The 6th Asian Roundtable on Corporate Governance Implementation and Enforcement in Corporate...

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

3

Agenda

Enforcement of Corporate Governance:

Introduction

I

4

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

8

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




(2) Civil sanctions

Breach of exchange listing rules- periodic and continuous disclosure obligations

- Independent directors, audit committees

- related party transactions


(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


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


Burden of proof lower than criminal standard (on a balance of probabilities)

13

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


Futures industry Offences (17%)


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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




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

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