Post on 16-Dec-2015
The 6th Asian Roundtable on Corporate Governance
Implementation and Enforcement in Corporate Governance
Nik Ramlah MahmoodSecurities Commission
Malaysia
Theme II – Session 1Agency Enforcement
Seoul, Korea2-3 November 2004
The views expressed in this paper are those of the author and do not necessarily represent the opinions of the OECD or its Member countries or the World Bank
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Agenda
Enforcement of Corporate Governance:
Introduction
Public Enforcement: Malaysia’s Experience
Issues and Challenges
I
II
III
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Agenda
Enforcement of Corporate Governance:
Introduction
I
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Post crisis, many Asian jurisdictions including Malaysia
had introduced significant legal reforms to the corporate
governance environment
Awareness of corporate governance is now significantly
greater
But developmental efforts would be stunted if not backed
by a focus on strengthening enforcement
Legal and institutional reforms in corporate governance must be backed by enforcement
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Public monitoring & enforcement by regulatory agencies
Timely and consistent
enforcement of rule violations Enforcement powers must
include ability to take action
against reputational
intermediaries
Private monitoring & enforcement by the market
Board monitoring
Shareholder monitoring
Reputational intermediaries (auditors, corporate advisers)
Other parties (investment analysts, financial press)
Enforcement of corporate governance
must be viewed holistically
Unlike developed markets, most developing markets do not enjoy strong
private (“bottom-up”) enforcement
This makes strong public (“top-down”) enforcement crucial
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core
pre
-req
uis
ites Transparency and disclosure
Market discipline is premised on the reliability of disclosures
The presence of enforcing institutionsThe integrity and efficacy of regulatory agencies and the court
system
The supporting legal frameworkThe whole range of laws in the corporate and financial system
must be firmly in place
Market maturity & level of sophisticationThe level of awareness of directors of their duties, shareholders
of their rights and the presence of reputational intermediaries
Core pre-requisites for public and private
enforcement
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Agenda
Public Enforcement: Malaysia’s ExperienceII
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Public enforcement: Malaysia’s experience
As with most developing countries private monitoring
and enforcement are at a relatively nascent stage of
development
Responsibility for corporate governance enforcement is
shared by several agencies
Regulatory agencies are endowed with strong
investigative powers and a wide range of sanctioning
options
Criminal sanctions are increasingly being
complemented by civil and administrative sanctions
Disclosure violations and false submissions - False/misleading statements in corporate submissions
- Breach of conditions of approval on corporate proposals
- False/misleading statements in prospectuses
Market offences - Market manipulation
- Insider trading
- Other market offences
Company legislation and common law
Breach of directors’ fiduciary duties
Other company law offences
Securities Legislation and Listing Standards
(1) Criminal sanctions
(2) Civil sanctions (certain cases)
(3) Administrative sanctions
Penal Code
Criminal breach of trust
Public enforcement of corporate governance is shared by several agencies
(1) Criminal sanctions
(1) Criminal sanctions
(1) Criminal sanctions
(2) Civil sanctions
Breach of exchange listing rules- periodic and continuous disclosure obligations
- Independent directors, audit committees
- related party transactions
(1) Criminal sanctions
(2) Civil sanctions
(3) Administrative sanctions
Powers
Securities
Commission(supported by
exchange front-line
regulation)
Agency
Companies
Commission
Jurisdiction
Police,Anti-Corruption Agency
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Regulatory agencies endowed with comprehensive investigative and enforcement powers
Power to seek various orders from the court
Power to impose administrative sanctions
Power to require surrender of travel documents
Power to disqualify Directors and CEOs of PLCs
Power to require production of books and records
Protection of informers and information
Power to prosecute (with consent of Attorney General)
Consistent with IOSCO’s principles of securities regulation powers of Securities Commission include:
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Securities law – The law reform towards greater civil and administrative sanctioning options began
in securities law, and now cover, inter alia, - insider trading and market offences- false and misleading submissions to regulators- false and misleading prospectus disclosures - breach of listing standards
Company law - Under the Corporate Law Reform Programme, company legislation in Malaysia is
currently being reviewed with a view towards modernisation. Reforms will likely incorporate a
greater reliance on civil and administrative enforcement options
Increasingly criminal sanctions are being complemented by civil and administrative sanctions
Caveat - In empowering regulators with administrative enforcement options, checks
