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Regulatory Discipline Fostering Enforcement Mechanism

Regulatory Discipline Fostering Enforcement Mechanism

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Regulatory Discipline Fostering Enforcement Mechanism

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  1. 2006 OECD Asian Roundtable on Corporate Governance Seminar on Corporate Governance Development in Thailand Bangkok, 13 September 2006 Regulatory Discipline Fostering Enforcement Mechanism The Regulatory Challenge in Malaysia Nik Ramlah Mahmood

  2. 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

  3. 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

  4. Malaysia’s securities laws seek to achieve an optimal mix of criminal, civil and administrative powers Enforcement tools available to the Securities Commission • 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 Criminal action Civil action Administrative action

  5. 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

  6. 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

  7. 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

  8. 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

  9. 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

  10. 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

  11. 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

  12. 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

  13. 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

  14. 160 140 120 100 Criminal 80 Civil 60 Administrative 40 20 0 2003 2004 2005 SC’s 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

  15. 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 Examples of Recent Enforcement Actions False and misleading submissions to the SC for IPO Insider Trading Failure to discharge due diligence responsibilities

  16. 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

  17. 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

  18. Thank you Kindly refer to the website of the Securities Commission for further information regarding developments in corporate governance in Malaysia