SECURITIES COMMISSION MALAYSIA REGULATORY PHILOSOPHY · principles-based, outcomes-oriented ......

SECURITIESCOMMISSIONMALAYSIAREGULATORYPHILOSOPHY

Securities Commission Malaysia3 Persiaran Bukit Kiara, Bukit Kiara, 50490 Kuala Lumpur. Tel: +603 6204 8000 Fax: +603 6201 5082 Website: www.sc.com.my3 Persiaran Bukit Kiara, Bukit Kiara, 50490 Kuala Lumpur. Tel: +603 6204 8000 Fax: +603 6201 5078 Websites: www.sc.com.my www.investsmartsc.my

COPYRIGHT©Securities Commission Malaysia 2015All rights reserved. No part of this publication may be reproduced, stored in or introduced into a retrieval system, or transmitted in any form or by any means (graphical, electronic, mechanical, photocopying, recording, taping or otherwise) without the permission of the Securities Commission Malaysia.

DISCLAIMERThis book aims to provide a general understanding of the subject and is not an exhaustive write-up. It is not intended to be a substitute for legal advice nor does it diminish any duty (statutory or otherwise) that may be applicable to any person under existing laws.

CONTENTSPREFACE v

INTRODUCTION 1ROLE AND FUNCTION 1 THE CONCEPT OF REGULATION 1SC’S REGULATORY FUNCTIONS 1 WHY WE REGULATE THE CAPITAL MARKETS 2WORKING TOGETHER 3EVOLUTION OF OUR REGULATION 5

PILLARS OF REGULATION

PROPORTIONALITY 8

TRANSPARENCY 9

REGULATORY OUTCOMES 11

REGULATION 121. REGULATORY NEUTRALITY 122. PRINCIPLES-BASED, OUTCOMES-ORIENTED REGULATION 14

INVESTOR PROTECTION 153. EMPOWERMENT OF INVESTORS 15

GROWTH WITH GOVERNANCE 174. COMPETITIVE CAPITAL MARKET 175. GOOD GOVERNANCE–AN INTEGRAL PART OF BUSINESS CULTURE 206. RESPONSIBLE FINANCIAL INNOVATION 227. FAIR AND ORDERLY CAPITAL MARKET 23

SUPERVISION AND ENFORCEMENT 248. FORWARD-LOOKING AND RISK FOCUSED SUPERVISION 249. STRONG AND EFFECTIVE STRATEGIC ENFORCEMENT APPROACH 28

CONCLUSION 29

SECURITIES COMMISSION MALAYSIA REGULATORY PHILOSOPHY | v

The Securities Commission Malaysia (SC) is a regulatory body mandated by Parliament to develop and regulate the Malaysian capital market. As the regulator, the SC is involved in the rule-making, authorisation, supervision and enforcement aspects of the capital market, playing a crucial role in ensuring a robust framework that continues to facilitate growth for the country’s economic prosperity. We aim to promote and maintain a fair, efficient, secure and transparent capital market, as well as facilitate the orderly development of a capital market that is innovative and competitive.

Investor demands and technological advancements have spurred product innovation, driven complexity in products, and created new ways and means of doing business in an age of digital disruption. These would have the effect of increasing participation in the market by promoting capital flows, which in turn would contribute to greater liquidity, encourage efficient allocation of capital and promote financial stability of the market. However, with an increasingly competitive and dynamic capital market environment, regionally and globally, our regulation must embrace these changes and thrive through them.

We seek to communicate to our stakeholders how we carry out our regulatory functions and what they can expect from us in the coming years as we fine-tune the design of our framework based on the nine regulatory outcomes detailed in this document.

In delivering these outcomes, we will continue to apply the principles of proportionality and transparency. Proportionality allows us to calibrate our regulation to commensurate with the risks posed by the markets, market participants, products and services and the standards of conduct practised in the market. Considering the importance of behaviour on trust and confidence in the capital market, we hope to shape behaviour and reinforce good conduct by communicating our expectations as well as provide relevant and meaningful information to our stakeholders as part of our transparency principle.

Securities Commission MalaysiaMarch 2015

PREFACE

SECURITIES COMMISSION MALAYSIA REGULATORY PHILOSOPHY | 1

INTRODUCTION

ROLE AND FUNCTION

Securities Commission Malaysia (SC), established under the Securities Commission Act 1993 (SCA), is responsible for developing and regulating the securities and derivatives markets in Malaysia,1 collectively referred to as the capital market. Our functions and powers are set out in the SCA, the Capital Markets and Services Act 2007 (CMSA) and the Securities Industry (Central Depositories) Act 1991 (SICDA). Collectively, these laws are referred to as securities laws.

THE CONCEPT OF REGULATION

The concept of regulation refers broadly to the rule-making, authorisation, supervisory and enforcement processes undertaken by SC in the capital market. Rule-making is the creation of formal standards that must be followed by individuals and firms. Authorisation is a gatekeeping function that regulates the entry of a person or product into the market. Supervision ensures continued observance and compliance with the standards created and allows us to monitor actual, potential or perceived risks. Enforcement fosters compliance by ensuring that any breach is met with commensurate sanctions.

Our regulation of the capital market involves a range of rule-making, authorisation, supervision and enforcement functions, as the dynamics among these four processes play a crucial role in ensuring that our capital market framework is robust and continues to facilitate growth.

