## _cr1359 — Summary Implementation of the IOSCO Principles—Detailed Assessments ## Source details **Canonical URL:** [_cr1359 — Summary Implementation of the IOSCO Principles—Detailed Assessments](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1359.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1359.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1359.pdf.json) --- ### Summary and Key Findings - SC exhibits high levels of implementation of the IOSCO Principles across most areas. - Regimes governing issuers, auditors, CIS, intermediaries, secondary markets, enforcement, co-operation and information sharing are extensive. - Areas for enhancements: - Strengthen legal protections for SC independence: amend removal provisions for Commission members and extend protections/indemnities for members, staff and agents. - Adjust disclosure deadlines for issuers and substantial shareholders to align with international best practice (shorten annual/audited reporting deadlines; align substantial shareholder reporting timeframes). - Implement fully new frameworks for oversight of CRAs and FIMM by carrying out planned on-site inspections.1 - Consider pre-conditions to enable SC to ease direct day-to-day involvement as the market develops. 1. On-site inspections on the two registered domestic CRAs were completed in June and September 2012. *Key contextual facts on assessment:* - FSAP assessment mission: April 4–20, 2012. - Assessor: Tanis MacLaren. - Methodology: 2011 IOSCO Methodology for Assessing Implementation of the IOSCO Principles. ### Institutional and Market Structure; Market Activity and Statistics - Regulators and governance: - Two main regulators: Securities Commission Malaysia (SC) and Bank Negara Malaysia (BNM). - SC reports to the Minister of Finance; statutory powers from Securities Commission Act 1993 (SCA), Capital Markets and Services Act 2007 (CMSA) and Securities Industry (Central Depositories) Act 1991 (SICDA). - SC organized into eight divisions and led by a nine member Commission headed by an Executive Chairman. - Two affiliated agencies: SIDREC and SIDC. - Audit Oversight Board (AOB) established within SC to oversee auditors of PIEs. - Market structure and participant counts (at time of assessment): - One securities exchange and one derivatives exchange (Bursa Malaysia group). - Two equity markets: Main Market and ACE Market. - 35 securities broking firms (POs) and 20 futures broking firms (TPs). - Selected Bursa Malaysia Securities trading statistics (years 2006–2011): - Total securities listed: 2006 — 1317; 2007 — 1357; 2008 — 1254; 2009 — 1305; 2010 — 1392; 2011 — 1476. - Total companies listed: 2006 — 1027; 2007 — 987; 2008 — 977; 2009 — 960; 2010 — 957; 2011 — 941. - Total market capitalization (RM billion): 2006 — 849; 2007 — 1,106; 2008 — 664; 2009 — 999; 2010 — 1,275; 2011 — 1,285. - Annual trading volume (billion shares): 2006 — 215; 2007 — 384; 2008 — 154; 2009 — 248; 2010 — 253; 2011 — 329. - Annual trading value (RM billion): 2006 — 278; 2007 — 582; 2008 — 313; 2009 — 303; 2010 — 390; 2011 — 438. - Value of new issues listed (RM billion): 2006 — 7.2; 2007 — 17.5; 2008 — 39.5; 2009 — 48.6; 2010 — 68.9; 2011 — 36.8. - RM12.6 billion raised through new issues of shares and warrants in 2011. - Over the six-year period referenced, total market capitalization increased 51.4 percent (RM 849 billion to RM 1,285 billion); annual trading volumes increased 53 percent; annual trading values increased 57.6 percent; value of new issues increased over 400 percent. - Derivatives market (Bursa Malaysia Derivatives) contract volumes (2006–2011): - KLCI Futures: 2006 — 1,628,043; 2007 — 3,157,341; 2008 — 2,920,728; 2009 — 1,997,955; 2010 — 1,994,907; 2011 — 2,482,314. - Crude Palm Oil Futures: 2006 — 2,230,340; 2007 — 2,793,560; 2008 — 3,003,549; 2009 — 4,008,882; 2010 — 4,064,361; 2011 — 5,871,132. - Annual trading volume (million contracts): 2006 — 4,161,024; 2007 — 6,202,686; 2008 — 6,120,042; 2009 — 6,137,827; 2010 — 6,154,745; 2011 — 8,446,237. - Foreign participation and foreign issuers: - As at 30 November 2011: total listed issuers 945; total market capitalization RM1,228 billion; foreign-incorporated listed issuers: 8 with aggregate market capitalization RM3 billion (<1%). - Foreign investors represented 27.7 percent of total value traded and 6.1 percent of total volume (November 2011 estimates). - Foreign shareholdings: 22.9 percent in value and 17.2 percent in number of shares at the central securities depository. - Derivatives exchange foreign participation proportion: 32 percent of total number of investors. - Bond market and sukuk: - Total Malaysian bond market value as at 31 December 2011: RM841.2 billion. - Average annual growth since 2001: 10.6 percent. - Outstanding ringgit-denominated sukuk as at end-2011: RM349.0 billion (41.5 percent of total bond market); RM349.0 billion approximates two-thirds of global sukuk outstanding (Malaysia is the biggest sukuk market in the world). - Corporate debt securities: 40.7 percent of all debt securities outstanding. - Net new issues of private sector debt securities in 2011: RM24.5 billion. ### Regulatory approach, strategy and market development - SC’s regulatory style: prescriptive and involved; CMP2 (2011–2020) and Corporate Governance Blueprint 2011 chart a transition toward greater disclosure reliance and less merit review. - CMP2 theme: "Growth with Governance". - SC strategy includes moving toward more emphasis on disclosure and less emphasis on merit reviews of new issues. ### Main findings on regulatory framework and oversight (Principles 1–8) - Principle 1: SC responsibilities clear in law (SCA, CMSA, SICDA); assessment: Fully implemented. - Principle 2: Operational independence in practice, but legal independence impaired by Minister’s ability to remove Commission members without cause; assessment: Partly implemented. - Reserve fund: RM 700 million. - Recommendation (exact wording preserved): Amend SCA to include general qualification requirements for Commission members; set that a Commission member may only be removed for cause (and repeal Minister’s right to remove members without cause); consider extending immunity to persons acting on behalf of the SC and permitting the SC to indemnify legal costs. - Principle 3: Powers, resources and capacity adequate; staff training allocation: average of 4% of staff salary yearly for learning and development initiatives. - Staff count presentation as provided in source (preserve numeric entries exactly): - Chairman's Office — 88 13 - Corporate Resources — 17626 - Enforcement — 86 13 - Issues & Investment /Corporate Finance & Investments — 100 15 - Market Supervision — 140 20 - Strategy & Development — 55 8 - Islamic Capital Market — 243 - Audit Oversight Board — 15 2 - Total684 100% - Assessment: Fully implemented. - Principle 4: Clear and consistent regulatory processes; assessment: Fully implemented. - Principle 5: Professional standards and confidentiality in place; assessment: Fully implemented. - Principle 6: Systemic risk mandate and processes in place; recommendation: Consider making SC a permanent member of the Financial Stability Executive Committee. - Example intervention cited: late 2010 issue with utility company bonds principal outstanding approximately RM6 billion (US$1.9 billion or 1.8% of total corporate bond market’s capitalisation) — SC engaged stakeholders to restore confidence. - Part IXA powers referenced (CMSA, s. 346A–346D). - Assessment: Fully implemented. - Principle 7: Regulatory perimeter review processes systematic; assessment: Fully implemented. - Principle 8: Conflicts-of-interest mitigation processes comprehensive; assessment: Fully implemented. ### Self-Regulatory Organizations (Principle 9): Bursa Malaysia and FIMM - Two SROs: Bursa Malaysia and FIMM; both subject to SC oversight. - FIMM recognized as an SRO under Part VIII of CMSA; SC required FIMM to meet stringent governance conditions (at least 45% PIDs on board and Chairman to be PID). - FIMM enforcement/complaints (2011): 36 complaints received; Disciplinary Committee reviewed/resolved 11; outcomes: reprimanded four UTMCs; reprimanded eight IUTAs; deregistered one UTC. - SC planned first regulatory audit of FIMM (noted: on-site inspection carried out May 2012). - Assessment for SRO oversight: Fully implemented (SC supervisory framework described in detail). ### Enforcement, inspection, investigation and surveillance (Principles 10–12; 33–37) - Principle 10: Inspection and surveillance powers: - SC inspection powers: SCA s. 126 (no prior notice), s. 127 access to books, CMSA s. 29(2) access to trading facilities; CMSA s. 348 and SCA s. 152 authority to require production/disclosure. - Surveillance systems: SC uses SMARTS; Bursa uses ARAMIS (being replaced); real-time feeds to SC. - Record retention: CMSA (s. 108) — at least seven years; AMLATFA s. 17(2) — not less than six (6) years. - Assessment: Fully implemented. - Principle 11: Enforcement powers and remedies: - Civil penalties up to three (3) times gross amount of gain/loss avoided and civil penalty up to RM1.0 million (s. 200(2) and 201(5)); - Administrative penalties up to RM500,000 (s. 356) and other remedial powers listed in CMSA. - IO powers include search, seizure, require statements, arrest without warrant (SCA ss. 128, 132, 134 & 141). - Enforcement activity 2008–2011: - 11 civil actions against 40 persons; - Out-of-court settlements with 13 individuals disgorging up to three (3) times gains; - 123 administrative sanctions between 2008–2011 (breakdown: Reprimand 46; Revocation/suspension 21; Directives 37; Imposition of fine/penalty 18; Refusal to receive submission 1). - Criminal prosecutions initiated against 29 persons (2008–2011) with detailed breakdowns by offence. - Assessment: Fully implemented. - Recommendation: Consider examining adequacy and consistency of maximum fines (range noted: RM 500 thousand to RM 1 million) to ensure deterrence; fines imposed by the SC should not be less than those imposed by the Bursa. - Principle 12 / Cooperation (Principles 13–15): - SC can share information domestically and internationally (SCA s. 148, s. 150); signatory to IOSCO MMOU and 32 bilateral MOUs. - Evidence of cross-border assistance: 26 requests under IOSCO MMOU and many licensing/information exchanges (2008–September 2011 data provided). - Assessment: Fully implemented. ### Issuers, disclosure, corporate governance and shareholder protection (Principles 16–18, 17) - Disclosure framework: - Prospectus registration required; CMSA s. 236 requires prospectus to provide all information necessary for informed assessment. - Quarterly reports deadline: within two months of period end. - Annual audited accounts: within four months of year-end. - Annual report: within six months of year-end. - Adoption of IFRS: implemented as of January 1, 2012 for Public Interest Entities. - Timeliness and recommended reforms: - Interim/report deadlines observed: quarterly — 60 days; audited annual financial statements — 120 days; recommendation: consider requiring audited annual financial statements within 90 days and annual report promptly thereafter; pursue taskforce to review periodic disclosure frameworks per Corporate Governance Blueprint 2011. - Assessment of issuer disclosure and shareholder rights: Broadly implemented. - Shareholder participation and proxies: - Companies Act notice periods: ordinary resolutions — at least 14 days; annual general meetings/special resolutions — at least 21 days. - Proxy restrictions in Section 149 noted; Listing Requirements changed effective 3 January 2012 removing qualification restrictions for proxies for listed companies. - Recommendations: consider making proxy reforms mandatory for all public companies; align reporting requirements for substantial shareholders, directors and senior management to shorter CMSA time periods. - Take-overs and related rules: - Mandatory offer (MO) thresholds and procedures set out (acquisition > 33% triggers MO); Take-over Code timing and disclosure requirements specified (offer acceptance by 60th day; shareholders minimum 42 days up to 95 days to consider). - Assessment: Broadly implemented for corporate governance and shareholder rights (gaps in notice periods, proxy limitations historically, and timing for substantial shareholder disclosures). ### Auditors, audit oversight and accounting standards (Principles 19–21) - Audit Oversight Board (AOB): - Created under SCA amendments (2010) with statutory powers (s. 31B, 31C, 31E). - Registration: auditors of PIEs must register with AOB; as at 31 December 2011 — 75 audit firms and 298 individual auditors registered with the AOB to audit PIEs. - Inspections (April 2010–December 2011): 24 inspections (23 regular, 1 special) covering 74 audit engagements; 13 remediation plans approved; 4 inquiries authorised; 6 warning letters; registration adjustments for 5 individual auditors. - Assessment: Fully implemented. - Auditor independence and standards: - MIA By-Laws and ISQC 1 adopted; MIA By-Laws stricter in some areas (key audit partner rotation — 5 years; fee concentration limit 15% rule; prohibitions on certain non-audit services). - Clarified ISAs adopted effective 1 January 2010. - Assessment: Fully implemented. - Accounting standards: - Malaysia fully converged with IFRS via MFRS framework effective 1 January 2012; MASB and FRF roles described. - Assessment: Fully implemented (with comment on timeliness issues under Principle 16). ### Credit Rating Agencies and other information providers (Principles 22–23) - CRAs: - Guidelines on Registration of CRAs issued March 30, 2011. - Ringgit-denominated bond/sukuk issues must be rated. - Registration, reporting and governance requirements detailed (Rating Committee composition, publication of methodologies, 7 year record retention, annual rating review within fifteen months). - Inspection powers extended via SCA amendments (inspection power under s. 126(1)(f)); one on-site inspection of a domestic CRA completed (inspection began May 2012). - Assessment: Framework in place; on-site inspections planned/implemented. - Other analytical services: - Investment advisers, corporate finance advisers, bond pricing agencies and property valuers subject to licensing/registration and oversight consistent with their roles. ### Collective Investment Schemes, CIS governance, valuation and wholesale funds (Principles 24–28) - Retail unit trusts: - Number of retail unit trusts (Total): 2007 — 484; 2008 — 532; 2009 — 541; 2010 — 564; 2011 — 587. - Total Net Asset Value (RM billions): 2007 — 168.0; 2008 — 130.4; 2009 — 191.7; 2010 — 226.8; 2011 — 249.5. - Number of Unit Trust Management Companies: 2007 — 39; 2008 — 39; 2009 — 39; 2010 — 39; 2011 — 40. - Wholesale funds: - Total Number of Funds: 2007 — 29; 2008 — 54; 2009 — 88; 2010 — 107; 2011 — 133. - Total NAV (RM billions): 2007 — 2.34; 2008 — 4.9; 2009 — 14.0; 2010 — 18.7; 2011 — 27.4. - Wholesale funds assets under management increased over 1070 percent over five years (RM 2.34 billion to RM 27.4 billion). - CIS regulation and safeguards: - All publicly offered CIS and operators/distributors subject to authorization and reporting requirements; trustee regime with asset segregation; NAV/valuation in accordance with IFRS. - Continuous disclosure of unit prices via FIMM. - Wholesale funds offered only to qualified investors; audited annual reports delivery required within two months of fund year-end. - Assessment: Fully implemented for CIS regulatory framework, valuation and disclosure; detailed guidelines on valuation, NAV frequency, suspension and remuneration/reimbursement for mispricing exist. ### Market intermediaries, licensing, capital, internal controls and failure management (Principles 29–32, 30–32) - Licensing and entry standards (Chapter 4 Licensing Handbook): - Examples of minimum paid-up capital / minimum shareholders’ funds by firm type (exact presentation preserved): - Stockbroking company: Minimum paid-up capital of RM20 million; maintain at all times Minimum shareholders’ funds of RM20 million; Minimum Capital Adequacy Ratio (CAR) of 1.2. - Universal Broker: Minimum paid-up capital of RM100 million; maintain at all times Minimum shareholders’ funds of RM100 million; Minimum CAR of 1.2. - Futures Broking Company: Minimum paid-up capital of RM5 million; maintain at all time minimum Adjusted Net Capital (ANC) the higher of — RM500,000; or 10% of aggregate margins required. - Fund Management Company (FMC) - discretionary portfolio management: Minimum paid-up capital of RM2 million; Minimum shareholders’ funds of RM2 million to be maintained at all times. - Corporate Finance Adviser and Investment Adviser: Minimum paid-up capital of RM500,000; Minimum net tangible assets of RM50,000 at all times. - Financial Planner: Minimum paid-up capital of RM50,000; Minimum net tangible assets of RM50,000 at all times. - Financial planner (CUTA) - dealing in unit trust products following a financial plan: Minimum paid-up capital of RM100,000; Minimum shareholders’ funds of RM100,000 to be maintained at all times. - Fund Supermarket (dealing in unit trust products as a principal business): Minimum paid-up capital of RM5 million; Minimum shareholders’ funds of RM5 million to be maintained at all times. - Unit Trust Management Company (UTMC) - CIS operator/management company: Minimum shareholders’ funds of RM10 million to be maintained at all times. - If intermediary carries more than one regulated activity, highest minimum financial requirement applies. - Prudential monitoring and reporting: - Stockbroking CAR mechanics require daily CAR calculation; ARMADA system used for daily CAR monitoring; reporting cadence based on CAR level (CAR< 2.0 times — Daily reporting; CAR ≥ 2.0 but < 4.0 — every two weeks; CAR ≥ 4.0 — Monthly). - Monitoring indicators for FMC proprietary positions include Proprietary investments to total AUM — 20% or more; Proprietary investments to shareholders’ funds — 30% or more; revenue contribution thresholds and cash allocation changes thresholds. - Internal controls and compliance: - Compliance officer requirements, segregation of client assets, KYC and records retention (seven years), outsourcing controls and audit expectations are set out. - On-site inspection cycles based on risk categories: High risk — yearly; Medium high — once every two (2) years; Medium low — once every three (3) years; Low risk — four (4) year audit cycle; SIFI — two (2) year audit cycle irrespective of category. - Failure management and compensation: - SC powers for intervention include s. 62, 67, 72, 125, 130–131, 360–361 among others. - Compensation regimes: Compensation Fund (equity — max claim RM100,000 per claimant), Fidelity Fund (derivatives — max RM500,000 per futures broking company), deposits with SC for FMCs/CMSL holders (coverage up to RM150,000 per fund manager). - Capital Market Compensation Fund (CMC) Bill passed May 2012 awaiting royal assent to consolidate compensation schemes. - Assessment: Fully implemented for market intermediaries, licensing, capital and client protection; recommendation: consider re-examining FMC capital requirements to a more risk-based formula in longer term and consider requiring external auditors to evaluate internal controls for stockbrokers and futures brokers. ### Exchanges, trading systems, transparency, market surveillance and default management (Principles 33–37) - Exchange group structure: - Bursa Malaysia comprises multiple subsidiaries including Securities, Derivatives, Clearing, Depository and Bonds arms; exchange holding company is publicly listed. - Exchanges and certain electronic facilities require authorization by the Minister on SC advice. - Transparency and trading: - Pre-trade and post-trade real-time transparency provided for most trades; allowed Direct Business Transactions (DBTs) subject to defined conditions and prompt reporting (DBT reporting: trades entered into trading system within 15 minutes; out-of-range DBTs must be reported by 12:30 p.m. next trading day). - No dark pools operating. - ETP Bond post-trade reporting: members must report transactions within 10 minutes; published with 15-minute delay. - Market surveillance and controls: - Parallel surveillance conducted by Bursa (ARAMIS) and SC (SMARTS) with direct SC access to exchange systems. - Mechanisms exist to detect and deter manipulation, insider trading and misrepresentation; legal prohibitions and enforcement powers detailed (Part V CMSA). - Circuit breakers: FBM KLCI declines of 10%, 15% and 20% trigger staged halts (10% decline triggers one hour halt; further declines extend halts). - Short selling: naked short selling prohibited; RSS and PSS frameworks exist with transparency and tagging. - Clearing, default management and settlement protections: - Central counterparties clear and settle trades; Clearing Guarantee Fund (equity) RM100 million; Derivatives Clearing Fund RM26 million (allocation proportions provided). - CMSA provides statutory priority for clearing house default proceedings (s. 43) to preserve enforceability of trades in participant insolvency. - Default procedures permit liquidation, transfer of positions, buy-ins for settlement failures and other measures; settlement timeframes such as T+3 referenced. - Assessment: Overall implementation counts for Principles 1–38 (aggregate for exchange-related Principles in supplied excerpt): - Fully Implemented (FI) - 34 - Broadly Implemented (BI) - 2 - Partly Implemented (PI) - 1 - Not Implemented (NI) - 0 - Not Applicable/Assessed (NA) – 1 - Recommended actions (selected, verbatim where preserved): - Principle 1: Continue joint work to ensure consistency in standards of disclosure and market conduct and in supervision of market participants. - Principle 2: Amend the SCA to include general qualification requirements for Commission members; set that a Commission member may only be removed for cause; repeal Minister’s right to remove members without cause; consider extending statutory immunity and indemnity provisions. - Principle 6: Consider making SC a permanent member of the Financial Stability Executive Committee. - Principle 9: Conduct the first regulatory audit of FIMM as soon as practicable. (Regulatory audit of FIMM was conducted May 2012.) - Principles 11 and 12: Consider examining adequacy and consistency of maximum fines; ensure fines imposed by SC not less than those imposed by Bursa. - Principle 16: Pursue Corporate Governance Blueprint 2011 recommendation to form taskforce to review periodic disclosure frameworks; consider requiring audited annual financial statements to be published within 90 days of year-end; consider civil liability for misstatements in continuous disclosure documents and deeming purchaser reliance to simplify civil actions. - Principle 17: Pursue proxy and notice period reforms; align reporting requirements for substantial shareholders, officers and directors; consider making disclosure for non-listed public companies available on SC website; consider widening disclosure requirements to include public rights offerings. - Principle 22: Conduct first inspection of a CRA as soon as practicable. (Note: on-site inspection of one of two CRAs took place shortly after the FSAP assessment.) - Principle 30: Consider re-examining capital requirements for FMCs and moving to a more risk-based formula. - Principle 31: Consider requiring external auditors to conduct periodic evaluations of internal controls and risk management processes for market intermediaries, at least for stock brokers and futures brokers who are Bursa Malaysia members. ### Overall assessment and strategic outlook - The assessment validates the SC’s regulatory philosophy and high level of compliance with IOSCO and FMI principles. - CMP1 and CMP2 frameworks provided structural market development; CMP2 emphasizes governance and streamlining regulatory procedures. - SC is self-funding, operationally independent in practice, and actively engaged in international regulatory fora (IOSCO Board membership noted). - SC is implementing many recommendations from the IOSCO Detailed Assessment Report and integrating them into CMP2 and Corporate Governance Blueprint 2011 priorities. *Source: IMF/World Bank FSAP assessment content as presented in the supplied PDF excerpt (content unit: _cr1359).* ### 1. Summary Implementation of the IOSCO Principles—Detailed Assessments ....................20 ### 1. Summary Implementation of the IOSCO Principles—Detailed Assessments ....................20 ### Summary and Key Findings - The Securities Commission Malaysia (SC), as the supervisor of the capital markets, has developed a robust supervisory framework that exhibits high levels of implementation of the International Organization of Securities Commissions Objectives and Principles of Securities Regulation (IOSCO Principles) in most areas. - The regimes governing the regulation of issuers, auditors, collective investment schemes, market intermediaries and secondary markets, and with respect to enforcement, co-operation and information sharing, are extensive. - Areas where enhancements are advisable: - Strengthen legal protections to buttress the SC’s independence by changing legal provisions on removal of commission members and protections for members of the Commission and its staff. - Adjust disclosure deadlines for issuers and their substantial shareholders to reflect international best practices. - Implement fully the new frameworks for oversight of credit rating agencies (CRAs) and the Federation of Investment Managers Malaysia (FIMM) by carrying out on-site inspections as presently planned.1 - Consider creating pre-conditions that enable the SC to ease gradually its direct involvement in day-to-day operations of the capital market and its participants as the jurisdiction develops. 1. On-site inspections on the two registered domestic CRAs were completed in June and September 2012. ### Introduction — Assessment Context and Methodology - Assessment mission: IMF/World Bank Financial Sector Assessment Program (FSAP) mission to Malaysia, period April 4 to 20, 2012. - Assessor: Tanis MacLaren, an external technical expert employed for this purpose by the IMF. - Assessment Methodology: 2011 IOSCO Methodology for Assessing Implementation of the IOSCO Principles (the Assessment Methodology). The final version of this revised Assessment Methodology is expected to be endorsed at the IOSCO annual meeting in 2012. - Focus: substance of regulatory outcomes of the key requirements under each Principle. - Information sources: - Detailed self assessment submitted by the authorities. - Extensive interviews with staff of the SC. - Review of legislation, regulations, guidelines and related materials. - Interviews with staff of Bank Negara Malaysia (BNM), Bursa Malaysia, market participants and other stakeholders. ### Institutional and Market Structure — Overview - Two main regulators: Securities Commission Malaysia (SC) and Bank Negara Malaysia (BNM), each with clearly delineated areas of oversight and accountability set out in legislation. - Formal arrangements govern areas of joint responsibility (e.g., investment banks) and give the SC authority to approve capital markets products designed, operated and offered by institutions licensed by BNM. - SC regulatory scope: - Authority over equity securities, debt securities and derivatives, whether traded over-the-counter (OTC) or on organized markets, and other capital markets activities such as discretionary portfolio management and management of collective investment schemes (CIS—or unit trusts). - SC reports to the Minister of Finance (Minister). - Statutory powers drawn from: Securities Commission Act 1993 (SCA), Capital Markets and Services Act 2007 (CMSA) and Securities Industry (Central Depositories) Act 1991 (SICDA). - Under the CMSA, SC has authority to make binding regulations and to issue guidelines and practice notes (s. 377 and 378). - BNM responsibilities: - Central bank and supervisor for banks, insurance companies, Islamic banks, takaful operators, reinsurance companies and other participants in the financial markets. - Oversight over foreign exchange and money markets. - Statutory basis includes Central Bank of Malaysia Act 2009 (CBA) and Banking and Financial Institutions Act 1989 (BAFIA). - BNM reports to the Minister. - Governance and organization of the SC: - Led by a nine member Commission headed by an Executive Chairman. - Commission meets monthly; functions (including approvals associated with gatekeeping and oversight) are vested with the Commission, with some functions delegated to committees or to the Chairman. - SC organized into eight divisions: Chairman’s Office, Compliance & Examination, Corporate Finance & Investments, Corporate Resources, Enforcement, Islamic Capital Market, Market Oversight and Strategy and Development. - Two affiliated agencies: Securities Industry Dispute Resolution Centre (SIDREC) and Securities Industry Development Corporation (SIDC). - SIDREC: - Specialized dispute resolution body for claims against certain licensed market intermediaries. - Provides mediation and adjudication; service offered free to investors; decisions and awards binding on the intermediary; claimants may pursue court action if dissatisfied. - Audit Oversight Board (AOB): - Established to provide independent audit oversight of public interest entities (PIEs). - Mandate to promote confidence in the quality and reliability of audited financial statements of PIEs. - Part of the SC but governed by a separate board including representatives from the accounting profession, regulators (SC, BNM, Companies Commission Malaysia) and private sector. ### Regulatory Approach and Strategic Direction - Current approach: SC is prescriptive and very involved in most aspects of capital market operation and participant behavior. - Transition indicators: - SC has issued Capital Market Masterplan 2 (2011–2020) (CMP2) and the Corporate Governance Blueprint 2011 aimed at structurally reforming and developing the market and raising corporate governance standards. - CMP2 theme: "Growth with Governance"; 10-year plan to develop capital market and support governance culture. - Corporate Governance Blueprint 2011 aims to complement regulatory discipline with self- and market-discipline. - SC strategy includes moving toward more emphasis on disclosure and less emphasis on merit reviews of new issues. ### Market Structure and Activity — Bursa Malaysia and Market Participants - Market infrastructure: - One securities exchange (Bursa Malaysia Securities) and one derivatives exchange (Bursa Malaysia Derivatives), plus securities and derivatives clearing houses, central securities depository, and operator of an electronic bond trading/reporting platform — all subsidiaries of Bursa Malaysia Berhad. - Holding company is listed on the securities exchange. - Securities exchange has two equity markets: Main Market and ACE Market. - Main Market: established companies with profit track records of three to five full financial years or sizeable business. - ACE Market: sponsor-driven market for companies with growth potential but insufficient history for Main Market. - Trading and firm counts (at time of assessment): - 35 securities broking firms that are participating organizations (POs) in Bursa Malaysia Securities. - 20 futures broking firms that are trading participants (TPs) in Bursa Malaysia Derivatives. - Trends in listings and market depth: - Over the past six years prior to assessment: - Number of listed companies declined: - Main Market: decline of 8.6 percent. - ACE Market: decline of 7.0 percent. - Number of issues listed: - Main Market: declined 14.2 percent. - ACE Market: increased 10.6 percent. - Structured warrants listed increased from 33 in 2006 to 304 in 2011 (an increase of over 800 percent). - CMP1 emphasis was on growth in market capitalization, not number of listings; resulted in an 8.6 percent compound annual growth rate in market capitalization, but a decline in number of listed companies.4 4. The SC reported that over this period, 241 listed companies (out of 955) had annual growth in market capitalization of more than 10 percent per annum and 60 of these had annual growth rates above 25 percent; 78 percent of these high growth companies started out with market capitalizations of less than RM500 million. ### Key Market Statistics (Bursa Malaysia Securities Trading) - Number of securities listed (by year and category): - Main Market (including REITs): 2006: 831; 2007: 810; 2008: 758; 2009: 995; 2010: 992; 2011: 988. - Second Board: 2006: 321; 2007: 294; 2008: 269; 2009: NA; 2010: NA; 2011: NA. - ACE Market (formerly known as Mesdaq): 2006: 132; 2007: 133; 2008: 134; 2009: 129; 2010: 134; 2011: 146. - Structured Warrants: 2006: 33; 2007: 120; 2008: 48; 2009: 137; 2010: 225; 2011: 304. - Bonds & Loans (introduced in 2008): 2006: NA; 2007: NA; 2008: 42; 2009: 41; 2010: 36; 2011: 33. - ETFs (introduced in 2008): 2006: NA; 2007: NA; 2008: 3; 2009: 3; 2010: 5; 2011: 5. - Total securities listed: 2006: 1317; 2007: 1357; 2008: 1254; 2009: 1305; 2010: 1392; 2011: 1476. - Number of companies listed (by year): - Main Market (including REITs and ETFs): 2006: 649; 2007: 636; 2008: 634; 2009: 844; 2010: 844; 2011: 822. - Second Board: 2006: 250; 2007: 227; 2008: 221; 2009: NA; 2010: NA; 2011: NA. - ACE Market (formerly known as Mesdaq): 2006: 128; 2007: 124; 2008: 122; 2009: 116; 2010: 113; 2011: 119. - Total companies listed: 2006: 1027; 2007: 987; 2008: 977; 2009: 960; 2010: 957; 2011: 941. - Market capitalization and trading activity (by year): - Total market capitalization (RM billion): 2006: 849; 2007: 1,106; 2008: 664; 2009: 999; 2010: 1,275; 2011: 1,285. - Annual trading volume (on-market trades & direct business trades) (billion shares): 2006: 215; 2007: 384; 2008: 154; 2009: 248; 2010: 253; 2011: 329. - Annual trading value (on-market trades & direct business trades) (RM billion): 2006: 278; 2007: 582; 2008: 313; 2009: 303; 2010: 390; 2011: 438. - Value of new issues listed (Total market cap of new issues of IPOs, structured warrants, bonds, loans and ETFs as at end of 1st day trading in RM billion): 2006: 7.2; 2007: 17.5; 2008: 39.5; 2009: 48.6; 2010: 68.9; 2011: 36.8. - Additional market growth figures highlighted: - Total market capitalization increased 51.4 percent (from RM 849 billion to RM 1,285 billion) over the six-year period referenced. - Annual trading volumes increased 53 percent (from 215 billion to 329 billion shares). - Annual trading values increased 57.6 percent (from RM 278 billion to RM 438 billion). - Value of new issues listed increased over 400 percent (from RM 7.2 billion to RM 36.8 billion). - RM12.6 billion was raised through new issues of shares and warrants in 2011. Note: In August 2009, the Main Board and the Second Board were merged to become the Main Market and the MESDAQ Market became the Ace Market. Source: Securities Commission. *Source: _cr1359 - 1. Summary Implementation of the IOSCO Principles—Detailed Assessments ....................20* ### 19. There has been substantial growth in the activity on Bursa Malaysia Derivatives ### 19. There has been substantial growth in the activity on Bursa Malaysia Derivatives ### Derivatives market growth and contract volumes - Substantial growth in activity on Bursa Malaysia Derivatives over the last six years, primarily in two key futures contracts. - KLCI futures trading increased 52.5 percent from 2006 to 2011. - KLCI futures trading reached a high volume mark in 2007 before falling during the crisis and its aftermath; it resumed growing in 2011. - Crude Palm Oil (CPO) futures trading is up 163.2 percent (by number of contracts), exhibiting growth in each year over the whole period. - Overall trading on the exchange doubled over the period. - Participation of foreign investors and retail investors is increasing. - Bursa Malaysia Derivatives – Number of Contracts Traded (by contract type and year) - KLCI Futures: 2006 — 1,628,043; 2007 — 3,157,341; 2008 — 2,920,728; 2009 — 1,997,955; 2010 — 1,994,907; 2011 — 2,482,314 - Crude Palm Oil Futures: 2006 — 2,230,340; 2007 — 2,793,560; 2008 — 3,003,549; 2009 — 4,008,882; 2010 — 4,064,361; 2011 — 5,871,132 - 3-Month KLIBOR Futures: 2006 — 272,502; 2007 — 239,314; 2008 — 195,193; 2009 — 126,690; 2010 — 95,477; 2011 — 92,775 - Others (i.e. Single Stock Futures, MGS1 Futures, US CPO Futures, KLCI Options): 2006 — 30,139; 2007 — 12,471; 2008 — 572; 2009 — 4,300; 2010 — 0; 2011 — 16 - Annual trading volume (million contracts): 2006 — 4,161,024; 2007 — 6,202,686; 2008 — 6,120,042; 2009 — 6,137,827; 2010 — 6,154,745; 2011 — 8,446,237 - Note: MGS–Malaysian Government Securities. - Source: Securities Commission ### Strategic partnerships and market access - Bursa Malaysia Derivatives entered into a strategic partnership with Chicago Mercantile Exchange (CME) in 2010. - Arrangement includes licensing of CPO futures settlement prices and global distribution of Bursa Malaysia Derivatives' products through the CME’s Globex electronic trading platform. - The U.S. Commodity Futures Trading Commission exempted Malaysian brokers from the requirement to be registered as futures commission merchants in the U.S. before they could transact with U.S. customers to trade on Bursa Malaysia Derivatives. ### Foreign issuers, foreign investor participation, and cross-listing prospects - Number and aggregate market capitalization of foreign-incorporated issuers listed on Bursa Malaysia Securities are not significant. - As at 30 November 2011: out of 945 listed issuers with a total market capitalization of RM 1,228 billion, there are only 8 foreign-incorporated listed issuers with an aggregate market capitalization of RM3 billion (representing less than 1 percent of the total market capitalization of all listed issuers). - Foreign investor presence in markets (November 2011 estimates by Bursa Malaysia): - Foreign investors represented 27.7 percent of the total value traded and 6.1 percent of the total volume of trading on the market. - Foreign shareholdings accounted for 22.9 percent in value and 17.2 percent in number of shares of the total shareholdings held at the central securities depository. - Proportion of foreign investors participating in the derivatives exchange: 32 percent of the total number of investors. - Prospects: - Number of foreign companies listed and foreign investors participating directly in Malaysian markets is likely to rise. - Bursa Malaysia currently does not have formal links with other securities exchanges or clearing houses, but discussions are ongoing with exchanges in Singapore and Bangkok to build a regional alliance to facilitate cross-border investment and cross-listings. ### Retail collective investment schemes (unit trusts) - Growth in the retail unit trust market has been steady. - Number of retail unit trusts increased by 21 percent over the past five years. - Highest growth in mixed income funds: up 250 percent, from 6 to 21. - Assets under management up 49 percent over the same period. - Retail Unit Trusts — Numbers of Funds by Type (2007–2011) - Equity: 2007 — 226; 2008 — 236; 2009 — 237; 2010 — 251; 2011 — 271 - Fixed Income/Bond: 2007 — 100; 2008 — 119; 2009 — 124; 2010 — 128; 2011 — 122 - Money Market: 2007 — 35; 2008 — 31; 2009 — 34; 2010 — 32; 2011 — 39 - Balanced: 2007 — 62; 2008 — 63; 2009 — 61; 2010 — 58; 2011 — 59 - Mixed Income: 2007 — 6; 2008 — 9; 2009 — 10; 2010 — 18; 2011 — 21 - Feeder: 2007 — 32; 2008 — 41; 2009 — 45; 2010 — 55; 2011 — 55 - Structured Products: 2007 — 9; 2008 — 15; 2009 — 14; 2010 — 6; 2011 — 3 - Fund of Fund: 2007 — 8; 2008 — 10; 2009 — 8; 2010 — 7; 2011 — 8 - Others: 2007 — 6; 2008 — 8; 2009 — 8; 2010 — 9; 2011 — 9 - Total: 2007 — 484; 2008 — 532; 2009 — 541; 2010 — 564; 2011 — 587 - Retail Unit Trusts — Total Net Asset Value & Number of Unit Trust Management Companies (2007–2011) - Total Net Asset Value (in RM billions): 2007 — 168.0; 2008 — 130.4; 2009 — 191.7; 2010 — 226.8; 2011 — 249.5 - Number of Unit Trust Management Companies: 2007 — 39; 2008 — 39; 2009 — 39; 2010 — 39; 2011 — 40 - Source: Securities Commission ### Wholesale collective investment schemes (unit trusts) - Growth in the wholesale unit trust market has been much more significant. - Number of unit trusts sold only to qualified investors increased by just under 360 percent over the past five years (from 29 to 133 funds). - Assets under management increased over 1070 percent over the same period (from RM 2.34 billion to RM 27.4 billion). - Wholesale Funds — Numbers of Funds and Total Net Asset Value by Year - Total Number of Funds: 2007 — 29; 2008 — 54; 2009 — 88; 2010 — 107; 2011 — 133 - Note: 2007 — 19 Restricted Investment Schemes (RIS) and 10 Wholesale Funds (all offered to qualified investors). - Note: 2008 — 29 RIS and 25 Wholesale Funds. - Total NAV (in RM billions): 2007 — 2.34; 2008 — 4.9; 2009 — 14.0; 2010 — 18.7; 2011 — 27.4 - Regulatory note: - From 2006 to 2009, RIS were allowed; in 2009 the SC merged RIS and wholesale funds under new Guidelines on Wholesale Funds. Since then, wholesale funds can only be established by fund management companies. - Source: Securities Commission ### Bond market developments - Total value of the Malaysian bond market as at 31 December 2011: RM841.2 billion. - Average annual growth rate since 2001: 10.6 percent. - Outstanding ringgit-denominated sukuk as at the end of 2011: RM349.0 billion, i.e., 41.5 percent of the total bond market. - Short-term debt securities: 13.8 percent of outstanding bonds. - Longer-term instruments (term to maturity longer than one year): 86.2 percent of outstanding bonds. - Corporate debt securities: 40.7 percent of all debt securities outstanding. - Number of approved corporate debt issues in 2011: 82 ringgit-denominated and 16 foreign currency-denominated. - Net new issues of debt securities by the private sector in 2011 (gross issues less redemptions): RM24.5 billion. ### Market intermediaries - Number of authorized market intermediaries remained broadly stable. - Categories and totals (2006–2011) - Investment Bank: 2006 — 10; 2007 — 13; 2008 — 13; 2009 — 14; 2010 — 14; 2011 — 14 - Stock Broker: 2006 — 29; 2007 — 20; 2008 — 20; 2009 — 19; 2010 — 20; 2011 — 20 - Universal Broker: 2006 — 4; 2007 — 1; 2008 — 1; 2009 — 1; 2010 — 1; 2011 — 1 - Derivatives Broker: 2006 — 16; 2007 — 13; 2008 — 14; 2009 — 13; 2010 — 13; 2011 — 13 - Fund Supermarket1: 2006 — -; 2007 — 1; 2008 — 1; 2009 — 1; 2010 — 1; 2011 — 1 - Unit Trust Management Company (UTMC)2 and Fund Management Company (FMC)3: 2006 — -; 2007 — -; 2008 — 26; 2009 — 27; 2010 — 30; 2011 — 31 - FMC and dealing in securities (restricted to Unit Trusts) licences4: 2006 — -; 2007 — -; 2008 — 3; 2009 — 3; 2010 — 3; 2011 — 3 - FMC: 2006 — 78; 2007 — 78; 2008 — 58; 2009 — 55; 2010 — 51; 2011 — 48 - Stand alone UTMC2: 2006 — -; 2007 — -; 2008 — 13; 2009 — 12; 2010 — 9; 2011 — 9 - Corporate Finance Adviser: 2006 — -; 2007 — 40; 2008 — 40; 2009 — 41; 2010 — 43; 2011 — 44 - Investment Adviser5: 2006 — 80; 2007 — 21; 2008 — 21; 2009 — 21; 2010 — 20; 2011 — 19 - Financial Planning: 2006 — -; 2007 — 26; 2008 — 25; 2009 — 24; 2010 — 24; 2011 — 23 - Corporate Unit Trust Adviser (CUTA): 2006 — -; 2007 — -; 2008 — 2; 2009 — 4; 2010 — 7; 2011 — 7 - Issuing House: 2006 — 2; 2007 — 2; 2008 — 2; 2009 — 2; 2010 — 2; 2011 — 2 - Total number of authorized market intermediaries: 2006 — 219; 2007 — 215; 2008 — 236; 2009 — 237; 2010 — 237; 2011 — 235 - Notes: - Fund Supermarket licence effective from 2007 onwards. - UTMC licence for dealing in securities (restricted to unit trusts) effectively operational from 2008 onwards. - Intermediaries licensed in both UTMC and FMC categories. - FMC and dealing in securities (restricted to unit trust) licences were issued to companies in anticipation of retail unit trust business. - In 2007, licences for Corporate Finance Advisors and Financial Planning were introduced; prior to that they were licensed as Investment advisers. - Source: Securities Commission ### Self-regulatory organizations (SROs) and oversight - Malaysia uses SROs that exercise direct oversight responsibility for certain market participants and whose rules are subject to meaningful sanctions. - Two SROs: Bursa Malaysia and FIMM. - FIMM is a recognized and authorized SRO under the CMSA; responsible for supervision of participants in the unit trust market, including registration of distribution agents. - Bursa Malaysia is recognized as an exchange holding company under the CMSA, undertakes certain SRO functions, and is the front line regulator of stockbrokers and futures brokers that are exchange members and participants in related clearing houses. - If banks or stockbrokers distribute unit trusts to clients, they are required to be registered with FIMM. ### Islamic capital market (ICM) - Capital markets comprise two components: conventional and Islamic; the ICM operates parallel to the conventional market based on Shariah principles. - Fundamental securities regulatory scheme for each market is similar, with an additional set of Shariah-compliance requirements for Islamic products and services. - SC is guided by the Shariah Advisory Council (SAC) to determine Shariah-compliance of securities. - Shariah-compliant securities amounted to RM1.16 trillion at the end of 2011, accounting for 54.4 percent of the entire capital market. - Of the securities listed on Bursa Malaysia Securities, 89 percent are deemed Shariah-compliant. - Malaysia is the biggest sukuk market in the world: - RM349.0 billion in outstanding ringgit-denominated sukuk as at the end of 2011, accounting for approximately two-thirds of global sukuk outstanding. - Of this RM349.0 billion, RM206.2 billion was issued by private entities and RM142.8 billion by public issuers. - The ICM was not assessed separately in this review; the Assessment Methodology does not distinguish between conventional and Islamic markets with respect to expectations or standards. ### Preconditions for effective securities regulation and legal infrastructure - Preconditions for effective supervision appear to be in place: stable macroeconomic environment, sound legal and accounting framework, and effective procedures for resolution of securities market problems. - Specialized courts exist to deal with complex commercial matters, including capital markets transactions; enforcement hearings can be carried out expeditiously. - Companies Act 1965 contains comprehensive provisions on company management, shareholder rights, duties of directors and officers, preparation of company accounts and audit, issuance of shares and debentures, proceedings of general meetings, and winding up of companies. - For publicly listed companies, CMSA and the Listing Requirements prescribe additional requirements. - Take-overs and mergers provisions are in the CMSA and the Malaysian Code on Take-Overs and Mergers 2010 (Take-Over Code); the Take-over Code has statutory backing and is enforceable by the SC. - Bankruptcy legislation is dated but under review and expected to be substantially amended in the near future. - CMSA provides modifications to laws of insolvency and miscellaneous provisions related to default procedures of the clearing house (s. 41-57). - If any participant of Bursa Malaysia becomes insolvent, trades on the securities and derivatives exchanges continue to be enforceable. - CMSA states that default proceedings of Bursa Malaysia Securities Clearing and Bursa Malaysia Derivatives Clearing take precedence over law of insolvency (s. 43). ### Main findings — regulatory framework and oversight - Principles 1–8 (relating to the regulator): - The SC has clear statutory authority and responsibility for Malaysian capital markets. - In practice, the SC has operational independence from the industry and the government, though its independence at law is somewhat impaired because the Minister can dismiss any Commission member without cause at any time under the SCA. - Statutory immunity of the SC, its Commission members and staff members does not extend to former employees and agents; indemnities are not available to these persons if sued for actions taken in the course of their duties at the SC. - Clear regulatory processes are in place and applied consistently. - Persons affected by SC decisions are afforded protections including right to be heard, written reasons, and rights of appeal. - SC staff are described as very professional and subject to detailed conduct rules; market participants praised the quality and openness of SC staff. - SC has an explicit mandate and authority for monitoring, mitigating and managing systemic risk, with regulatory processes and communication/information sharing in place with BNM. - The perimeter of regulation is assessed regularly; SC can exercise public interest jurisdiction to block problematic behavior or products or change rules to permit new services and products. - Processes are in place to address conflicts of interest and misalignment of incentives; SC, issuers, intermediaries, CRAs, the Bursa, FIMM and CIS are subject to extensive management and disclosure requirements regarding conflicts of interest. - Principle 9 (relating to self-regulation): - Two organizations (Bursa Malaysia and FIMM) exercise direct oversight responsibility for certain markets and participants; both are subject to SC oversight and required to observe high standards. - The regime for Bursa Malaysia is detailed, comprehensive and has operated effectively for several years. - SC established supervisory framework for FIMM as an SRO, including on- and off-site supervision, reporting and a rule review process. - As at the date of the review, the SC had not conducted an on-site examination of FIMM, although other oversight modes were operative prior to recognition; an on-site inspection of FIMM was carried out (May 2012). *Source: Securities Commission (as presented in the supplied IMF review content).* ### 35. Principles 10–12, Principles relating to enforcement of securities regulation: The ### _cr1359 - 35. Principles 10–12, Principles relating to enforcement of securities regulation: The ### Principles 10–12 — Enforcement powers, inspection, investigation and surveillance - The SC has broad inspection, investigation and surveillance powers. - The SC has powers to investigate and take action against anyone who breaches the laws it administers. - The SC carries on active inspection and enforcement programs. - Both on-site and off-site reviews of regulated entities are performed. - Market surveillance is performed at the exchanges and at the SC. - The fines that can be imposed by the SC and the Bursa Malaysia vary. ### Principles 13–15 — Cooperation in regulation - The SC has the ability and capacity to share information and cooperate with regulators, both domestically and internationally. - There is no requirement that there be an MOU in place. - The SC has specific authority to provide assistance to a foreign supervisory authority to investigate an alleged breach of a legal or regulatory requirement that the foreign supervisory authority enforces or administers. - The SC is a signatory to the IOSCO Multilateral MOU and to many bilateral MOUs with its counterparts in other countries. ### Principles 16–18 — Issuers, disclosure, listings and corporate governance - Extensive requirements are in place for initial offering and continuous disclosure documents for securities. - The disclosure to be provided to purchasers of futures contracts is specified in the CMSA and the rules of the Bursa Malaysia Derivatives. - New issues of securities (debt, equity or CIS) to the public are required to be offered via prospectuses that must be registered by the SC. - Virtually all public issues of equity securities are listed on the Bursa Malaysia Securities and are subject to the provisions in the CMSA, SC guidelines and the Listing Requirements. - The SC approves listings on the Main Market of Bursa Malaysia Securities and the Bursa approves listings on the ACE Market. - Continuing disclosure documents are made public through the facilities of the exchange. - Investors are treated equitably with respect to voting, access to information and the ability to participate in any takeover bid. - Full information must be provided for any takeover bid. - As of January 2012, Malaysia implemented International Financial Reporting Standards (IFRS) for all Public Interest Entities (PIEs), which includes public companies, CIS, financial institutions and market intermediaries. - The publication of annual audited financial statements and annual reports by listed companies are slow compared to the requirements that apply to CIS. - The notice period for shareholder meetings may be too short for full communication with all shareholders. - Substantial shareholders in listed companies are given much longer to report their initial positions and any changes than are the directors and the CEOs of these issuers. - The definition of 'interests in securities' does not include publicly offered rights. - There is no timely public transparency of information on the positions of these key personnel for unlisted public companies. ### Principles 19–23 — Auditors, credit rating agencies and other information service providers - There is a regulatory system in place in Malaysia that subjects auditors of PIEs to appropriate levels of oversight. - Auditors of PIEs must be registered with the Audit Oversight Board (AOB), which is an agency of the SC. - The AOB conducts examinations of auditors and has the power to sanction breaches of the standards. - There are extensive requirements for auditors to be independent of the entities they audit and these requirements are enforced by the AOB. - The regulatory framework in Malaysia requires that the financial statements included in public offering and listing particulars documents and publicly available annual reports be audited in accordance with the International Standards on Auditing (ISA) issued by IFAC, for all periods beginning on or after January 1, 2010. - CRAs whose ratings are used for regulatory purposes are subject to registration; bonds issued in ringgit must be rated. - The SC has full power to supervise these entities, including carrying out on-site and off-site examinations and sanctioning. - The SC has a framework in place to conduct on-site examinations of CRAs and on-site examinations were being planned; as of the date of the review, SC had yet to conduct an on-site examination of a CRA. One inspection has since been completed. - Entities that provide analytical or evaluative services include investment advisors/analysts, corporate finance advisors, bond pricing agencies and property valuers. - Investment advisors/analysts, corporate finance advisors and bond pricing agencies have to be licensed or registered with the SC. - Property valuers are professionals registered with the Board of Valuers at the Ministry of Finance. ### Principles 24–28 — Collective investment schemes and hedge funds - All publicly offered CIS and their operators and distributors are subject to authorization and reporting requirements. - All funds offered to the public must be approved by the SC, which process includes the review of a detailed prospectus that contains comprehensive and timely information about the CIS. - Funds are established as unit trusts, with assets segregated from those of the operator and distributor and held by an independent trustee that must be approved by the SC. - All CIS and their operators and distributors are subject to a comprehensive supervision framework that includes both off-site and on-site reviews. - The fund’s securities and its assets are subject to valuation in accordance with IFRS. - Continuous disclosure of unit prices is provided through the FIMM website. - A hedge fund can be set up under the wholesale framework to offer securities only to qualified (sophisticated) investors and it must be approved by the SC. - The operator must be licensed as a fund management company and the offering memorandum containing extensive information about the fund must be deposited with the SC. - Wholesale funds are also subject to requirements to report regularly to investors and to the SC, including delivery of audited annual reports within two months of the fund's year end. ### Principles 29–32 — Market intermediaries, licensing, capital and client protection - A framework is in place for licensing and to apply on-going requirements for market intermediaries. - Applicants are subject to detailed reviews before being licensed. - There are initial and ongoing capital requirements for all types of intermediaries that reflect the risks that they undertake. - The capital requirements for stockbroking and futures broking companies address the full range of risks to which the firms are exposed, including market, credit, liquidity and operational risk. - There are requirements regarding capital calculations and immediate reporting of deficiencies by market intermediaries. - Market intermediaries are required to have extensive systems of risk management and internal controls in place. - There are regulations for proper protection of clients, including requirements for segregation of clients’ assets and business conduct rules, such as ‘know your client’ and suitability. - The SC has plans in place for dealing with a firm’s failure; the plans are flexible to include action to restrain conduct, to ensure client’s assets are properly managed and to provide relevant information to the regulators and the general public. *Source: _cr1359 - 35. Principles 10–12, Principles relating to enforcement of securities regulation: The* ### 41. Principles 33–37, Principles for the secondary markets: Exchanges are subject to ### _cr1359 - 41. Principles 33–37, Principles for the secondary markets: Exchanges are subject to ### Overview: Principles 33–37 (secondary markets; exchanges and trading systems) - Exchanges are subject to authorization by the Minister with the advice of the SC. - An electronic facility that falls within the meaning of “stock market” but is not intended to operate as a stock exchange or derivatives exchange must be registered by the SC as a Registered Electronic Facility (REF). - Monitoring activities by Bursa Malaysia include real-time market surveillance and supervision of participating members and clearing members. - Market surveillance for trading on the securities market is performed in parallel at the exchange and the SC. - The SC has a comprehensive oversight system for exchange supervision including on-site examinations and off-site reviews of rules and other matters. - The SC may suspend the operations of a stock exchange or REF; on the recommendation of the SC, the Minister may revoke authorization of any exchange; the SC may revoke an REF’s registration. - There is both pre-trade and post-trade real-time transparency of prices on the Bursa Malaysia exchanges, except for certain specified trades permitted outside the automatic trading system subject to clearly defined conditions and prompt post-trade reporting. - Rules against market abusive transactions are extensive and mechanisms exist to detect and take action against improper conduct. - Trades on both the securities and derivatives exchanges are cleared and settled through central counterparties with detailed and transparent provisions to protect markets against a default by any participant. - There are regular consultations and information sharing arrangements between Bursa Malaysia, the SC, and BNM to minimize adverse effects of market disruptions. ### Detailed findings (selected excerpts from Principles 1–38 assessment relevant to exchanges and markets) - Principle 33 (establishment/authorization of trading systems): FI — Exchanges subject to authorization by the Minister with SC advice; REFs must be registered by the SC; applicants must meet specified criteria including systems and infrastructure capacity and technical competence. - Principle 34 (ongoing supervision of exchanges): FI — SC oversight includes on-site examinations and off-site reviews; SC may suspend operations; surveillance carried out by exchanges and SC. - Principle 35 (transparency of trading): FI — Both pre-trade and post-trade real-time price transparency for most trades on Bursa Malaysia; Certain specified trades (Direct Business Transactions) may occur outside the automatic trading system subject to conditions and prompt post-trade reporting; no dark pools operating in Malaysia. - Principle 36 (detect/deter manipulation): FI — Extensive rules against market abusive transactions; SC and Bursa collect and analyze extensive trading data to deter and detect improper transactions. - Principle 37 (management of large exposures/default risk/market disruption): FI — Clearing and settlement through central clearing houses with detailed transparent provisions; formal and informal arrangements for SC and BNM consultation. - Additional relevant cross-cutting findings: - Market surveillance is performed at both the exchanges and the SC. - Bursa Malaysia conducts real-time surveillance and supervises participating and clearing members. - Central counterparties provide clearing and settlement protections against participant default. ### Implementation summary (aggregate counts) - Fully Implemented (FI) - 34 - Broadly Implemented (BI) - 2 - Partly Implemented (PI) - 1 - Not Implemented (NI) - 0 - Not Applicable/Assessed (NA) – 1 ### Recommended action plan (selected recommendations relevant to markets, exchanges, and overarching regulatory framework) - Principle 1: Continue joint work to ensure consistency in standards of disclosure and market conduct and in supervision of market participants to provide Malaysian investors appropriate investor protection regardless of product, service, or intermediary. - Principle 2: Amend the SCA to include general qualification requirements for Commission members; state that a Commission member may only be removed for cause and delineate those causes; repeal the Minister’s right to remove members at any time; consider extending statutory immunity provisions to persons acting on behalf of the SC (including former employees and agents) and permitting the SC to indemnify legal costs. - Principle 6: Consider making the SC a permanent member of the Financial Stability Executive Committee. - Principle 9: Conduct the first regulatory audit of FIMM as soon as practicable. (Note: the regulatory audit of FIMM was conducted by the SC in May 2012.) - Principles 11 and 12: Consider examining adequacy and consistency of maximum fines under the legislation to ensure amounts are high enough given market growth and profitability; fines imposed by the SC should not be less than those imposed by the Bursa. - Principle 16: Pursue SC Corporate Governance Blueprint 2011 recommendation to form a taskforce of industry and regulators to review periodic disclosure frameworks, including shortening submission periods for quarterly and annual reports; consider requiring audited annual financial statements to be published within 90 days of the year-end and the annual report available promptly thereafter; consider amending CMSA to provide for civil liability for misstatements in continuous disclosure documents analogous to prospectus liability and simplifying actions by deeming purchasers to have relied on the misstatement. - Principle 17: Pursue Corporate Governance Blueprint recommendations to encourage companies to extend notice periods for shareholder meetings and eliminate proxy appointment restrictions in Section 149 of the Companies Act; consider making proxy reforms mandatory for all public companies; consider aligning reporting requirements for substantial shareholders, officers and directors so shorter CMSA time periods for CEOs and directors apply to all substantial shareholders, directors and senior management of issuers and apply to all public companies; consider making disclosure for non-listed companies available to the public on the SC's website; consider widening disclosure requirements to include public rights offerings presently excluded. - Principle 22: Conduct the first inspection of a CRA as soon as practicable. (Note: an on-site inspection of one of the two CRAs took place shortly after the FSAP assessment visit.) - Principle 30: In the longer term, consider re-examining capital requirements for FMCs and moving to a more risk-based formula sensitive to specific positions held. - Principle 31: Consider requiring external auditors to conduct periodic evaluations of internal controls and risk management processes for market intermediaries, at least for stock brokers and futures brokers who are members of Bursa Malaysia. *Source: IMF Financial Sector Assessment—detailed assessment and recommended action plan (excerpt covering Principles 33–37 and related findings and recommendations).* ### 42. The high level of compliance accorded to the Malaysian capital market in this ### _cr1359 - 42. The high level of compliance accorded to the Malaysian capital market in this ### Compliance with IOSCO standards and FMI principles - The assessment finds a high level of compliance accorded to the Malaysian capital market under the more rigorous IOSCO standards and the new Financial Market Infrastructures (FMI) principles. - The IOSCO assessment result is described as a validation of the regulatory philosophy adopted by the SC. ### Strategic regulatory roadmap and SC approach - Since its establishment, the SC has been committed to benchmarking itself against international standards and best practices. - Historically, prevailing market conditions led the SC to implement a prescribed approach to regulation appropriate and effective under those circumstances. - The SC has instituted a comprehensive regulatory and supervisory framework, including the issuance of detailed laws and guidelines, which: - Heightened transparency. - Established clarity on the roles and responsibilities of market participants. - Promoted stability and confidence in the Malaysian capital market. ### Capital Market Masterplans (CMP1 and CMP2) and outcomes - CMP1: - Strategies documented in the first Capital Market Masterplan (CMP1) were implemented between 2001 and 2010. - Measures, including market developmental initiatives, fostered stability and resilience and helped insulate the Malaysian capital market from the impact of the recent global financial crisis. - CMP2: - Provides the basis for an ongoing regulatory approach to drive market growth domestically and through greater internationalisation. - Emphasizes strong governance arrangements and streamlining regulatory procedures and processes. - The capital market has expanded significantly and become an important source of financing in the Malaysian economy, particularly with the development of the bond market to meet long-term financing needs. - The market’s resilience now gives the SC flexibility to adopt a regulatory framework that can drive greater competition and innovation. ### International engagement and cross-border cooperation - Malaysia is taking continuous steps to align its regulatory framework with the changing global regulatory landscape and is actively involved in international financial regulatory policymaking work. - Amid regional expansion of local market intermediaries and plans to further internationalize the Malaysian capital market, the SC recognises the increasing importance of cross-border enforcement and supervisory cooperation. - Note: The SC Chairman is a member of the IOSCO Board and Vice-Chairman of the Emerging Markets Committee. The SC is also involved in several regulatory policy committees of IOSCO. ### SC governance, independence, and operational features - The Report notes SC is a self-funding statutory body with comprehensive rules of internal governance and is operationally independent. - In practice, any discretionary power of the Minister provided by securities law has always been exercised upon advice and recommendation by the SC. - The SC works closely with other regulators to ensure financial stability while encouraging development of new market segments and entry of new players to promote competition. - The overall stability of the capital market, amidst rapid but orderly growth, has meant SC is trusted by the market and the government to perform its functions effectively within its current governance structure. ### Corporate governance, disclosure, and shareholder participation reforms - Issues on enhancing information disclosure practices by issuers and treatment of securities holders were already identified in the CG Blueprint published prior to this assessment; resolving these issues is a priority for the SC. - Measures and initiatives in progress include: - Formation of a taskforce to review the current framework for periodic disclosure by issuers (including the need to shorten the submission period for quarterly and annual reports). - A proposed extension of the notice period for shareholder meetings to ensure effective and informed investor participation. - Removal of restrictions on proxy voting. - As of 3 January 2012, the Bursa Malaysia Listing Requirements no longer have qualification restrictions for proxies and allow shareholders of listed companies to appoint multiple proxies. ### Implementation and use of the IOSCO assessment - The SC is already in the process of implementing a number of recommendations in the IOSCO DAR that reflect strategies identified in CMP2 and the CG Blueprint. - The SC values suggestions by multilateral institutions like the IMF and the World Bank and pro-actively learns from international best practices to put in place appropriate preconditions for an effective regulatory regime. - The IOSCO assessment methodology is regarded as a useful tool for reviewing the effectiveness of regulatory and supervisory frameworks; the analysis and recommendations in the Report will feed into SC’s on-going improvement efforts to support projected growth and greater internationalization during the CMP2 period. - The SC thanked the IOSCO assessors for their engagement; the assessment required significant resources and time but was valuable in identifying strengths and areas for further improvement. ### Purpose of the detailed assessment - The assessment’s primary purpose is to ascertain whether the legal and regulatory securities markets requirements and the operations of securities regulatory authorities in implementing and enforcing these requirements in practice meet the standards set out in the IOSCO Principles. - The assessment is intended to identify potential gaps, inconsistencies, weaknesses and areas where further powers and/or better implementation of the existing framework may be necessary, and to be used as a basis for establishing priorities for improvements to the current regulatory scheme. *Source: _cr1359 — Excerpt from IM F assessment chapter on Malaysian capital market compliance and SC regulatory framework.* ### 53. The assessment of the country’s observance of each individual Principle is made ### 53. The assessment of the country’s observance of each individual Principle is made ### IOSCO assessment methodology and benchmarks - Assessment categories: fully implemented, broadly implemented, partly implemented, not implemented, and not applicable. - The IOSCO assessment methodology provides a set of assessment criteria to be met for each Principle to achieve the designated benchmarks. - The methodology recognizes that means of implementation may vary by domestic context, market structure, and stage of development, and that regulatory authorities may implement the Principles in many different ways. - Definitions: - Fully implemented: all assessment criteria specified for that Principle are generally met without any significant deficiencies. - Broadly implemented: exceptions limited to those specified under the broadly implemented benchmark and do not substantially affect the overall adequacy of the regulation. - Partly implemented: assessment criteria under the partly implemented benchmark are generally met without any significant deficiencies. - Not implemented: major shortcomings as specified in the not implemented benchmark are found. - Not applicable: Principle does not apply because of the nature of the country’s securities market and relevant structural, legal and institutional considerations. ### Principles Relating to the Regulator — Principle 1 (Responsibilities) - Description: - SC responsibilities, powers and authorities are set out in Securities Commission Act 1993 (SCA), Capital Markets & Services Act 2007 (CMSA) and Securities Industry (Central Depositories) Act 1991 (SICDA). - SCA establishes the SC and gives legal mandate to promote and maintain market integrity, supervise and monitor market activities and participants, take enforcement action against illegal/improper practices and market misconduct, and promote market development. - CMSA is primary legislation regulating securities and derivatives markets; SICDA establishes central depository and securities accounts. - SC issues guidelines under s. 377 of CMSA; SC regulatory decisions have been challenged and upheld by courts. - SC issues guidelines to clarify application of regulation to new products and services, operational aspects, and scope of waivers/exemptions (example: Guidelines on the Offering of Structured Products, 2007). - Bank Negara Malaysia (BNM) shares regulatory role where institutions under its supervision carry on capital markets activities; division of responsibilities set out by law and MOUs. - Registered Persons under CMSA (Part 1 of Schedule 4) include Islamic banks, commercial banks and insurance companies permitted to carry on specified regulated activities without separate SC registration; they must comply with many CMSL obligations (CMSA, s. 91 - 93 and 97). - SC and BNM jointly issued Guidelines on Investor Protection covering competency and entry requirements for employees of Registered Persons. - Capital market products subject to consistent regulatory requirements; Shariah-compliant products must also fulfil additional Shariah requirements. - Key MOUs between SC and BNM: - A general MOU establishing framework for co-operation and information exchange; - An MOU on Investment Banks outlining roles/responsibilities under dual regulatory framework; - An MOU on Mutual Recognition of Financial Advisers and Financial Planners. - Formal coordination: joint committees, regular meetings, annual meeting between SC Chairman and BNM Governor, staff-level discussions. - SC mandates market development and issued CMP1 (2001-2010) and CMP2 (2011-2020). CMP2 theme: ‘Growth with Governance’. - SC uses a formalized ‘challenge’ process for new issues or proposed changes to test proposals against investor protection and other mandates. - Assessment: Fully implemented. - Comments: - Both BNM and SC share supervision of some capital markets activities. Authorities encouraged to continue joint work to ensure consistency in disclosure, market conduct standards and supervision to provide appropriate investor protection. ### Principle 2 (Independence and accountability) - Description: - SC generally operates without government or commercial interference; day-to-day operation led by Executive Chairman (SCA, Section 4). - SC is financially independent and self-funded (levies, fees, charges) (SCA, s. 23 and 24); sets its budget and controls its funds (s. 23). - SC has a reserve fund: RM 700 million (enough to fund its operations for five years with no additional income). - Internal processes: annual budgeting, procurement policy/guidelines, authority matrices, integrity pacts, transparent tender process, periodic reporting, Treasury Management Committee and Treasury Management Guidelines. - Consultation with Minister of Finance on regulatory policy changes; certain matters require Minister’s approval or concurrence (e.g., approving a new stock exchange (CMSA, s. 8(1)); making regulations (SCA, s. 159, CMSA, s. 378(1) and SICDA, s. 63); concurrence required to approve a clearing house (CMSA, s. 38(4)). - Minister has general exemption powers (examples listed) exercised on SC recommendation and issued as regulations published in official gazette. - Matters requiring Minister approval reviewed by Ministry of Finance policy department (Loans Department, Financial Market and Actuary Division) and Treasury Solicitor’s Office; Attorney General’s Chambers involved for subsidiary legislation review. - Governance framework: board committees under SCA s. 18 (Licensing Committee, Issues Committee, Trust and Investment Management Committee, Take-overs and Mergers Committee) provide independent challenge and deliberation; Commission Secretary supports members. - Statutory immunity clause for Commission members, Shariah Advisory Council, AOB members, committee members, Chairman and staff for actions in good faith (SCA, s. 160); statute does not indemnify legal costs; agents of SC not covered by statutory provisions but often indemnified contractually. - Appointment/removal: - All nine members of the Commission appointed by the Minister; four of nine specifically 'represent the Government' and presently include Ministry of Finance, BNM and Ministry of Primary Commodities. - Commissioners appointed for fixed term not to exceed three years (renewable). - Restrictions: a Commission member cannot be an executive/salary-director of a public listed company or have employment contract with a public listed company (SCA, s. 5); must disclose interests (SCA, s. 13). - Accountability: SC is accountable to Parliament; must provide annual report including audited statements (SCA, s. 28 and 29); financial statements prepared in accordance with Financial Reporting Standards (FRS) and audited by external auditors; annual report posted on website. - No legal requirement to make public actions/decisions, but SC publishes impactful actions/decisions, press releases and speeches; not legally mandated to provide written reasons but does so in cases that materially affect rights (e.g., licence rejections, administrative sanctions, suspensions/revocations). - Procedural protections: show cause letters, Sanctions Committee procedures, right to be heard and appeal set out in CMSA; Public Prosecutor's consent required before SC can commence criminal prosecution; all actions subject to judicial review. - Historical litigation: 1993–2011 there have been 10 judicial review cases filed against SC; none succeeded. - Assessment: Partly implemented. - Comments and policy recommendations (preserve exact wording of recommendations): - Observations: SC operates free of influence in practice, but legal provisions missing expected terms under Assessment Methodology. - Concerns: SCA structure and appointment/removal provisions give Minister unfettered ability to remove any Commission member at any time, without cause or notice, contrary to Key Question 5. - Recommended legislative amendments: - Amend SCA to include general qualification requirements for Commission members. - Amend SCA to set out that a Commission member may only be removed for cause (such as bankruptcy, persistent failure to attend meetings, acting in conflict of interest, etc. as listed in s. 8 of the SCA). The right of the Minister to remove members without cause should be repealed. - Immunity and indemnity: - Consider extending immunity language to protect persons acting on behalf of the Commission (coverage should not depend on employment status at time of lawsuit; former employees and agents should be included). - Consider provisions permitting the SC to indemnify these persons for their legal costs in the event they are sued. ### Principle 3 (Powers, resources and capacity) - Description: - SC has powers under SCA, CMSA and SICDA to licence, inspect, enforce and regulate capital market participants; s. 15 SCA sets objectives/functions; CMSA allows making legally enforceable regulations and guidelines (s. 377 & 378). - Funding adequate: levies on transactions on Bursa Malaysia Securities and fees/charges on corporate proposals; SC controls operational allocation of its financial resources. - Human resources and technology: - SC has sufficient qualified staff and technological infrastructure, systems and databases. - Extensive framework for attracting, retaining, developing and motivating staff; tracks “people risk” as key operational risk. - Staff training and development: SC has structured development programme; consistently allocated an average of 4% of staff salary yearly for learning and development initiatives. - Governance and internal controls: organisation structure with defined responsibilities and delegated committees; job profiles and job evaluation; Policy-Making Framework; internal audit reporting to Audit Committee composed of independent non-executive Commission members. - Investor education: emphasis on nationwide financial literacy and inclusion; Securities Industry Development Corporation (SIDC) participates; SIDC conducted 847 programmes for over 60,000 market intermediaries and more than 650 financial literacy and investor education programs for more than 150,000 individuals between 2008 and 2011; resources from SC funds and Capital Market Development Fund (CMDF) devoted to these efforts; CMDF allocated significant funds towards promoting shareholder activism. - Total Number of Staff by Business Group/Department–2011 (preserve original presentation exactly): - # of Staff % of Total Staff - Chairman's Office - 88 13 - Corporate Resources - 17626 - Enforcement - 86 13 - Issues & Investment /Corporate Finance - & Investments - 100 15 - Market Supervision - 140 20 - Strategy & Development - 55 8 - Islamic Capital Market - 243 - Audit Oversight Board - 15 2 - Total684 100% - Assessment: Fully implemented. - Comments: (none beyond description in source) ### Principle 4 (Clear and consistent regulatory processes) - Description and findings: - Procedural fairness set out in securities laws; statutory right to appeal; parliamentary questioning and courts as final arbiter. - Enforcement guided by: - The Enforcement Handbook (administrative actions); - The Guidelines for the Prosecution of Securities Offences (criminal prosecution); - The Guidelines on Compounds (offering compounds). - Committees for independent challenge: Licensing Committee, Issues Committee, Trust and Investment Management Committee, Take-overs and Mergers Committee (SCA, s. 18); working-level committees include Intermediary Review Committee (IRC), Surveillance Review Committee (SRC) and Systemic Risk Oversight Committee (SROC). - Policy-making consultation processes applied for developing/amending regulatory policy, post-implementation review, cost-benefit analysis, and exposure drafts. - Consultation approaches: public exposure/consultation papers; dialogues, syndications, focus group discussions; committees/experts engagement. - Policy-Making Framework requires Concept Note including purpose, analysis, stakeholders, project plan (consultation, communication, measurement of effectiveness). - Public disclosure: policies and reasons for changes communicated via public consultations, market dialogues, briefings, press releases and speeches. - Cost-benefit analysis routinely conducted to minimize unjustified burdens. - Availability of laws/regulations/guidelines for free on SC website; printed copies available for purchase. - Procedural safeguards for affected persons: inquiry and evidence-gathering, show cause letters (14 days as practice, extendable), right to counsel, Sanction Committee protocols, reasons given for decisions, right to appeal and judicial review, independent appeal panel (entire board of Commission members not involved in original decision). - Licensing criteria: Sections 64 and 65 (grounds to refuse to grant a license); Section 72 (grounds to revoke/suspend); first-time applicants not given right to be heard but given full reasons for refusal and right to appeal. - Consistency measures: vetting by General Counsel office, referral of administrative actions to Sanctions Committee, intranet access to regulatory processes, specialized committees with clear terms of reference. - Assessment: Fully implemented. - Comments: - Securities laws do not expressly mandate SC to give reasons in writing, but SC gives reasons in all cases materially affecting rights. - Courts have upheld SC’s procedural fairness (example cited: Court of Appeal decision in NasionCom v Securities Commission Malaysia, April 9, 2012). ### Principle 5 (Professional standards and confidentiality) - Description: - All staff must comply with SC’s Code of Ethics and Code of Conduct (established under SCA, s. 20). - Codes include mandatory obligation to avoid situations prejudicing independent judgment; prompt disclosure of conflicts to Executive Director of Corporate Resources; prohibitions on certain securities investments except specified exceptions (private limited company securities, securities managed where staff has no discretion, Malaysian Government securities, any unit trust approved by the SC, foreign securities traded in a foreign exchange). - Asset declarations: required on joining and annual asset declaration for executive staff and management; full declaration every 5 years with annual updates. - Secrecy obligations: staff must comply with SCA secrecy obligation (s. 148) and maintain confidentiality of computer sources and information. - Prohibition on using information for personal gain. - Procedural requirements for performance: time charters, KPIs, SOPs, SLAs. - Misconduct procedures: internal guidelines for inquiry, investigation, resolution; appeals to Chairman and Malaysian Labour Department; Labour Department can refer to Industrial Tribunal. - Potential disciplinary sanctions include warning, reprimand, prohibition of facility use, cost of replacement, forfeiture of salary, suspension without salary, stoppage/deferment of salary increment, ineligibility for bonus, reduction of salary, demotion, dismissal, and public notice of dismissal. - Assessment: Fully implemented. - Comments: (none beyond description in source) ### Principle 6 (Systemic risk monitoring, mitigation and management) - Description and findings: - Statutory mandate and authority: - SCA s. 15(1)(p) gives SC power to take reasonable measures to monitor, mitigate and manage systemic risks in securities and derivatives markets. - Part IXA of CMSA (ss. 346A to 346D) sets measures available to SC for systemic risk responsibilities. - Historical context: systemic risk surveillance formalized after 1997 Asian crisis; Division of Strategy and Risk Management created in 2003. - Risk identification responsibilities assigned to Risk Management, Economics and Strategy and Research departments in Strategy and Development Business Group. - Tools for identifying systemic risk: - Key firms: systemic risk matrix (interconnectedness, size, market presence/substitutability), monitoring capital positions, stress tests of stockbroking companies. - Macro environment: capital market stress indices (modified financial conditions indices focusing on capital market factors), market valuation metrics (price-earnings, etc), risk aversion indicators (futures term-structure, CDS premiums, credit spreads), portfolio investment exposure metrics. - Capital market products: credit risk assessments (Bond-Under-Stress matrices), product-complexity reviews. - Assessment and governance: - Heads for Investments, Risk Management and Supervisory risk review outputs and escalate to Systemic Risk Oversight Committee (SROC) for holistic review. - SROC assesses inter-relationships across product/firm/macro, major stress points, common factors, regulatory perimeter and methodological issues; engages externally with BNM, Bursa Malaysia and the Ministry. - Reporting and cycles: - Monthly – Credit risk analysis, firm prudential risk analysis, stress-testing of stockbroking companies, macro risk analysis; - Quarterly – SROC discussion and holistic assessments, Risk Management Committee enterprise risk assessment; - Annual – Regulatory perimeter, firm systemic risk assessment. - Ongoing reviews focus on stress-testing methodology for market intermediaries, identification of SIFIs, measuring capital market stress, crisis management procedures. - Regulatory expertise and resources: dedicated functions, research programs, staff training, cross-departmental collaboration; resources dedicated to risk measurement and analysis. - Regulatory actions example: - Late 2010: SC flagged potential issue with certain Malaysian utility companies with bonds principal outstanding approximately RM6 billion (US$1.9 billion or 1.8% of the total corporate bond market’s capitalisation). - At risk segment: similar government-related bonds estimated at least half the value of corporate bond market at the time (RM160 billion (US$51 billion) out of total capitalisation RM320 billion (US$101 billion)). - Outcome: SC engaged stakeholders (Ministry, BNM, investors, bond trustees); government agreed to expedite scheme to buy back bonds from investors at agreed prices, restoring confidence and limiting systemic consequences. - Communication and coordination: - Information sharing with BNM via MOU and forums (Joint Surveillance Group, High Level Financial and Market Stability Group chaired by SC Managing Director and Deputy Governor of BNM). - SC participates in Financial Stability Executive Committee (FSEC) by invitation when matters involve capital markets issues; FSEC chaired by Governor of BNM. - SC engages with other authorities (e.g., Malaysia Deposit Insurance Corporation regarding trade repository for OTC derivatives). - On-going work: - Developing formal operational framework to guide use of Part IXA powers (CMSA, s. 346B and 346C). - Working with BNM to enhance arrangements for communication and coordination of supervisory responses to systemic risks (s. 346D(1)(b)). - Assessment: Fully implemented. - Comments and policy recommendation: - SC participates in FSEC by invitation only. Consideration should be given to making the SC a permanent member of FSEC to benefit from SC’s capital markets expertise routinely. ### Principle 7 (Review of regulatory perimeter) - Description: - SC has systematic processes to identify, assess and respond to issues affecting regulatory objectives and the regulatory perimeter arising from business environment, capital market products/participants/activities, and SC internal circumstances. - Approach combines long-term structural issues and immediate regulatory concerns; may result in recommendations to change securities laws/regulations. - Example outcome: SCA amended in 2010 to establish the Audit Oversight Board (AOB). - Longer-term issues addressed through CMP2 (reviewed every five years); shorter-term issues addressed through annual cycle: review business environment, assess key risks, prioritise issues, document risks and enterprise risk profile, senior management review, incorporate into formal work programme. - Formal process for post-implementation review (Guide To Conducting A Post-Implementation Review); SC reviews regulatory guidelines whenever significant events occur in other markets to address weaknesses. - Reviews include unregulated products, markets, participants and activities and potential regulatory arbitrage; SC can exercise public interest jurisdiction to block problematic behaviour or change rules. - Assessment: Fully implemented. - Comments: (none beyond description in source) ### Principle 8 (Conflicts of interest and misaligned incentives) - Description and findings: - Processes to identify and evaluate conflicts of interest across licensing, review of proposed issues, examination of licensed persons, and disclosure requirements. - CMSA provisions and SC guidelines require disclosure of conflicts and impose administrative, civil or criminal sanctions for violations (see Principle 31 reference in source). - Mitigation steps instituted pre-approval and on continuous basis; corporate governance considered key component in surveillance and enforcement. - Legal prohibitions exist (e.g., CMSA s. 93 prohibits licensed dealer or fund manager from trading for its own account before filing client orders to prevent front-running). - SC has power to issue directions to Bursa when conflict exists due to Bursa’s dual roles (CMSA, s. 26). - Additional measures: - Require independent opinions on related-party transactions; - Require internal controls and processes for market professionals (stockbrokers, corporate finance advisers, CRAs); - Regulatory requirements on product design and distribution (e.g., Guidelines on Offering of ABS require special valuation reports and cash flow requirements); - Mandated disclosure by issuers, CRAs, securities firms; - Corrective and enforcement actions for non-compliance. - FIMM (SRO for CIS operators/distributors) market conduct rules require disclosure of compensation arrangements to address conflicts. - Assessment: Fully implemented. - Comments: (none beyond description in source) ### Principle 9 (Self-Regulatory Organizations — SROs) - Description: - Two organizations exercise some direct oversight responsibility and have rules subject to meaningful sanctions: Bursa Malaysia Berhad (Bursa Malaysia) and Federation of Investment Managers Malaysia (FIMM). - FIMM is a recognized and authorized SRO under Part VIII of CMSA. - Bursa Malaysia is recognized as an exchange holding company under Part II of CMSA and undertakes certain SRO functions; operates an integrated exchange providing trading, clearing, settlement, depository services and electronic trading platform for bonds. - Assessment: (assessment text for Principle 9 not provided in supplied excerpt) - Comments: (further details on Bursa Malaysia subsidiaries begin after the supplied excerpt) *Source: IMF staff assessment text in the provided PDF excerpt.* ### 1. Bursa Malaysia Securities Berhad; ### _cr1359 - 1. Bursa Malaysia Securities Berhad; ### Role and structure of the Exchange Group - The Exchange Group comprises: - Bursa Malaysia Securities Berhad; - Bursa Malaysia Derivatives Berhad; - Bursa Malaysia Securities Clearing Sdn Bhd; - Bursa Malaysia Derivatives Clearing Sdn Bhd; - Bursa Malaysia Depository Sdn Bhd; and - Bursa Malaysia Bonds Sdn Bhd. - Bursa Malaysia is the exchange holding company and is responsible for establishing rules for its subsidiaries, including eligibility rules for individuals or firms to participate in the securities, derivatives and bonds markets. - Rules governing eligibility, market participation and access to services are subject to the SC’s approval pursuant to Section 9 of the CMSA and section 7 of the SICDA, and are made public via Bursa Malaysia’s website. - Bursa Malaysia and its subsidiaries act as front-line regulators of the markets they operate and are vested with statutory responsibilities to ensure a fair and orderly market and prudent risk management (Sections 8, 11 and 15 of the CMSA). ### Rules, approvals, and supervisory obligations - Exchange rule changes require SC approval under section 9 of the CMSA; the SC’s review explicitly assesses whether proposed rule changes result in fair treatment of members and applicants for membership and whether they are in the public interest. - A stock exchange or derivatives exchange requires the approval of the Minister to operate (CMSA, s. 8). The Minister grants approval only on the recommendation of the SC, assessing the exchange’s capacity to operate with sufficient financial, human and other resources. - Section 11(7) of the CMSA imposes a duty on the exchange to have sufficient financial, human and other resources at all times. - Capacity requirements include: - Adequate and properly equipped premises to conduct trading of securities and derivatives contracts; - Competent personnel for the conduct of its business; - Automated systems with adequate capacity, security arrangements and facilities to meet emergencies. - Section 8(2)(d) of the CMSA requires the body corporate to satisfy the Minister that it can take appropriate action against its POs or affiliates for breaches of its rules. - Bursa Malaysia is a member of the World Federation of Exchanges (WFE) and must meet WFE membership criteria, including measures for protection of investors and standards for participants. - For any proposed rule or amendment the exchange must submit a concept paper detailing rationale, impact analysis to investors/markets, potential conflicts of interest, benchmarking to other jurisdictions, and industry feedback; the SC also considers anti-competitive implications. - The CMSA imposes duties of cooperation with the SC: - To provide assistance to the SC, including furnishing returns and information relating to operations or dealings in securities or trading in derivatives contracts (CMSA, s. 29). - To notify the SC immediately if it becomes aware of any irregularity, breach of securities laws, exchange or clearing house rules, or any matter indicating the financial standing or financial integrity of any PO or its affiliates or of the chief executive or directors is in question or may reasonably be affected (CMSA s. 11(5)(b)). - Under Regulatory Guidance, Bursa Malaysia must provide co-operation and assistance as may be requested by the SC (part II, paragraph 1.1.1(l)) and must treat market participants and applicants fairly and consistently (paragraph 1.1.1(e), Part II). ### Enforcement powers and sanctions - Bursa Malaysia’s Business Rules and Listing Requirements create binding contractual obligations and can be enforced by Bursa Malaysia subject to SC oversight. - Enforcement actions available under Business Rules against market participants and/or registered persons: - Issue a private or public reprimand; - Impose fines; - Suspend the right to trade; - Strike off or terminate a person from the register; - Impose restrictions on any activities of the person. - Enforcement actions available under Listing Requirements against a listed company and its key officers and directors: - Issue a private or public reprimand; - Impose fines of up to RM 1 million; - Suspend the trading of listed securities; - De-list the securities or the listed company. - There is evidence that Bursa Malaysia has imposed sanctions for breaches. Reported sanctions data: - Bursa Malaysia Sanctions (aggregated categories) — counts by year: - Fines: 2009 — 65; 2010 — 107; 2011 — 60 - Caution: 2009 — 27; 2010 — 56; 2011 — 66 - Any of Reprimand, Fine, Suspension &/or Striking off: 2009 — 4; 2010 — 11; 2011 — 19 - Reprimand or Fine and Deferred Suspension: 2009 — 4; 2010 — 0; 2011 — 0 - Any of Private Reprimand, Directive to Rectify and Fine for Failing to Rectify: 2009 — 33; 2010 — 38; 2011 — 17 - Total: 2009 — 133; 2010 — 212; 2011 — 162 - Bursa Malaysia Sanctions for Breach of Listing Requirements — counts by year: - Public Reprimands and Fines: 2009 — 191; 2010 — 107; 2011 — 57 - Public Reprimands: 2009 — 102; 2010 — 121; 2011 — 35 - Private Reprimands: 2009 — 15; 2010 — 52; 2011 — 16 - Total: 2009 — 308; 2010 — 280; 2011 — 108 ### Governance, oversight and accountability - The CMSA requires public interest directors (PID) to make up one third of the board of any exchange holding company, stock exchange or futures exchange; if the stock or futures exchange is a subsidiary of an exchange holding company, PIDs are required only at the holding company board level (CMSA, s. 10(1) and 10(2)). - PIDs are appointed by the Minister in consultation with the SC; one PID is appointed as non-executive Chairman of the board of Bursa Malaysia. - Bursa Malaysia must obtain prior approval of the SC for the appointment of the chief executive officer (CMSA, s. 10). - Bursa Malaysia, as a public listed company, must comply with the Malaysian Corporate Governance Code (CG Code), which requires balanced board representation (Principle A(2) of Part 1). - The current board composition described: - Six independent members; - Two members representing the participating organisations (POs); - Four members representing public interest. - Independent directors are nominated by the Nomination and Remuneration Committee, with concurrence of the SC, and elected by public shareholders. - Board committees (Audit, Risk Management, Listing, etc.) contain at least a majority of directors independent of the POs; the Audit Committee is entirely independent of the POs; some committees include independent experts (e.g., Listing, Appeals). - The SC’s ongoing oversight framework includes extensive reporting requirements, on-site examinations, rule review and approval, power to modify or suspend application of rules, involvement in director appointments, power to appoint an independent auditor, and power to issue directions to Bursa Malaysia. - During annual regulatory audits the SC assesses Bursa’s efficiency, timeliness and effectiveness in discharging statutory or administrative responsibilities (including enforcement actions, market surveillance, corporate disclosure handling, inspection of market intermediaries, review of financial reports by listed issuers, risk management operations, market operations); the SC may make recommendations for remedial measures. ### Staff confidentiality and due process protections - Bursa Malaysia staff are subject to confidentiality requirements and undertakings in the Bursa's Code of Ethics and are prohibited from disclosing or using confidential information other than as required in the course of their duties; these requirements are similar and no less stringent than those of the SC. - Bursa Malaysia is bound by principles of natural justice and must ensure due process when exercising enforcement powers. Due process steps include: - Upon determination that evidence supports a prima facie case, a notice to show cause is issued specifying alleged breach(es), relevant rule provisions, and, for hearings, time, place and date of meeting when the charge is to be heard; - The defaulting participant may respond in writing within 14 days from the date of the notice; - Where a hearing will be conducted, the defaulting participant may attend and be heard at the hearing; - If the defaulting participant fails to respond or appear within the stipulated time, Bursa Malaysia may proceed to deal with the charge; - Where Bursa Malaysia issues a reprimand, imposes a fine or suspends the defaulting participant, the defaulting participant shall be notified in writing of the sanction. *Source: _cr1359 - 1. Bursa Malaysia Securities Berhad;* ### 6. Any participant against whom a decision has been made by Bursa Malaysia ### 6. Any participant against whom a decision has been made by Bursa Malaysia ### Appeals and conflict-of-interest safeguards at Bursa Malaysia - A participant may appeal by notifying Bursa Malaysia of his intention to appeal within fourteen (14) days from receipt of the notice of the sanction. - Appeals proceed first to the Appeals Committee of the Bursa and then to the SC or the courts. - Statutory duty: Bursa Malaysia must always act in the public’s interest, particularly in protecting investors; where this duty conflicts with any other duty, the duty to act in the public interest shall prevail (Section 11(2) and (3) of the CMSA). - The SC can direct the exchange to address any case of conflict of interest. - Regulatory and operational measures to prevent conflict of interest: - Regulatory Guidance requires Bursa Malaysia to have processes to deal with conflicts of interest and to use its best endeavours to ensure employees and subsidiaries can identify potential conflicts. - Bursa Malaysia has issued Conflicts of Interest Guidelines and submits monthly reports on conflicts of interest to the SC. - Board composition requirement: at least 1/3 of the board of the exchange and exchange holding company must be public-interest directors and one of the public-interest directors is the non–executive chairman of the board. - The SC includes a review of Bursa Malaysia’s conflict of interest policy and procedures in its annual regulatory audit and makes recommendations as needed. ### FIMM: role, history, and functions - FIMM (formerly the Federation of Malaysian Unit Trust Managers) was established in 1993 as a trade association by unit trust management companies (UTMCs). - When the SC was established, UTMCs were required to be registered with a body approved by the SC; FIMM was recognized as the “body approved” to register UTMCs and persons who deal in securities on behalf of the UTMCs (largely individual unit trust consultants (UTCs)). - FIMM responsibilities: - Conducts fit and proper assessments for UTCs, administers exam requirements, and enforces marketing and distribution guidelines. - Issues and enforces rules for members and unit trust distribution agents covering firm-level business conduct, individual representative conduct, and minimum qualifications. - UTCs act as agents of their sponsoring UTMC, CUTA or IUTA; the sponsoring company is responsible for supervision. - Legal duty: FIMM is required by law (CMSA, s. 324(1)) to ensure any exercise of power or function is undertaken in the public interest, with particular regard to investor protection. - Disciplinary powers under Memorandum of Association and by-laws include: - Issue a private or public reprimand; - Impose a fine; - Suspend membership or registration of the registered person; - Terminate membership or revoke registration of the registered person. ### FIMM enforcement activity and complaint handling (2011 example) - In 2011, FIMM received 36 complaints against its members and/or persons registered by it. - The Disciplinary Committee reviewed and resolved 11 complaints. - Outcomes in 2011 included: - Reprimanded four UTMCs; - Reprimanded eight IUTAs; - Deregistered one UTC; - The remaining complaints were pending. - Arrangement with the SC: FIMM refers complaints to the SC that relate to the CMSA and other securities laws under the SC’s purview. ### Requirements and conditions for recognition as an SRO - To be recognised as an SRO, FIMM had to satisfy the SC that it: - Has sufficient financial, human and other resources to carry out its functions; - Is fit and proper; - Is managed by officers who are fit and proper; - Has competent personnel to carry out its functions. - CMSA requirement (s. 323(1)): an SRO must be able to take appropriate action against its members and any person to whom its rules apply. - As an SRO, FIMM had to ensure its rules provide for: - Promote investor protection; - Promote fair treatment of members and applicants for membership; - Promote proper regulation and supervision of members; - Promote appropriate standards of conduct of members; - Ensure fair representation of members in its governing body; - Ensure members and officers comply with securities laws, SC guidelines, and where relevant, exchange rules; - Allow an aggrieved member to appeal against any decision of FIMM (CMSA, s. 323(1)(g)). - Rule amendment and oversight provisions: - No amendment to rules of a recognised SRO has effect unless approved by the SC; - Proposed amendments must be submitted to the SC with the text and explanation of purpose; - The SC may, after consultation, require the SRO to amend its rules (s. 325). - Assistance and notification obligations: - FIMM must provide assistance and information to the SC for proper administration of securities laws (s. 331). - FIMM must notify the SC immediately if it becomes aware of any matter that adversely affects or is likely to adversely affect investors or any contravention by its members of any securities law (CMSA, s. 324(2)). ### Governance, board composition, and representation - SC approval is required for any appointment, election or nomination of a Board member of an SRO; at least 1/3 of the Board must comprise PIDs (s. 326). - In recognising FIMM, the SC imposed a more stringent condition: at least 45% of its Board must comprise PIDs and the Chairman of the Board must also be a PID. - Current Board composition: nine members and nine PIDs, with one board member position unfilled. - Constituency concept for board appointments: - Members are divided into 5 constituencies based on annual management fees. - Each constituency is allocated two seats on the Board of FIMM. - During the AGM, members vote for the two representatives for each constituency. - Governance committees established by FIMM include Disciplinary Committee, Appeals Committee, Rules Committee, Audit Committee and Industry Development Committee. - The Disciplinary Committee is made up exclusively of PIDs. - The Rules and Audit Committees have a majority of PIDs. - The Industry Development Committee has a majority of industry members. - New by-law (By-Laws Relating to the Appointment and Functions of the Councils and Committees of the Federation of Investment Managers Malaysia) requires all committees of FIMM to include at least two PID members. - Committees may include: - Board directors; - Authorized representatives of members of FIMM; - Senior executive officers of members, IUTA and/or CUTA; - Individuals deemed fit with sound knowledge of the investment management industry. ### SC oversight and supervisory framework for FIMM - Oversight mechanisms combine periodic regulatory reporting, prior review of new rules and amendments, approval of directors, power to withdraw recognition, and power to issue directions. - Supervisory framework components: - On-site audit; - Review of corporate governance standards and practices; - Rules review and approval process; - Off-site supervision; - Regular communication/engagement protocol between FIMM and the SC on supervisory concerns. - Supervisory objectives: - Ensure FIMM complies with: - statutory obligations in the CMSA; - conditions of approval upon recognition as an SRO; - submission, reporting and notification protocol set by the SC; - IOSCO’s standards for an SRO; - Ensure FIMM’s operating environment and regulatory processes are sound, efficient, effective, fair and consistent; - Ensure FIMM has adequate staffing, resources and training to perform its regulatory functions effectively and efficiently. - Pre-recognition steps: - The SC conducted a detailed review of FIMM’s rules, processes and governance prior to recommending recognition. - The SC required FIMM to obtain a ‘readiness audit’ from an external auditor prior to recognition; the SC participated in setting the audit scope and received the report. - Reporting requirements: - FIMM is subject to detailed periodic and ad hoc reporting, such as quarterly reports of complaints and immediate reports of enforcement actions in progress. - These reports are reviewed by the SC and followed up where necessary. - The SC expected to undertake the first regular regulatory audit on FIMM later this year, examining: - The organization’s compliance with its conditions of recognition; - Its governance; - Its regulatory and supervisory framework; - Its complaints handling. - The SC is considering establishing a guideline equivalent to the Bursa Malaysia Regulatory Guidance to formalize oversight structure. ### Confidentiality, procedural fairness, and conflict-of-interest management at FIMM - Confidentiality requirements: - Set out in FIMM's Framework on Conflicts of Interest and Risk Management Framework. - Directors, officers and employees may not use information acquired by virtue of position for personal gain or to cause detriment without Board consent or ratification. - Employees must sign a “Letter of Confidentiality” and disciplinary action (including lodging police reports) can follow unauthorized disclosure. - FIMM Code of Ethics and Articles of Association require members to respect and preserve client/investor confidentiality and prohibit misuse of such information for unfair gain. - Procedural fairness: - By statute, FIMM may not make a decision under its rules that adversely affects a person’s rights unless the affected person has an opportunity to make representations (CMSA, s. 324(4)). - FIMM must provide the registered person with notice containing particulars of the complaint and copies of supporting documents, if any. - The registered person has fourteen business days from receipt of the notice to submit a written reply to the complaint. - Conflict-of-interest safeguards: - The CMSA requires an SRO’s rules to satisfactorily manage conflicts between its interest and the public’s interest, particularly investor protection. - The SC can issue directions to a recognised SRO where a conflict exists or may arise between the SRO’s interests and proper performance of legislative or rule-based functions. - Board composition requirement of at least 1/3 PIDs reduces likelihood of conflicts; PIDs are reported to take public interest roles seriously. - The annual regulatory audit framework for FIMM includes review of conflict of interest policies and procedures. ### Market-wide regulatory context and SC enforcement powers - Competition Act 2010 (in force 1 January 2012) establishes a framework to promote competition; prohibits anti-competitive agreements and abuse of dominant position; Competition Commission empowered to act against entities including the stock exchange for anti-competitive activities. - The SC retains full authority to inquire into matters affecting investors or the market. - SC enforcement powers under securities laws include civil, criminal or administrative action against persons who breach securities laws, including the exchange, the exchange holding company, participating organisations, affiliates and recognised SROs (CMSA, s. 354 and 355). - The SC can take administrative action for contraventions or failure to comply with or enforce: - rules of a stock exchange, approved clearing house or central depository; - any written notice, guidelines issued or condition imposed by the SC; - any rule of a recognised SRO. - The SC can take action against any person who submits false reports to the SC, Bursa Malaysia or Bursa Malaysia Clearing (CMSA, s. 369). - The SC can act against breaches related to serious market misconduct such as false trading and market manipulation (CSMA, s. 175-179 and 181). - Both Bursa Malaysia and FIMM and their officers are subject to the prohibition on insider trading in the CMSA and maintain internal measures to prevent insider trading. - If Bursa Malaysia or FIMM fail to use their powers to address misconduct, the SC can require them to do so (CMSA s. 354 and 355). ### Assessment and comments - Assessment: Fully implemented - Comments: - Both Bursa Malaysia and FIMM, which exercise direct oversight responsibilities for their members, are subject to SC oversight and are required to observe high standards of conduct. - The regime applicable to Bursa Malaysia is detailed, comprehensive and has been operating effectively for several years. - FIMM’s status as a recognized SRO is of comparatively short standing, but the SC’s engagement with the organization is long-standing. *Source: _cr1359 - 6. Any participant against whom a decision has been made by Bursa Malaysia* ### 2011. The SC has full powers to supervise its activities, review its rules and conduct on- ### _cr1359 - 2011. The SC has full powers to supervise its activities, review its rules and conduct on- ### Supervisory framework and oversight of SROs - The SC has full powers to supervise its activities, review its rules and conduct on-site and off-site examinations. - FIMM is subject to a rules review process and to detailed periodic and ad hoc reporting requirements, such as quarterly reports of complaints received with respect to its members and immediate reports of any enforcement actions that have begun. - The SC participates in setting the scope of external readiness audits for SRO recognition and receives the audit reports. - While the SC had not conducted a regulatory inspection of FIMM at the time of the review, it required a ‘readiness audit’ prior to recognition as an SRO and expected to undertake the first regular regulatory audit on FIMM later in 2012; the assessor notes that the first on-site regulatory audit on FIMM was conducted in May 2012. - The SC engages in detailed oversight of Bursa Malaysia and FIMM inspections and enforcement activities and has full access to all information maintained by the exchanges and FIMM. - Assessment: Fully implemented. ### Principle 10 — Inspection, investigation and surveillance powers (Description and operational practice) - Entities regulated by the SC include: - Licensed intermediaries and representatives; - Approved stock exchanges, derivatives exchanges, clearing houses and depositories (Bursa Malaysia); - Recognised self-regulatory organisations (FIMM); - Registered persons (financial institutions authorized to carry on certain capital markets activities without having to obtain a licence from SC, as set out in Schedule 4 to the CMSA). - Legal and operational inspection powers: - SC may conduct on-site or off-site inspections with no obligation to give prior notice (SCA, s. 126). - Directors and officers must give SC examiners access to all books, documents and accounts (SCA, s. 127). - SC has full and free access to the trading facilities of the Exchange (CMSA, s. 29(2)). - Inspection powers extend to recognized SROs (CMSA, s. 330(4)). - CMSA s. 348 allows the SC to direct a CMSL holder to produce books relating to its business or affairs and related matters. - SCA (s. 152) permits SC to require any person (regulated or otherwise) to disclose any information it deems expedient for due administration of securities laws. - Section 346B of the CMSA empowers SC to obtain any information from any person the SC considers necessary for monitoring, mitigating and managing systemic risks. - Coordination with BNM for investment banks: - Joint regulatory framework adopted by BNM and the SC; both may conduct independent examinations, coordinate reviews and discuss findings. - Surveillance systems and processes: - Day-to-day trade surveillance conducted using SMARTS for securities markets; SMARTS incorporates alerts for suspicious transactions and thematic surveillance. - Derivatives market monitored via an on-line, real-time information feed from Bursa; SC reviews periodic daily, weekly and monthly reports submitted by Bursa. - Bursa Malaysia undertakes day-to-day real time monitoring through ARAMIS; ARAMIS uses alerts based on parameters including price and volume. Bursa is replacing ARAMIS with a new surveillance system with enhanced analysis features. - Bursa performs cross-market surveillance by online monitoring of underlying and derivatives products; information on unusual trading activities and price movements are shared between markets and analysed. - Bursa conducts an extensive corporate surveillance program for listed company compliance. - Recordkeeping and retention requirements: - CMSA (s. 108) requires accounting records and other books retained for at least seven years. - AML legislation generally requires retention of records for at least six years after the last transaction on the account; AMLATFA s. 17(2) specifies not less than six (6) years from account closure or transaction completion/termination. - Required transaction records include client’s name, particulars of the beneficial owner, address, amount, price, commission charged, date, time, account number, etc. - SICDA s. 25(4) and s. 25A require securities accounts be in the name of the beneficial owner or authorised nominee and authorised nominees to furnish beneficial owner particulars to the central depository. - Central depository record requirements (SICDA, s. 27) include: - All money received or paid by the central depository; - All deposited securities and particulars showing for whom they are held; - All purchases and sales of deposited securities and particulars of other dealings, and the identity of buyer and seller or persons executing such dealings. - Bursa Rules (e.g., Securities Rule 404.4 and Derivatives Rules 603.1 & 601.3A) require intermediaries to obtain essential client particulars. - Rule 601.3(b) of Bursa Malaysia Derivatives Rules requires Trading Participants to maintain records that include the source of funds used for trading in derivatives on the holder’s own account. - SC powers regarding client identity and records: - SC may access any record and document maintained by regulated entities to obtain information on the identity of all clients. - Intermediaries must furnish information relating to beneficial ownership as and when required by Bursa Malaysia (Bursa Malaysia Securities Rules, para. 404.3(7)). - Outsourcing of inspections: - SC does not outsource inspection per se; Bursa Malaysia and FIMM exercise front-line regulatory responsibilities subject to SC oversight. ### Principle 11 — Enforcement powers (Description and practice) - Investigative and enforcement toolkit: - SC may appoint an Investigating Officer (IO) to investigate securities offences where there is reasonable belief of breach. - SC may initiate administrative sanctions, civil actions, and, with Public Prosecutor consent, criminal prosecutions. - IO powers under SCA (ss. 128, 132, 134 & 141) include: - Enter any place to search, take possession and seize documents, records, minute books or registers relevant to securities offences; - Require production of relevant documents/books/registers; - Require surrender of travel documents of persons under investigation; - Require presence of any person to record statements; - Arrest without warrant any person suspected of committing a securities offence. - It is a criminal offence to fail to cooperate with or obstruct an IO (SCA, s. 128(7) and 134(5)). - Civil and court powers (CMSA high court orders and remedies): - Recover an amount not exceeding three (3) times the gross amount of pecuniary gain or loss avoided and impose a civil penalty up to RM1.0 million (s. 200(2) and 201(5)); - Remove or bar a director or officer from being a director or chief executive of any public company for a period of time (s. 318, 360); - Compel compliance with Malaysian Code on Takeovers and Mergers or SC rulings (s. 220(3)); - Recover amount of loss or damage on behalf of aggrieved persons (s. 358(1)). - Remedies to prevent or remedy contraventions include (inter alia): - Restrain contravention or require cessation; restrain dealing in securities or trading in derivatives; declare a derivative void/voidable; restrain acquisition or disposal of assets; direct disposal of securities; restrain exercise of voting rights; restrain issuance or offer of securities; appoint receiver of property; vest securities in SC or trustee; require remedial acts or restitution; direct compliance with exchange/clearing house rules (s. 360 and related provisions). - Administrative sanctions available under CMSA: - Direct compliance with rules or listing requirements; - Impose penalty up to RM500,000; - Reprimand; - Require remedy/mitigation including restitution; - Refuse to accept/consider corporate proposals; - Against promoters/directors: impose moratorium/prohibition against trading and dealing in securities; issue public statements regarding retention of office prejudicial to public interest; - Against exchange holding company or derivatives exchange: suspend trading, limit transactions on derivatives, defer completion of closing date of derivatives, immediately close out derivatives positions, discharge derivatives, require affiliates to act in a particular manner (s. 354 and 355). - Specific powers for take-overs and mergers (section 220): - Issue compliance directives; impose fines up to RM1.0 million; reprimand; direct mitigation including restitution; prohibit use of stock exchange facilities; direct suspension of trading or listing removal; direct prohibition on listing for unlisted corporations. - Client asset protection powers (s. 125) and licensing remedies (for CMSA licensees): - Not renew licences (s. 64 and 65); - Revoke or suspend licences (s. 72); - Issue compliance directives (s. 356); - Impose penalty not exceeding RM500,000 (s. 356); - Require mitigation steps including restitution (s. 356). - Consistency in sanctions: - The SC has a process to ensure consistency; assessment criteria consider nature and seriousness of contravention, conduct after contravention, and previous regulatory record. - Enforcement activity, 2008–2011: - SC initiated 11 civil actions against a total of 40 persons for various breaches of securities laws (between 2008 and 2011). - Since 2008 the SC entered out-of-court settlements with 13 individuals who breached insider trading laws where defendants agreed to disgorge up to three (3) times the gains made from trading activities. - Between 2008 and 2011, SC imposed 123 administrative sanctions. Summary table (Nature of breaches and sanction counts) — totals: - Total sanctions: 123 - Breakdown by sanction type across breach categories: - Reprimand: 46 - Revocation/suspension of license: 21 - Directives: 37 - Imposition of fine/penalty: 18 - Refusal to receive submission: 1 - Major breach categories and totals: - Misconduct of intermediaries & licensing breaches: total 62 - Take-over breaches: total 50 - Misleading information (financial statements, prospectuses): total 2 - Non-compliance with asset valuation guidelines: total 4 - Non-compliance with AML guidelines: total 3 - Inaccurate submission by corporate advisor: total 1 - Late submission of financial information: total 1 - Criminal prosecutions, 2008–2011: - SC initiated criminal prosecution against 29 persons for various breaches; tabulated outcomes by offence type: - Financial statement fraud: 15 persons — Pleaded guilty – 8; Compounded – 1; Acquitted – 3; On-going – 3 - Securities fraud: 6 persons — Convicted – 2; On-going – 4 - Issuance of securities without prospectus registered with the SC: 2 persons — On-going – 2 - Carrying out regulated activities without license: 3 persons — Convicted – 1; Pleaded guilty – 1; On-going – 1 - Failing to provide statement to the SC in connection with an investigation: 3 persons — Pleaded guilty – 3 - Audit partner abetting a director in financial statement fraud: 1 person — On-going – 1 - Total recorded: 30* (note: one individual charged for two offences) - Prosecution processes: - SC prosecuting officers conduct securities prosecutions; five SC prosecuting officers are empowered as Deputy Public Prosecutors to prosecute securities cases involving Penal Code breaches and to conduct appeals at High Court and Court of Appeal. - Asset-freezing and urgent remedies: - Specialized commercial courts provide expeditious access to court orders and injunctive relief (e.g., asset freezes) which can be obtained on an ex parte basis quickly. - Access to banking information: - SC can obtain banking documents and information from banks with BNM written authorisation; BNM provides authorisation within three (3) to five (5) working days in practice and no requests have been denied. - Proposed Financial Services Bill 2012 includes a provision to allow financial institutions to disclose customer documents to an IO in compliance with orders or requests by enforcement agencies without prior written authorisation from BNM (Proposed section 131 read with Schedule 11). - Reconstruction of transactions: - SC and IOs can require contemporaneous records sufficient to reconstruct all securities and derivatives transactions. - Private remedies and investor recourse: - Private persons may seek remedies under CMSA sections 199, 201, 210, 224, 282, 357 and 360 for loss or damage from securities misconduct. - Types of misconduct covered include false trading, market rigging, market manipulation, manipulative devices and insider trading (s. 175–179, 181 and 201). - SC may recover damages on behalf of victims in the public interest for breaches relating to issuance of securities, take-overs and mergers (s. 358). - Compensation and dispute resolution: - Compensation Fund (CMSA, s. 152) compensates persons for monetary loss from misappropriation or misuse of funds/property by stockbroking company or insolvency. - Fidelity Fund (CMSA, s. 167) compensates persons for monetary loss from defalcation or fraudulent misuse by futures broking company or employees. - SIDREC provides dispute resolution for monetary disputes not exceeding RM100,000 between clients and licensed intermediaries; process involves mediation and adjudication; decision is binding on CMSL holder though claimants may pursue court remedies if dissatisfied. - Information sharing and confidentiality: - SC may share information with other authorities on matters of investigation and enforcement (SCA, s. 149); may provide copies of seized documents, recorded statements, and books/documents from examinations. - SC may, without restriction, disclose such information to domestic authorities; SCA permits SC to publish information on enforcement actions (s. 152A) and does so on its website for public information (criminal prosecutions disclosed when charges are laid). - Non-public information must be protected; disclosure requires SC authorization (SCA, s. 148). - Assessment: Fully implemented. - Comments and recommendation: - Maximum fines under legislation vary from RM 500 thousand to RM 1 million; Bursa Malaysia may impose fines up to RM 1 million for breach of Listing Requirements and no cap for Business Rules. - Consideration should be given to examining adequacy and consistency of maximum fines to ensure deterrence given market growth and profitability; fines imposed by SC should not be less than those imposed by the exchange. - The assessor notes trends in other jurisdictions toward higher maximum fines and that SC recently began a review of the fine structure at the SC and Bursa. ### Records, retention and traceability - Required retention periods: - CMSA (s. 108): accounting records and other books retained for a period of at least seven years. - AMLATFA s. 17(2): records to enable reconstruction of all financial transactions for a period of not less than six (6) years from account closure or transaction completion/termination. - Records sufficient to permit tracing of funds and securities in and out of brokerage and bank accounts related to securities transactions are required. - Company and shareholder registers: - Companies Act s. 158(1)(a) requires a register of members showing shares held by each member. - Companies Act s. 69O permits companies to require disclosure by members regarding beneficial ownership of voting shares; SC and Companies Commission may order disclosure of shareholders’ identities and interests. ### Assessments, implementation status and outstanding items - Principle 10: Assessment — Fully implemented. - Principle 11: Assessment — Fully implemented. - Noted outstanding items and recommendations: - First regulatory audit of FIMM should take place as soon as practicable (noted that the first on-site audit occurred May 2012). - Consider examining adequacy and consistency of maximum fines (RM 500 thousand to RM 1 million ranges and exchange fine regimes) to ensure fines operate as a real deterrent; SC has begun a review of fine structure at SC and Bursa. *Source: _cr1359 - 2011. The SC has full powers to supervise its activities, review its rules and conduct on-* ### 1. Risk-focus (limited/full scope), which focus on high-risk areas of the regulated ### 1. Risk-focus (limited/full scope), which focus on high-risk areas of the regulated entities. Risk-focused audits are also conducted to assess compliance with regulatory requirements; ### Inspection types and purposes - Risk-focus (limited/full scope): focus on high-risk areas of the regulated entities; risk-focused audits also assess compliance with regulatory requirements. - Thematic (Industry wide): inspections relating to practices, products or areas of concern that cut across the industry, such as business conduct. - Investigative (Business Conduct Audit): focused examinations of one or more issues, usually in response to complaints from the public or referral from other departments within the SC or other agencies; examinations may be conducted at any time without prior notice. ### SC Risk Profiling Framework and categorization - Risk assessment considers both qualitative and quantitative perspectives. - Quantitative emphasis: risk-based capital adequacy requirements and other prudential and capital limits imposed on market intermediaries. - Qualitative emphasis: quality of management, number and types of complaints received, risk mitigation programmes/controls implemented, and systemic impact of an intermediary. - SC generates a Total Net Risk Rating for each firm; firms are divided into: - high risk - medium high risk - medium low risk - low risk - Supervisory prioritization: - High overall net risk rating attracts higher priority, greater coverage, time and resource allocation from the SC. - Audit frequency by category: - High risk: yearly audit - Medium high risk: audit once every two (2) years - Medium low risk: audit once every three (3) years - Low risk: four (4) year audit cycle - If identified as a SIFI, intermediary is subject to a two (2) year audit cycle regardless of other category. - Coordinated oversight with Bursa Malaysia leads to 52% to 76% of stockbroking firms examined annually. ### SC inspection activity (2008–2011) — stockbroking and futures broking companies - Total firms in industry (including investment banks and universal brokers): 48 - On-site inspections conducted by SC: 35, comprising: - 19 risk-focused examinations - 10 thematic inspections - 6 surprise inspections ### Supervision of investment banks — SC and BNM joint approach - SC and BNM jointly supervise investment bank activities using a risk-focused supervisory approach integrating: - on-site supervisory practices - extensive regulatory reporting - off-site monitoring - Division of responsibilities: - SC: supervision of the business and market conduct of investment banks to promote market integrity and investor protection in the capital market. - BNM (co-functional regulator): prudential regulation to ensure safety and soundness in the interest of depositors. - BNM’s Supervisory Risk-based Framework supports consistent and effective supervision across BNM’s portfolio via: - individual firm supervision - horizontal or thematic reviews - conveying ratings, supervisory recommendations and remediation requirements in writing and through extensive interaction with the Board and senior management - disciplined follow-through on necessary remediation ### Fund management companies — SC inspections (2008–2011) - Total examinations: 23, comprising: - 16 risk-focused examinations (full scope) - 7 thematic inspections - Focus: primarily conducted on fund managers in higher risk categories. - Diagnostic engagements: - Total diagnostic engagements between 2008 and 2011: 36 - Diagnostic engagements focus on firms posing medium high to medium low risk and are narrower in scope, targeting specific areas of concern identified during risk profiling. ### Follow-up, enforcement actions and remedies - Process in place to ensure examiners follow up on actions taken by regulated entities to address non-compliance or weaknesses detected during examinations. - Outcomes: - Some instances of non-compliance were addressed satisfactorily without formal disciplinary action. - More serious cases resulted in formal disciplinary action, including: - Revocation of license - Refusal to renew license - Issuance of warning letters - Issuance of directives, inclusive of requiring restitution - Imposition of fines - Example of court action: - In 2009, the SC obtained a High Court order for the appointment of a receiver in relation to the affairs, assets and properties of a fund management company to protect the funds from being fraudulently dissipated. ### Off-site monitoring, indicators and analyses - Off-site monitoring complements on-site examinations to enable early detection of areas of concern and provides preliminary desk review analysis prior to on-site examinations. - Activities include: - Reviewing financial returns submitted by regulated entities - Carrying out stress testing on regulated entities’ financial positions - Implementing Key Supervisory Indicators (bank line utilization, adjusted net capital, margin level, etc.) to trigger supervisory attention - Periodic assessments of capital adequacy position of investment banks and stockbroking companies vis-à-vis their exposures ### Bursa Malaysia inspections and coordination with SC - Bursa adopts a risk-based approach (RBA) for profiling and selecting intermediaries for on-site inspection, using internally established financial and non-financial factors. - RBA is carried out annually to prioritize Bursa’s resources for on-site inspection; the inspection program is discussed annually with the SC and reassessed and adjusted throughout the year if circumstances change. - Bursa inspection frequency by risk category: - All high-risk intermediaries: inspected every year - Medium-risk intermediaries: inspected over a period of three (3) years - Low risk intermediaries: inspected once in three (3) years - Non-periodic inspections: conducted in response to issues, themes or trends detected during routine inspections or external triggering factors (alerts from other Bursa divisions, the SC, external complaints and whistle blowers). ### Bursa inspection counts (between 2008 and 2011) - Participating Organizations: - Total Periodic: 51 - Non-periodic: 18 - Total: 69 - Trading Participants: - Total Periodic: 26 - Non-periodic: 7 - Total: 33 - Aggregate: - Total Periodic: 77 - Non-periodic: 25 - Total: 102 *IMF staff compilation from source document.* ### 1. At the present time, there are 35 POs and 20 TPs. ### _cr1359 - 1. At the present time, there are 35 POs and 20 TPs. ### Surveillance systems - The SC utilises an automated surveillance system called Securities Markets Automated Research Trading and Surveillance (SMARTS) to identify unusual transactions on authorised exchanges and regulated trading systems. - The SMARTS system is premised on a set of predetermined parameters and is reviewed according to changes in market condition or in every 2 years. - The parameter is based on the volatility or velocity of trading activities; if triggered, the SC will be alerted on possible market irregularities and potential breaches of securities laws. - SC also conducts surveillance based on market intelligence. - Bursa uses an automated surveillance system, market intelligence, and public feedback to detect market and/or price manipulation. ### Detection and investigation of market and/or price manipulation - Once an alert is triggered, the SC undertakes further analysis of trading pattern and trading participation to ascertain cogent evidence of any possible breach of securities laws. - SC and Bursa have extensive mechanisms for detection; SC has oversight of Bursa surveillance and a communication protocol that includes gap assessments. - SC conducts parallel surveillance and regular discussions with Bursa to close gaps and enhance Bursa’s surveillance capabilities. - Bursa’s analytic methods include: - Trade analysis to detect price ramping/depression, bidding up/down activities and marking the close. - Volume analysis to detect high levels of crossed trades, churning, stacking, order withdrawals, no change in beneficial ownership and avoiding priority in the order books. - If necessary, Bursa will submit a surveillance report to SC for further assessment; the matter may be referred to relevant SC departments or returned to Bursa for enforcement action under Bursa rules. - Between 2008 and 2011: - SC received 11 referrals from Bursa relating to possible market and/or price manipulation. - Of these, six cases were forwarded to relevant departments of the SC for further action and five were returned to Bursa for enforcement action under their rules. - At the SC over the same time period, 18 cases of possible market manipulation were reviewed by the Enforcement Business Group. - Investigations were initiated for six cases and administrative actions were recommended for three cases. - Sanctions imposed included suspensions of licenses, fines ranging from RM1.0 million to RM3.0 million each and jail terms of 1 day to 2 years. ### Detection and investigation of insider trading - Mechanisms and procedures for insider trading detection/investigation by SC and Bursa are similar to market manipulation processes. - Between 2008 and 2011: - SC received 71 referrals from Bursa relating to possible contravention of insider trading provisions. - Of these, 47 cases were forwarded to relevant departments of the SC for further action, meanwhile two cases were returned to Bursa for enforcement action under their rules. - The SC’s Enforcement Business Group reviewed 61 cases of possible insider trading, following which investigations were initiated for 42 cases. - The SC pursued civil action against 15 individuals for contravention of insider trading laws. - 13 of the individuals have entered into out of court settlements with the SC, by agreeing to disgorge up to three times the gains made from trades. - The cases on the two remaining individuals are still ongoing. - Between 2008 and 2011, the SC initiated civil actions against 40 persons including: - Obtained a civil injunction refraining an individual from dealing in RM10.2 million worth of proceeds arising from disposal of shares in contravention of insider trading provisions; - Obtained civil orders against 10 defendants seeking restitution to aggrieved investors in the amounts exceeding RM34.4 million; - Actions against 14 individuals for insider trading contravention; out of court settlements were entered with 13 defendants who agreed to disgorge up to three (3) times the gains made from their trading activities and recovered RM2.187 million. The case against 1 other defendant is still ongoing. ### Misrepresentation by listed companies and auditor reporting - The SC conducts proactive surveillance to detect and investigate misrepresentation of material information by listed corporations, including: - Reviewing unaudited quarterly financial statements; - Monitoring company announcements, circulars, prospectuses; - Reviewing complaint letters and other publicly available information. - Triggering factors include a qualified audit report, a significant change in board composition without a corresponding change in shareholdings, a change of external auditor and late submission of financial statements. - Auditors of listed corporations have a statutory obligation (CMSA, s. 320) to submit a report to the SC if they detect a possible breach of securities laws or stock exchange rules, or any matter that may adversely affect the financial position of the listed corporation. - Bursa’s mechanisms to detect misrepresentation include: - Tracking promotional announcements that may affect the price or volume of securities; - Monitoring and detection of profit deviation between audited and unaudited quarterly results; - Complaints and whistle-blowing mechanisms; - Review of corporate announcements by public listed companies; - On-site inspection of stockbroking companies. - Between 2008 and 2011: - SC preferred criminal charges against 17 individuals for the disclosure of false/misleading information in financial statements to Bursa. - Of this, nine individuals were charged as a result of investigations commencing from auditor reports submitted pursuant to section 320 of the CMSA. - Of the 17 individuals charged, eight pleaded guilty, one paid a compound of RM100,000, three were acquitted after full trial while the cases against the five remaining individuals are still ongoing. - The eight individuals who pleaded guilty were convicted and sentenced to fines ranging from RM300 to 400 thousand. In addition, four of these individuals were sentenced to jail terms ranging from one day to six months. ### Intelligence, complaints handling and information management - SC receives intelligence/information via web-based complaint submissions, emails to a dedicated address, phone hotline, letters, faxes, walk-in and referrals from other agencies. - The Investor Affairs and Complaints Department (IAC) handles intelligence/information management to ensure integrity and independence of the review process. - IAC has information-sharing arrangements with SIDREC; SIDREC provides quarterly reports and escalates matters on a case-by-case basis to the SC. - SC analyses trends from intelligence/information to highlight regulatory, policy or process concerns, concerns relating to regulated entities, public listed companies, and gaps in investor knowledge; information is maintained in a database to feed SC’s strategic thinking and regulatory efforts. - Between 2008 and 2011: - SC received 3,985 items of intelligence/information, including complaints and enquiries. - A total of 1,166 files were opened of which 631 files were resolved and 278 files were referred to other regulatory agencies including foreign agencies. ### Compliance systems, supervision and monitoring of intermediaries - The SC requires regulated entities to have supervisory and compliance procedures reasonably designed to prevent securities laws violations. - The Licensing Handbook requires supervised entities to monitor business to ensure compliance with securities laws, regulations, guidelines and relevant code of conduct (Para 7.02(7)). - All participants of Bursa Malaysia Securities and Bursa Malaysia Derivatives must comply with relevant Rules of Bursa Malaysia Securities Berhad, Rules of Bursa Malaysia Securities Clearing, Rules of Bursa Malaysia Derivatives, Rules of Bursa Malaysia Derivatives Clearing and Rules of Bursa Malaysia Depository as relevant. - The SC monitors execution and communication of compliance procedures through inspection programs (of firms, the Bursa and FIMM). - Compliance officers must submit monthly reports including assessment of sufficiency and comprehensiveness of training systems and programmes. - Periodic examinations assess whether employees have been notified of compliance procedures including regular updates. - Exchange supervisory rules placing responsibility on firms and boards: - Rule 404.1(7)(b) of the Bursa Malaysia Securities Rules: stockbroking companies must exercise strict supervision and maintain proper supervisory and compliance systems. - Rule 610.1(a) of the Bursa Malaysia Derivatives Rules: futures broking companies must establish and maintain a proper system to supervise Registered Representatives, agents and other personnel and achieve compliance with the Rules of Bursa Derivatives and the CMSA. - Paragraph 7.02 of the Licensing Handbook imposes a condition that a licensed intermediary must monitor and supervise the activities of its representatives. - Legal liability and sanctions: - If an employee or a representative of a CMSL holder commits a breach, the CMSL holder or the employer is deemed to have committed the breach (CMSA, s. 367(2) and 367(3)). - The SC can impose administrative sanctions for contravening exchange rules and securities laws including those relating to employee supervision (CMSA, s. 354(3) and 356). - Examples of supervisory and enforcement outcomes: - SC imposed fines ranging from RM100,000 to RM275,000 on five regulated entities for failing to supervise their business activities. - SC reprimanded Boards of Directors, issued warning letters to two unlicensed persons, and issued a directive to cease regulated activities on a regulated entity for a period of 15 months. - Bursa keeps extensive books and records and permits audit of execution and trading of all transactions. - Bursa’s supervision framework: - Centralised supervision framework for routine on-site and off-site monitoring of participants covering front office, middle office and back office functions, conduct of business, capital adequacy, disclosure or segregation of client assets. - Monitoring includes inspections at participants’ premises and off-site monitoring of financial standing via periodic returns. - Findings referred to Bursa’s Enforcement Division; reports and analysis (including inspection reports) are sent to the SC. - FIMM: - FIMM has not yet begun regular on-site examinations of its members and registered firms; these firms are subject to examination by the SC or, for some IUTAs that are financial institutions, by BNM. - FIMM requires annual self-reporting of compliance by UTMCs and UTCs and follows up on deficiencies. - FIMM investigates complaints lodged against members and registered persons. - For financial institutions that distribute capital market products: - SC monitors sales practices/marketing via periodic filings of complaints received and engages affected financial institutions. - Firms marketing unit trust funds must be registered with FIMM, which provides additional supervision and monitoring/resolution of marketing and distribution issues. - BNM has on-site and off-site processes for market conduct supervision including review of disclosure and sales documents, 'secret shopper' visits and formal on-site reviews. ### Enforcement actions: administrative, civil and criminal - The SC has extensive powers under the CMSA to impose administrative sanctions, pursue civil actions and initiate criminal prosecutions. - Administrative sanctions are imposed for breaches requiring immediate action and redress and include directives for restatement of accounts, revocation and suspension of licenses, barring of submissions/proposals to the SC for advisors, reprimands and fines. - In determining administrative sanctions, SC considers nature and seriousness of the contravention, conduct after the contravention and prior regulatory record. - Between 2008 and 2011, SC imposed 122 administrative sanctions comprising: - 48 cases of issuance of reprimands; - 21 suspension/revocation of license; - 34 cases of issuance of directives; - 18 cases of imposition of penalties totalling RM2.7 million; - 1 case of refusal to receive submission. - Examples of administrative sanctions: - Penalties ranging from RM100,000 to RM275,000 on five regulated entities for failing to supervise. - Reprimand and penalty of RM100,000 on a public listed company for failure to undertake a mandatory offer after acquiring more than 2% of voting shares. - Additional enforcement activity: - SC issued a total of 400 supervisory letters against corporate advisers, regulated entities, public listed companies, boards of directors, research houses and individuals for minor breaches. - Between 2008 and 2011, SC filed appeals regarding 26 sentences viewed as inadequate deterrents: three appeals were allowed, four appeals dismissed and 19 appeals are still ongoing. - Between 2008 and 2011, SC imposed compounds totalling RM4.825 million on nine persons for securities law offences. - Criminal actions: - SC pursues criminal action for breaches with significant market impact, deliberateness, pre-meditation or gross abuse of trust; compounds may be offered for less serious infractions. - There are four dedicated Sessions courts in Malaysia to hear securities and commercial crime cases to build judicial expertise and improve trial speed. ### Effectiveness and assessment - Assessment: Fully implemented - Comments: - The SC has extensive powers to carry out inspection, surveillance and enforcement activities and exercises these powers in an effective and credible manner, complemented by similar activities at Bursa Malaysia. - The inspection program is risk-based and all market intermediaries are subject to regular review. - