manage issues
• Inform and educate the public
• Instill awareness
• Build goodwill
• Neutralise criticisms
• Seek assistance
• Reassure and restore confidence

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SCs Enforcement actions 2003-2005

• Drop in criminal actions since 2003
• Enhanced powers on administrative and civil
  action in 2004 and corresponding rise in use of
  non-criminal actions

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Examples of Recent Enforcement Actions

• Hospitech Resources Berhad
• Revocation of approval for listing
• Reimbursement of IPO money
• Energro Berhad
• Revocation of approval for listing and
  restructuring
• Civil enforcement action for restraint of dealing
  in assets and restitution
• Prosecuted accountant and advisor
• Public reprimand of principal advisers and
  suspension of submissions to the SC
• Padiberas Nasional Berhad (Bernas)
• Civil enforcement action for insider trading
• Restitution of disgorged profits for aggrieved
  investors
• Ocean Capital Berhad
• Public reprimand of reporting accountant and
  suspension of submissions to the SC
• Public reprimand of principal adviser

False and misleading submissions to the SC for
IPO
Insider Trading
Failure to discharge due diligence
responsibilities
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Our enforcement efforts acknowledged
internationally

• Doing Business in 2006 World Bank
• Malaysia ranked amongst the top three in
  regulating the liability of directors and in
  requiring the most disclosure of related-party
  transaction
• CLSA/ ACGA CG Watch 2005
• Enforcement publicly demonstrated in Malaysia
• Enforcement milestones achieved through several
  actions taken relating to misutilisation of
  public issue proceeds and submission of false
  information to the SC
• World Bank Report on the Observance of Standards
  and Codes (ROSC)
• Full score for compliance with International
  Financial Reporting Standards
• Noted the strengthening of disclosure rules and
  corporate whistleblower protection

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Lessons learnt

• View enforcement holistically
• Targetted and pre-emptive approach
• Wider use of enforcement tools and clear criteria
  on actions to be taken
• Centralise accountability for all enforcement
  action
• Leverage on the media as a tool of enforcement
• Appropriate arrangements with other regulators
  vital

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Thank you

• Kindly refer to the website of the Securities
  Commission for further information regarding
  developments in corporate governance in Malaysia
• www.sc.com.my