and balances in the exercise of power are crucial as enforcement is taken outside the
court system. In Malaysia as with other common law countries, challenge is typically
provided for under the administrative law framework
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The relative merits of different sanctioning options
Private rights
of action
Criminal
sanctions
Civil
sanctions
Administrative
sanctions
Strong deterrent value
Subject to procedural delays of the court system
High burden of proof (‘beyond a reasonable doubt’)
Deterrent value lower than criminal sanctions
Subject to procedural delays of the court system
Burden of proof lower than criminal standard (on a balance of
probabilities)
Deterrent value lower than criminal or civil sanctions
Allows for speedy action (not subject to procedural delays of the court
system)
Regulatory agencies determine standard of proof
Need for checks and balances in exercise of power
Requires/allows for a market-based enforcement response
Subject to procedural delays of the court system
Burden of proof lower than criminal standard (on a balance of probabilities)
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Warning & public
reprimand26%
Civil actions2%
Prosecution
Other administrative
actions3%
Compound27%
38%
Disciplinary actions
4%
• Revocation of license
• Restitution• Restrain dealing
in assets• Appointment of
receivers
• Barring of submissions
• Issuance of directions
An array of different sanctioning options is crucial for effective enforcement
Nature of sanctions meted out by the Securities Commission (2002 – Aug 2004)
Corporate Governance(45.3%)
(24 cases, 40 individuals)
Fraud (5.7%)
(3 cases,11 individuals) Corporate Governance offences include:
– Providing false or misleading info on proposals/dealings in securities or affairs of company
– Fraud involving directors or management
– Mis-utilisation of public issue proceeds
– Breach of condition of SC’s approval
– Trading offences involving directors or management
Short selling & licensing
related offences
(32%)
Profile of Offences Prosecuted by the Securities Commission (1999-August 2004)
Criminal prosecution is used for serious breaches of the law
(17 cases, 18 individuals)
Futures industry Offences (17%)
(9 cases, 17 individuals)
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Increasingly a significant proportion of criminal prosecution relates to corporate governance offences
Profile of Offences Prosecuted by the Securities Commission (1999-August 2004)
17.0%
32.0%
45.3%
5.7%
0.0% 5.0% 10.0% 15.0% 20.0% 25.0% 30.0% 35.0% 40.0% 45.0% 50.0%
Corporate Governance offences
Short selling & licensing related
offenses
Futures industry offences
Fraud
24 cases, 40 individuals
17 cases, 18 individuals
9 cases, 17 individuals
3 cases, 11 individuals
Source: Securities Commission
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Case study 1: Energro Berhad (August 2004)
Issue - The case involved a restructuring and listing exercise which entailed alleged breaches of
securities law, ie, false and misleading submissions to the SC and prospectus disclosures
Enforcement action taken
- Revoked prior granted regulatory approval for listing - Directed the company to transfer monies raised from the restructuring exercise into trust
accounts to safeguard investors interests - Initiated civil enforcement action, to restrain any dealings with assets, and for restitution of
monies to affected investors/subscribers- Prosecuted promoter and accountant- Criminal trial pending
For effective enforcement of corporate governance, public enforcement agencies need a wide array of powers
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Case study 2: Kiara Emas Asia Industries Bhd (KEAIB) – August 2004
Issue - A company (KEAIB) had utilised the proceeds of its rights issue in breach conditions
of a prior granted approval of the SC. False disclosures were submitted to the SC
Enforcement action taken - Director charged for criminal breach of trust (CBT) as the preferred charge, and
in the alternative, the breach of condition of SC's approval in the utilisation of KEAIB's rights issue under securities law
- Internal accountant charged for role in submitting false information to the SC
- External auditor charged for role in submitting of false information to the SC
Regulators also need to be empowered to take action against ‘reputational intermediaries’ such as external auditors
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CLSA Reports on Corporate Governance in Asia (2001-2004)Year-on-year improvement in relation to country rating on corporate governance enforcement:
Our efforts in public enforcement have shown results
CLSA Country Ratings on Enforcement (Malaysia) – Trend Analysis
Year 2001
2002
2003
2004
Enforcement 2.0 3.0 3.5
5.0
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Agenda
Issues and ChallengesIII
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The surveillance, investigation and prosecution of corporate governance violations typically involve the overlapping jurisdictions of multiple regulators
Inter agency co-operation and information sharing at all stages are crucial
Various issues potentially arise in a multiple agency environment
During investigations, there may be restrictions either operationally or at law, which impede information sharing and co-operation, slowing down the enforcement process
Upon investigation, agencies may often discover that the preferable charge for a given wrong may lie outside their jurisdiction
Different agencies may have varying levels of capacity and resources to meet enforcement challenges
The fact that agencies are accountable to different government ministries does not facilitate co-operation
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Ministry of Domestic Trade and Consumer
Affairs
Ministry of Home AffairsPrime Minister’s Dept Ministry of Finance
Securities Commission
Companies Commission
PoliceAttorney General
Central Bank
Securities Law
May pursue certain offences
involvingcorruption
Penal Code
Consent required in
criminal prosecutions
Banking Law
Domestic regulatory agencies that may be involved in corporate governance breaches include:
Anti- Corruption Agency
Company Law
Key agencies involved in enforcing corporate governance violations of listed companies
Government ministries and other relevant agencies
In Malaysia enforcement of corporate governance may involve numerous agencies
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Working committees/dialogues
Formal agreements/arrangements
Joint training and education efforts
Overarching/national level committees
- Regular inter-agency meetings between government agencies to discuss operational issues and sharing of information
- Various MOUs were entered into between the SC and other domestic and foreign regulators (eg., between Securities Commission and Labuan Offshore Financial Authority) - Prosecutors from the Attorney General’s Chambers are seconded to the Securities
Commission, allowing speedy charges for Penal Code offences to be brought (eg., criminal breach of trust)
- A High-Level Enforcement Committee was formed chaired by the Securities Commission, which includes the Police, and the Companies Commission which reports to Prime Minister to ensure accountability
- The Securities Commission provided training programmes for the Police and the Judiciary on matters related to securities law and its enforcement
Formal and informal channels for cooperation and information sharing are vital
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Widening powers of the securities regulator:
- Would the widening of the scope of securities laws to include all offences involving elements of fraud in public listed companies make enforcement more effective?
Other possible options
The ‘hot pursuit’ model:
- The Malaysian Anti-Corruption Agency (ACA) is statutorily empowered to apply its powers of investigation and prosecution to ‘prescribed offences’ under the jurisdiction of other regulators. (eg., the Penal Code, Elections Act and Customs Act)
- Is this model relevant for the enforcement of corporate governance-type offences in a multiple regulator environment?
A dedicated agency for enforcement:
- Should enforcement reside, not with the securities regulator or the registrar of companies, but with a single agency dedicated to enforcement?
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The current review of company law under the auspices of the Corporate Law Reform Programme will, inter alia, review the merits of introducing…
A more facilitative regime for class actions A legislative framework for statutory derivative actions
Investor education is vital
.
Prospective developments:
Reducing dependence on public enforcement
Strengthening the legal foundations for private enforcement:In securities law, the trend has been towards statutorily entrenching private rights of enforcement…
- Insider trading and market offences (1997)- False and misleading prospectus disclosures (2000)- Breaches of the listing standards and the Securities Industry Act 1983 (2004)
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Developing expertise and building capacity in agency enforcement
Public enforcement agencies must be well funded
Public enforcement is resource intensive
Public enforcement agencies must have staff with appropriate investigative and prosecutional skills
Public enforcement agencies must be able to handle international
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Transparency - Meaningful disclosures of enforcement activities by regulatory agencies are crucial for accountability
Enforcement disclosures by the Securities Commission: The SC annual report is tabled before Parliament. Enforcement activity disclosures
include, inter alia:
- investigations taken- criminal prosecutions- civil and administrative actions taken
The SC website includes the annual report and quarterly updates on enforcement activity. (see www.sc.com.my)
The exercise of wide powers endowed at law – What measures need to be in place to ensure consistent and fair action? Is redress under administrative law enough – or are other simpler challenge or appellate structures necessary?
Comprehensive public enforcement powers require accountability on the part of regulators
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With comprehensive tools and wide powers, regulators must have an enforcement strategy
Use of criminal vs Civil powers or administrative
Cost vs. Benefit
Serious Offences vs. `Technical’ breaches
Quantity vs. Quality of enforcement action
When to take action on behalf of investors
Thank youKindly refer to the website of the Securities Commission for further information regarding our work on corporate governance and enforcement:
www.sc.com.my