SC’S REGULATORY FUNCTIONS

SupervisionAuthorisationRule-making Enforcement

1 Capital market activities carried out in Labuan are regulated by the Labuan Financial Services Authority.

2 | SECURITIES COMMISSION MALAYSIA REGULATORY PHILOSOPHY

WHY WE REGULATE THE CAPITAL MARKETS

Our objectives of capital market regulation are aligned with the International Organization of Securities Commissions (IOSCO) objectives of securities regulation.

We regulate the capital market to–

These three objectives collectively contribute to promoting trust and confidence. The capital market is a conduit that enables capital to be mobilised to those who need it and its related risks to be borne by those who are willing to assume them. In a system where risks and rewards are exchanged, it is imperative that everyone trusts that these risks and rewards will be allocated fairly and efficiently, on an informed basis.

Hence, regulation seeks to promote trust by ensuring dissemination of relevant and accurate information in a timely manner. Such disclosure contributes to the integrity of the price formation process, which is essential for markets to operate in a fair manner.2 A reliable price formation process builds confidence by reducing pricing discrepancies, which lowers transaction and search costs for participants.

A key component of maintaining trust and confidence in the market is the preservation of market integrity. Malaysia’s capital market regulation seeks to promote market integrity in various ways. These include imposing fit and proper requirements for licensed and registered persons, establishing mandatory standards of conduct, as well as requiring approval and disclosure for products that are accessible to retail investors. These requirements are important as the general public’s willingness to participate in the capital market relies upon their confidence in the quality of intermediaries, markets, products, services and information made available to them.

Regulation is designed to reduce systemic risk. Systemic risk refers to the potential of

Protect investors

Ensure fair, efficient,

and transparent

markets

Reduce systemic

risk

2 Other than disclosure, regulation can also contribute to the creation of fair markets by promoting transparency of trading and detecting and deterring manipulation as well as other unfair trading practices.


any widespread adverse effect on the financial system and thereby on the wider economy. Factors which can give rise to systemic risk may include the design, distribution or behaviour under stressed conditions of certain investment products; the activities or failure of a regulated entity; a market disruption; or an impairment of a market’s integrity. Systemic risk can also take the form of a more gradual erosion of market trust or confidence.3 Regulation should therefore aim to reduce the risk of failure, while at the same time ensuring that failure of markets and market participants will not have significant detrimental effects on the financial welfare of citizens and the economy as a whole.

Through the exercise of our regulatory functions, we seek to achieve our core regulatory objectives of investor protection; ensuring fair, efficient and transparent markets; and reduction of systemic risk – an important part of encouraging and promoting the growth of our market.

WORKING TOGETHER

The SC as an institution reports to the Minister of Finance. In carrying out our regulatory functions, we work closely with other government agencies, regulatory bodies and industry associations.4 These government agencies and regulatory bodies include the Attorney-General’s Chambers, Bank Negara Malaysia (BNM),5 Royal Malaysian Police, Ministry of Domestic Trade, Co-operatives and Consumerism, as well as the Companies Commission of Malaysia, among others.

Attorney-General’s Chambers

Under the Federal Constitution, the Attorney-General as the Public Prosecutor has the power, exercisable at his discretion, to institute, conduct or discontinue any proceedings for an offence. When pursuing criminal enforcement, we are subject to the oversight of the Attorney-General’s Chambers. The commencement of any criminal prosecution and the offer of any compound under securities laws require the written consent of the Public Prosecutor.

3 Mitigating Systemic Risk – A Role for Securities Regulators (IOSCO, 2011) www.iosco.org/library/pubdocs/pdf/IOSCOPD347.pdf

4 These industry associations include the Association of Stockbroking Companies Malaysia, Malaysian Investment Banking Association, Malaysian Futures Brokers Association, Malaysian Association of Asset Managers, Association of Trust Companies Malaysia, Financial Planning Association of Malaysia and Malaysian Financial Planning Council.

5 Central Bank of Malaysia.


Bank Negara Malaysia

As the capital market is a key component of the broader financial market, the oversight of the financial market is the shared responsibility of both BNM and SC. Financial institutions6 are permitted to carry out specified capital market activities as registered persons7 and are required to comply with all relevant guidelines issued under securities laws.

We collaborate with BNM in areas such as formulation of policies and amendments to legislation, regulation and supervision of entities that come under our joint regulatory oversight, supervision of the payment system, mutual recognition of financial planners and financial advisers, as well as investigation and enforcement. This collaboration is encapsulated in the 2012 Memorandum of Understanding (2012 MoU).8

The 2012 MoU enhances and extends the collaboration and information sharing to areas that are critical in managing threats to financial stability and systemic risk, including the supervision of financial groups, management of financial crisis, supervision of money markets and derivatives market, combating threats relating to money laundering and terrorism financing, and the supervision of auditors of financial institutions.

Exchanges

Securities laws recognise the role of the stock and derivatives exchanges as market operators and their statutory duty to maintain an orderly and fair market.

The exchanges are also responsible for supervising their participants9 to ensure that they observe the exchanges’ business rules, and in the case of listed corporations, the listing requirements. Following its demutualisation, Bursa Malaysia Bhd was listed on its own stock exchange. In order to ensure that the exchanges continue to pursue their public interest mandate, securities laws provide for, among others, SC’s oversight of the exchanges as a frontline regulator and a requirement that one third of the board members of the exchange holding company and its exchanges consist of public interest directors.

6 As defined under section 2 of the Central Bank of Malaysia Act 2009.7 Section 76 of the CMSA, together with Part 1 of Schedule 4 of the CMSA.8 The 2012 MoU builds upon the past two MoUs signed in 2002 and 2007 respectively. 9 “Participants” include stockbroking companies and derivatives broking companies.


Self-Regulatory Organisations

Securities laws also provide for the recognition of self-regulatory organisations (SROs). An SRO is a member-operated organisation that establishes and enforces minimum standards and rules of conduct. The Federation of Investment Managers Malaysia (FIMM), whose members include unit trust distributors and their agents, is a recognised SRO under section 323 of the CMSA. As an SRO, securities laws impose an obligation on FIMM to promote appropriate standards of conduct among its members.

International Organization of Securities Commissions

The increasingly globalised nature of financial markets demands that our regulatory framework reflects the reality of interconnectedness in financial markets. As regulatory disparities across jurisdictions incentivise regulatory arbitrage, it is essential for us to ensure that our approach to regulation is aligned with prevailing international standards and best practices.

For securities regulators worldwide, such standards are issued by the IOSCO, which is a multilateral body representing securities regulators from 105 jurisdictions. The IOSCO members are collectively responsible for regulating more than 95% of the world’s capital markets. The standards issued by IOSCO prescribe in detail the attributes of an effective and comprehensive securities regulatory framework.

The SC is a signatory to the IOSCO Multilateral Memorandum of Understanding on Consultation and Co-operation and Exchange of Information (MMoU).10 This MMoU facilitates co-operation among the signatories in areas of information exchange and enforcement of securities laws.

EVOLUTION OF OUR REGULATION

1993–2007

By the beginning of 1993, the securities industry was regulated by multiple agencies. This presented some difficulties as the industry grew larger and more complex.

10 As at 16 February 2015, there are 105 signatories to the MMoU.


The need for a more streamlined and cost-effective regulation was clear, given the increasing global nature of securities business and the ramifications of an inefficient regulatory infrastructure on the future competitiveness of our market. This resulted in the need for a more specialised regulatory agency which led to the establishment of SC in March 1993.11

The focus of regulation from 1993 to 2007 was to put in place the foundation that would enable the capital market to sustain long-term economic growth given the capital market’s increasing importance in financing Malaysia’s economic prosperity.

Efforts were made to centralise with the SC the regulation of unit trusts and fundraising in 1996 and 2000 respectively. Following the 1997 Asian financial crisis, measures were put in place to enhance corporate governance, including the regulation of related party transactions. In 2004, the Kuala Lumpur Stock Exchange (later renamed “Bursa Malaysia”) was demutualised to enable it to respond to changing market dynamics and pursue commercially-oriented strategies in an effective and timely manner.

CMSA and beyond

In 2007, the CMSA was introduced. The CMSA not only consolidated the Securities Industry Act 1983 and Futures Industry Act 1993 into a single statute, but also introduced a single licensing regime to replace the multiple licences which were issued to entities undertaking multiple regulated activities. We continuously strive to improve the efficiency of the licensing process. In 2011, the requirement for annual licence renewal was removed and the appeal process for licence holders was simplified.

The CMSA was amended in 2011 and 2012 to facilitate the offering of new products such as private retirement schemes and business trusts in order to broaden the asset management industry and expand the range of financing structures – particularly those that can tap into the increasingly large pools of domestic savings.12

11 For further details, see Capital Market Development in Malaysia: History and Perspectives (Securities Commission Malaysia, 2004).

12 For further details on the development of the Malaysian capital market post-2003, see Capital Market Development in Malaysia: Growth, Competitiveness and Resilience (Securities Commission Malaysia, 2014).


Moving forward

Our regulation has evolved with the changing landscape to ensure that the capital market remains resilient and contributes to the nation’s growth. We continue to work towards providing an environment that will enable firms to innovate and investors to be treated fairly.

In 2012, our regulatory framework was independently assessed by the International Monetary Fund and the World Bank under their Financial Sector Assessment Programme. The report, which was released in February 2013 (2013 FSAP Report) validates our regulatory framework’s conformity with IOSCO’s Objectives and Principles of Securities Regulation (IOSCO Principles) where we were rated “Fully Implemented” for 92% of the IOSCO Principles.

The changes we have made to our approach over the years signal a gradual but steady evolution in how we regulate. We regularly assess the effectiveness and perimeter of regulation to ensure that our regulatory requirements and framework adequately address risks posed to the objectives of capital market regulation.13 We also take into account global and domestic developments to ensure that our regulatory framework is in line with international standards and best practices.

Moving forward, the design of our capital market regulatory framework has to respond to the proliferation of technological advancements, innovation, increasing cross-border transaction and investment flows, complexity of products and services and heightened conduct risk.

Set against this backdrop, this document explains the outcomes that we seek to achieve from our regulation. The regulatory outcomes are underpinned by two important pillars – Proportionality and Transparency.

13 Objectives of capital market regulation are discussed on page 2.


Capital market regulation should be adaptive – it must balance business needs with investor protection. Regulation must also be able to respond to market and economic events, innovation and evolving technologies. Achieving the goals of business efficiency and investor protection requires careful balancing in the design of our regulatory framework. This endeavour will become even more challenging as capital markets achieve greater integration, and regulatory and competitive issues take on both domestic and international dimensions.

In order to achieve a balanced, efficient and effective regulatory environment, we apply the principle of Proportionality – an approach that facilitates growth and development yet remains fit for purpose, recognising that market participants differ in the risks they pose and the benefits they generate. By proportionality we mean that the degree to which we regulate markets, products, services, market participants and activities should commensurate with the risks they pose, the standards of conduct practised and the outcomes we are seeking to achieve. This means that any regulatory intervention or tool should deliver the desired outcome in the most effective manner, imposing requirements only where necessary, considering alternatives to regulation and minimising the risk of unintended consequences.

PROPORTIONALITYPILLARS OF REGULATION


Transparency supports our accountability to the public and our stakeholders, and helps us to design proportionate regulation. Transparency means communicating relevant and meaningful information concerning the delivery of our functions such as the drafting of our rules and standards, supervisory approach and concerns on emerging risks. We will disclose relevant information where we believe that the public has a legitimate interest in knowing about a particular matter and where we are legally permitted to do so. However, we will not disclose information if the disclosure could harm public interest. Our Transparency Matrix sets out examples of disclosures we will make for each of our regulatory functions and the intended objectives for such disclosures.

SC’S TRANSPARENCY MATRIXOur

regulatory function

General regulatory concerns

Rule-making Authorisation Supervision Enforcement

What we will do

Provide information on emerging risks, policies and areas of regulatory focus

Share reasons and feedback on proposed rules, standards and engage in public consultations

Provide common reasons for–

i. refusal; orii. delay

in authorisation while maintaining the anonymity of the parties concerned

Share information on–

i. good practices among firms;

ii. the focus of our thematic reviews and outcomes; and

iii. common area of structural and procedural weaknesses within firms

Share information on enforcement initiatives, actions and outcomes

PILLARS OF REGULATION

TRANSPARENCY


Our regulatory function

General regulatory concerns

Rule-making Authorisation Supervision Enforcement

Our intended objectives

Enable capital market participants and SC to collaborate towards mitigating impending risks and costs of regulatory change

• Formulationof well-reasoned rules

• Informthepublic of new rules

• Promotecompliance with rules

• Enablemarketparticipants to be aware of our requirements

• Helpnewentrants understand our authorisation process

Encourage compliance by market participants and encourage self-regulation

• Helpthepublic to understand what we do and why we do it

• Shapebehaviour and promote good governance

• Deterprohibited conduct

By communicating our concerns and expectations, we hope to encourage our stakeholders to work together with us to achieve the regulatory outcomes. Our engagement with stakeholders is, and will remain, an ongoing undertaking. We are committed to having an open-door policy in receiving feedback to enable us to continuously improve the way in which we regulate the capital market.


REGULATION

• Regulatoryneutrality

• Principles-based,outcomes-oriented approach

INVESTOR PROTECTION

• Empowerment of investors

SUPERVISION AND ENFORCEMENT

• Forward-lookingand risk-focused supervision

• Strongandeffectivestrategicenforcement approach

GROWTH WITH GOVERNANCE

• Competitivecapitalmarket

• Goodgovernance– an integral part of business culture

• Responsible financial innovation

• Fairandorderlycapital market

We intend to pursue the

following regulatory outcomes

Our outcomes are supported by two Pillars

PROPORTIONALITY TRANSPARENCY

REGULATORY OUTCOMES


1. REGULATORY NEUTRALITY

Regulatory neutrality means regulation should not confer an undue advantage to a particular market, participant, product or service without clear regulatory or policy justification. It therefore supports consistent and fair application of regulation across the market and minimises risk of regulatory arbitrage or conduct that is not in the spirit of the regulatory intent.

Malaysia’s regulatory architecture for financial markets is premised on an institutional approach to regulation. Under this approach, the entity’s legal structure for example, whether it is set up as a bank, a stockbroker or an insurance company, determines which regulator is tasked in overseeing its regulated activities from both prudential and business conduct perspectives. Many financial conglomerates today are involved in a cross-section of products and services, as well as along business lines, without regard to their legal status or structure. As regulators expand the scope of business that is permissible by a regulated entity, that activity will overlap with the regulatory purview of another supervisor or regulator. Potential inconsistencies in the application of rules and regulation by different regulators are bound to emerge, along with challenges associated with inter agency co-ordination.

Given how much financial services institutions and products have evolved from their institutional labels – namely banking, insurance and securities – there is a need to recalibrate our regulatory approach. Our focus will now shift from institution- and product-centric regulation towards regulation that is based more on activities, paving the way for regulatory neutrality. Regulation that is structured to focus on particular products or institutions risks obsolescence as markets can quickly evolve to overtake the product and institutional structures that were considered appropriate then.

As we focus on activities rather than products, one of the key areas of concern is the emergence of conduct risk. Conduct risk is risk attached to the way in which firms and their staff conduct themselves, for example, in areas such as governance, how investors are treated, staff remuneration, incentive structures

REGULATIONREGULATORY OUTCOMES


and how conflict of interest is managed. In enforcing good conduct, we will realign our approach from one that is intermediary-focused to ecosystem-focused, where conduct regulation will integrate investor-oriented outcomes into business decisions and be expanded to include all persons carrying out capital market activities.


2. PRINCIPLES-BASED, OUTCOMES-ORIENTED REGULATION

Principles-based and outcomes-oriented regulation represents an evolution in the regulatory relationship between regulator and regulatee, from one of directing and controlling to one that is based on collaboration and mutual trust where articulated standards have been met. Its success relies upon a strong collaboration between the regulator and stakeholder, and is dependent upon strong supervision and enforcement.

Principles-based regulation emphasises broad-based standards over prescriptive and detailed rules, with greater focus on outcomes rather than dictating processes. This approach acknowledges that there may be more than one way to achieve a regulatory outcome. By clearly articulating our desired outcomes, firms are given room to achieve their own business goals without compromising those regulatory outcomes.

In this regard, open and continuous stakeholder engagement is crucial. These engagements not only help to build upon and clarify standards that have been set, but also have the potential to reduce resistance to rules and obligations imposed on our stakeholders by making them active participants in our rule-making processes.

Adopting principles-based regulation does not mean we will not impose rules as part of our regulation. While broad principles may be suitable for business and investment conduct, we will nevertheless ensure that there is precision and clarity when imposing mandatory obligations upon market participants and investors.


14 SIDREC was established in 2010. For more information, please visit www.sidrec.com.my.

3. EMPOWERMENT OF INVESTORS The capital market continues to expand in size, structure and complexity. In tandem with this, investors have greater and easier access to information and an increasing ability to invest in a diverse variety of products in global markets. Traditionally, we placed reliance on disclosure and taking enforcement action as a means to protect investors. However, recent global financial events and investor behavioural studies have prompted some regulators (including SC) to reassess their approach to investor protection.

To strengthen investor protection in the capital market, we will place greater emphasis on investor empowerment. Empowerment of investors can result from:

• Fairtreatmentofinvestors• Investorsbeingproactive• Investorliteracy

The fair treatment of investors embodies the principle that product issuers and product distributors must consider investors’ interests throughout the lifecycle of the product. For instance, product distributors and advisers should actively manage conflicts between their own interests and that of the investor’s by recommending products that are suitable to the investor’s investment objectives and ensuring that the investor is made aware of any such conflict. Information provided to investors should be concise, relevant and comprehensible and should be given in a timely manner. Product issuers and product distributors should also provide investors with genuine means for complaints or concerns to be raised and addressed, and cooperate with regulators to facilitate access to quick, affordable and efficient redress mechanisms. Where complaints or claims cannot be resolved at product issuer or product distributor level, investors may refer their claims to the Securities Industry Dispute Resolution Center (SIDREC).14

Product issuers, product distributors and advisers should make “fair treatment of investors” an integral part of their business and governance culture to

INVESTOR PROTECTIONREGULATORY OUTCOMES


promote a more informed and participative investor base that is critical for a healthy and vibrant capital market.

Fair treatment of investors does not, however, relieve investors of responsibility for their own investment decisions and informed assumption of risk. Empowerment in fact requires investors to be proactive throughout the term of their investments. Investors should understand their rights, obligations and risks in respect of each investment they make. They should also make necessary enquiries and obtain the information they require as well as independent professional advice where needed. Investors should proactively monitor their investments to ensure that the investments continue to meet their objectives and, when appropriate, take steps to seek redress.

Improving investor literacy is a critical component of empowerment of investors, as a vigilant and knowledgeable investor should be in a position to assess investment products that are suitable for their own investment outcomes. Such investors benefit the regulator by reducing the risk of them being personally and financially affected by the illegal and unethical practices of others. These investors may also benefit product issuers and product distributors as they can provide continuous demand for appropriate and innovative products.

InvestSmart™ is the umbrella project designed to further our investor literacy initiatives, with the aim of reaching the multi-layered and multi-faceted demographic of Malaysian investors. In our collaborative efforts with other governmental agencies and a network of strategic partners, InvestSmartTM includes both a mass-outreach approach and a more targeted educational programme approach. We have a dedicated website for investor education at www.investsmartsc.my and strong social media presence, including an InvestSmartTM mobile application and “edumercials” over broadcast media. In addition, we also conduct exhibitions, roadshows and “SC Reach” visits.

Recognising that the children of today will be tomorrow’s investors, we have developed targeted educational programmes which include “Kids & Cash”, “Teens & Cash” and “Cash@Campus”. We also have programmes for the general public to develop a more in-depth understanding of the capital market such as “Be Money Wise” and “Money@Work”.

We believe that synergies between investment literacy, tools for investment decision and a conducive ecosystem can have a multiplier effect on the effectiveness of each of these individual components, enhancing the overall effectiveness of investor empowerment.


15 To facilitate the offering of services that cannot be obtained domestically, the Licensing Handbook allows foreign intermediaries to be granted a temporary licence for capital market activities provided that the intermediaries, both the principal and employee, are appropriately licensed in the home jurisdiction.

4. COMPETITIVE CAPITAL MARKET

In strengthening the Malaysian capital market, one of our main focuses is to ensure that the capital market continues to discharge its primary role in capital formation, supporting Malaysia’s economic development and is, at the same time, well positioned as a competitive market within the region. Competitiveness of the capital market relates to the market’s ability to attract and retain capital, investment, talent and participation within a globalised market.

For the capital market to be competitive, a conducive environment for businesses to operate and grow is needed. Our regulatory framework is modelled to encourage development, competition and innovation while ensuring that the capital market operates in a fair, orderly and transparent manner. Recognising the increasing importance of accessing the global market and its potential contribution to the growth of the Malaysian capital market, the CMSA enables the offering of foreign capital market products and services in Malaysia, subject to meeting specified requirements.15 In formulating our policies and regulations, we will consider how they can promote and facilitate current and potential market participants in their pursuit of wealth creation in a sustainable manner.

Islamic capital market is a key segment of the overall capital market in Malaysia. It has grown on the back of a facilitative environment governed by sound regulatory and Shariah governance frameworks. The internationalisation agenda of the Islamic capital market will be a key thrust for continued growth and sustainability, enhancing its competitive positioning and establishing Malaysia as a key global marketplace for the Islamic capital market. We regularly review our regulatory framework to identify areas that can be enhanced to support the internationalisation agenda, for instance, by entering into mutual arrangements with other regulators and exploring potential new growth areas to broaden the Islamic capital market’s international dimension.

GROWTH WITH GOVERNANCEREGULATORY OUTCOMES


To widen market access for our capital market products and services, we have entered into arrangements with our international counterparts. These arrangements include the ASEAN Framework for cross-border offering of collective investment schemes (CIS), which currently involve Malaysia, Singapore and Thailand, our memorandum of understanding (MoU) with 24 European Union (EU) securities regulators to co-operate on the supervision of cross-border offering of alternative investment funds, and obtaining the United States Commodity Futures Trading Commission (US CFTC)’s recognition, which allows our domestic futures brokers to solicit and accept orders and customer funds directly from US customers without the need to register separately as a futures broker in the US.16

While the growth and development of core market segments such as equities, bonds, derivatives and investment management are essential, the development of niche areas is needed to increase the attractiveness of the Malaysian capital market as the preferred venue for financial innovation, fundraising and investment. In this regard, we will continue to intensify efforts to capitalise on opportunities in niche market segments without compromising the growth and success of the core capital market. For example, given the rapid expansion of Sustainable and Responsible Investment (SRI), we have introduced a new framework for the issuance of SRI Sukuk. The framework aims, among others, to attract participants of the SRI segment into the Islamic capital market sphere, which in turn will garner broader domestic and international participation by both issuers and investors.

While efforts are being made to enhance the competitiveness of the capital market regionally and globally, healthy domestic competition is also vital in enhancing the efficiency and quality of products and services offered in our capital market.

Recognising that competition promotes productivity and innovation, we will–

(a) uphold rules and principles that support an effective competition culture within the capital market;

16 The Order of Registration granted to Bursa Malaysia Derivatives Bhd permits its identified members or other participants located in the US with direct access to its electronic order entry and trade matching system to trade agricultural commodity, interest rate and security index futures and option contracts. The CFTC only issues the Order to a foreign board of trade that possesses, among other things, the attributes of an established, organized exchange and that is subject to continued oversight by a regulator that provides comprehensive supervision and regulation that is comparable to the supervision and regulation exercised by the CFTC.


(b) embrace regulatory neutrality to ensure consistent and fair application of regulation across the capital market;

(c) adopt a more principles-based, outcome-oriented approach to regulation to provide market participants with increased flexibility in how they deliver outcomes determined by the regulator; and

(d) continuously review our regulatory framework or approach to remove unnecessary barriers that may restrict competition and access to the capital market.


17 Other measures include the launching of the Corporate Governance Blueprint 2011 to raise the standards of corporate governance by strengthening self and market discipline. The Blueprint was then followed by the issuance of the new Malaysian Code of Corporate Governance in 2012. In 2014, the Malaysian Code for Institutional Investors was issued.

18 Between 2003 and 2013, 68.1 per cent of SC’s enforcement actions were in relation to corporate governance related breaches.

5. GOOD GOVERNANCE – AN INTEGRAL PART OF BUSINESS CULTURE

The focus of our regulation is to encourage and reward ethical behaviour. Good governance advocates values such as integrity, ethics, sustainable business, accountability, transparency, and fairness. Governance is a necessary ingredient to promote growth and to enable us to move towards progressive liberalisation of the capital market.

Good governance has been our long-standing priority. This has been reaffirmed through the 1999 High-Level Finance Committee Report on Corporate Governance, Capital Market Masterplan and Capital Market Masterplan 2, and other corporate governance initiatives.17 To enhance the standards of professionalism and ethical conduct in the financial services industry, the Financial Services Professional Board was established in September 2014 as an industry-led initiative supported by BNM and SC to promote, advocate and facilitate the identification, development and the adoption of professional and ethical standards across all sectors in the industry.

Governance processes and procedures are a critical focal point in creating safeguards against fraud, corrupt practices and corporate misconduct. It provides society with the necessary confidence that financial intermediaries and corporations are well-managed institutions to which investors and lenders can confidently commit their funds. Embedding principles of good governance ensures a sustainable business model that contributes towards wealth creation and preservation. This is also essential in managing and mitigating conduct risk. Our efforts in promoting good governance are complemented by proactive corporate surveillance aimed at detecting corporate misconduct and enhancing the quality of disclosures. We will continue to take firm enforcement action for serious corporate governance breaches.18

Boards play a critical role in making good governance an integral part of business culture. In essence, boards must ensure firms place ethical conduct at the heart of their business. To achieve this, firms will need to pay equal attention to both good governance values and internal controls.


Boards are expected to exercise appropriate oversight and be responsible for the overall governance of their firm, including transparent management and mitigation of risks arising from the firm’s business conduct and its incentive structure. The firm’s risk management framework and its product and service approval processes should be regularly reviewed and adapted to address any risk and uncertainties that may arise with innovation.

While our regulation imposes minimum standards and conduct rules, firms must ensure that they comply with these standards and rules – in form and in spirit – and take it upon themselves to go beyond prescribed minimum standards.

Promoting good governance goes beyond the strengthening of regulations. Inculcating good governance requires all stakeholders in the governance ecosystem to assume responsibility for upholding good governance.


6. RESPONSIBLE FINANCIAL INNOVATION

Global financial events have demonstrated that innovation without good governance and effective disclosure can lead to significant detrimental consequences within markets.

Financial innovation is a stimulus for the development and growth of the capital market. Innovation supports a diversity of products and services, thus allowing greater choice and access to investors. Innovation does not only serve private interests by generating wealth potential, but may also benefit society by creating employment, encouraging development of thought leadership, creating procedural efficiencies and raising productivity.

Our role is to provide a conducive environment for businesses to operate and grow responsibly, where the benefit of financial innovation is balanced with sound management of any possible negative outcomes that may be associated with it. However, we will ensure that innovation does not come at the expense of investor protection and market integrity. Firms, on the other hand, will be expected to upgrade and maintain capabilities to manage innovation risks on an enterprise-wide basis and ensure continued improvements of their risk management policies.

A lack of understanding of the structure, risks and implications of new products and services may result in regulation being overly restrictive in its approach, which may be counter-productive and deter responsible innovation. Hence, we will constantly review our approach to regulation and supervision in order to adapt to the challenges presented by market innovation. We will also work in partnership with market participants to better understand and assess the structure, risks and implications of innovation in products, markets and services.


7. FAIR AND ORDERLY CAPITAL MARKET

A fair and orderly capital market is essential to foster trust and confidence. Fair markets mean that the market should be free from manipulative or deceptive practices, and participants should have fair access to markets and market information. Orderly markets imply regularity, reliability and economy of operation with appropriate transparency of material information. In a fair and orderly market, participants would be able to assess the value of a product or service on its merits, without having their assessment being affected by concerns over market integrity or enforceability of transactions.

Fair and orderly markets have competitive prices that reflect supply and demand, with measures in place to curb excessive price volatility. Such a market environment may reduce transaction and search costs, and can limit information asymmetry between issuers, participants, investors and their agents.

Maintaining a fair and orderly capital market is the joint responsibility of the regulator and market participants. The frontline regulator, i.e. the exchanges, contributes towards a fair and orderly market by promoting price discovery, maintaining a secure and reliable trading system, ensuring integrity of trading through fair and equitable rules, and supervising the conduct of its members. On the other hand, market participants contribute by making accurate and timely disclosures and refraining from illegal, dishonourable and improper practices.

As market abuse poses a threat to the integrity of the market and erode trust and confidence, we will continue to be vigilant to ensure that our surveillance of the market is effective in detecting unusual activities at an early stage. Where necessary, we will take pre-emptive action to contain risk and to protect investors and markets. We will encourage self-reporting and continuously leverage on our supervisory efforts, advanced surveillance technology and whistle-blowers to enable us to take intervention action before the risk crystallises.


8. FORWARD-LOOKING AND RISK-FOCUSED SUPERVISION

Supervision is critical in furthering our mission of promoting and maintaining a fair, efficient, secure and transparent capital market. Complexities of markets, financial products and participants have necessitated a shift in our approach to supervision from one solely based on disclosure and regulatory compliance to one that is more forward looking.

In order to monitor, mitigate and manage systemic risk, our supervisory scope has now been expanded to include risk identification of individual firms, issuers, products, transactions and markets.

For SC, this means:

• raisingoursurveillanceandsupervisoryeffortsandeffectiveness;• developinggreaterregulatoryagilityandstrongercapacityandcapabilities;

and• heightening collaboration across boundaries and jurisdictions, both

domestically and internationally.

Supervision of market intermediaries

Our supervisory efforts have been directed at achieving the following:

• ensuringfinancialsoundnessofmarketintermediaries;• preservingmarketconfidence;and• providingadequateprotectiontoinvestors.

To achieve these objectives, we have strengthened our supervisory capabilities by adopting the enhanced Risk-focused Supervisory Framework (RSF). This approach leverages on effective risk identification, assessment and mitigation of the intermediary and at the group level, taking into account its exposures abroad.

SUPERVISION AND ENFORCEMENT

REGULATORY OUTCOMES


Under this framework, market intermediaries will be assessed under the following four spectrums:

(a) Microprudential: Assessing the strength of intermediaries’ financial and capital positions on an on-going basis.

(b) Conduct: Greater emphasis will be placed on conduct risk. Intermediaries will be expected to have effective policies and procedures that will integrate investor-oriented outcomes into business decisions, with greater board accountability. Conduct supervision will also continue to focus on client asset protection, integrity of financial statements and quality of submissions made by market intermediaries.19

(c) Anti-Money Laundering, Countering the Financing of Terrorism and Proliferation of Weapons of Mass Destruction (AML/CFT/PWMD): We assess market intermediaries’ processes to ensure that they are able to take appropriate measures to manage and mitigate risks associated to threats of AML/CFT/PWMD.

(d) Macroprudential: We identify systemically important intermediaries and analyse the interconnectedness of market intermediaries across the capital market, regionally and globally, in order to chart vulnerabilities and potential threats.

In advancing our regulatory objectives, we will continue to work in partnership with the industry by actively engaging market intermediaries at board level, senior management and critical control positions such as compliance, internal audit and risk management.

Supervision of markets

Our supervisory role extends to the supervision of markets, with the key objectives to promote and maintain fair, efficient, secure and transparent markets and to facilitate the orderly development of an innovative and competitive capital market.The securities and derivatives markets operated, provided or maintained by

19 Market intermediaries include distributors, trustees, custodians, reporting accountants and advisers.


an operator are classified into an approved market,20 an exempt market21 or a registered electronic facility (REF).22

The level of supervision imposed on a type of market corresponds with the risk posed by that market. In deciding the appropriate level of supervision, factors such as size and structure of market, nature of services and products traded on the market and nature of market participants are taken into consideration.

For approved markets where integrity of the trading system, efficient price formation and trade execution are crucial for investor confidence, our supervision is more extensive and includes, among others, annual onsite audit, periodic submission of reports by the exchange, oversight of the exchange’s regulatory responsibilities and continuous engagement with the exchange on development and regulatory matters. Supervision of an REF, on the other hand, focuses on monitoring the REF for its compliance with terms and conditions imposed at registration.

Supervision of financial market infrastructures

Our supervisory role also extends to financial market infrastructures (FMI). An FMI refers to a multilateral system among participating institutions, including the operator of the system, used for the purpose of:

(a) clearing and settlement; or (b) recording

payments, securities, derivatives and other financial transactions.

Our supervisory approach for FMIs is similar to the supervision of approved markets. The key objectives of FMI regulation are to ensure the safety and efficient

20 An approved market refers to a stock market of an approved stock exchange or derivatives market of an approved derivatives exchange. Currently, Bursa Malaysia Securities Bhd and Bursa Malaysia Derivatives Bhd are examples of an approved market.

21 A securities or derivatives market may be declared as an exempt market where the market operator is already regulated by a comparable regulator.

22 An REF is a market that is provided, operated or maintained utilising an electronic facility and is normally independent from an approved market.


provision of clearing house facilities and depository services,23 as well as the proper regulation and supervision of its participants, having due regard to the protection of investors and public interest in fostering transparency, enhancing safety, as well as mitigating and managing systemic risk. We also require FMIs functioning as a central counterparty to undertake stress-testing on the adequacy of its clearing fund and large exposures in managing credit and liquidity risks, default drills and annual business continuity plan tests.

Surveillance of public-listed companies

While the exchange is primarily responsible for ensuring that public-listed companies (PLCs) comply with the listing requirements, we carry out risk-focused surveillance on PLCs to ensure compliance with securities laws. Our attention is centred on their corporate conduct and disclosures with the objective of detecting suspicious corporate transgressions and enhancing the quality and reliability of financial statements. This, together with our frequent engagements with PLC directors and auditors, has enabled us to take early pre-emptive action to prevent losses arising from questionable transactions.

23 We approve the establishment of the clearing house for the clearing and settlement of securities or derivatives transactions, with the concurrence of the Minister of Finance. On the recommendation of the SC, the Minister of Finance also approves the establishment of the central depository for the central handling of securities. In this regard, Bursa Malaysia Bhd’s subsidiaries, namely Bursa Malaysia Securities Clearing Sdn Bhd and Bursa Malaysia Derivatives Clearing Bhd are approved as a clearing house for the securities and derivatives markets respectively, while Bursa Malaysia Depository Bhd is approved as the central securities depository.


9. STRONG AND EFFECTIVE STRATEGIC ENFORCEMENT APPROACH

Strong and effective enforcement of laws, regulations and rules governing the capital market is important for the preservation of public confidence in the integrity of our market, as well as in ensuring that the capital market remains fair and orderly. We take a strategic approach to enforcement, utilising a variety of enforcement tools, ranging from administrative, civil and criminal actions to deliver a strong and effective response to illegal and unethical activities in the capital market.

Strategic enforcement means that the type of sanction applied in each case is dependent upon the facts, supporting evidences and desired outcome of the case. In determining the desired outcome for each case, we will assess whether the action taken is intended to punish wrongdoers, protect investors, preserve assets, correct misinformation or compensate aggrieved investors. We seek to utilise the full suite of enforcement tools available, including leveraging on our wide supervisory powers for a more targeted and pre-emptive approach to enforcement. Where cross-border investigations are involved, we will continue to leverage on bilateral24 and multilateral arrangements with our foreign regulatory and supervisory counterparts to facilitate collaboration and exchange of information on enforcement matters.

Our Prosecuting Officers are appointed by the Public Prosecutor under the Criminal Procedure Code and are accountable to the Public Prosecutor when carrying out their duties as Prosecuting Officers. This has enabled our Prosecuting Officers to manage and conduct prosecution for breaches of securities laws. Several of our Prosecuting Officers are also gazetted as Deputy Public Prosecutors to handle appeals involving cases initiated under securities laws.

While criminal actions must be pursued to denounce wrongful behaviour by offenders and serve as a deterrent, the use of civil and administrative sanctions will enable us to differentiate between conduct which is wrongful in itself and conduct which is prohibited, where the aim of such civil and administrative sanctions will be to control conduct or an activity without necessarily implying social condemnation. Our strategic enforcement approach will enable us to take gradual and effective enforcement action, building on the mutual trust and confidence between stakeholders and ourselves.

24 As at 31 January 2015, we have bilateral arrangements with 33 countries.


The decisions we make must take into account various factors, including the protection of investors, growth and confidence of the market and also impact of such decisions on the industry. With this in mind, stakeholder engagement will remain an important aspect of our regulation.

We continuously conduct engagements and consultations with relevant stakeholders in the market as part of our ongoing initiative to develop the market. We have established a two-way relationship with domestic industry associations and investor groups which form a major part of our stakeholder engagement process. As part of our new consultative framework for capital market policy and regulatory reforms, we have established three advisory groups, which draw on the expertise and knowledge of capital market professionals, to provide global perspectives on capital market issues and advise on developmental aspects.

To communicate our expectations to our stakeholders, we will continue to publish additional guidance on our regulatory approach, and may publish further details on our regulatory principles and outcomes.

CONCLUSION


Securities Commission Malaysia3 Persiaran Bukit Kiara, Bukit Kiara, 50490 Kuala Lumpur. Tel: +603 6204 8000 Fax: +603 6201 5082 Website: www.sc.com.my3 Persiaran Bukit Kiara, Bukit Kiara, 50490 Kuala Lumpur. Tel: +603 6204 8000 Fax: +603 6201 5078 Websites: www.sc.com.my www.investsmartsc.my

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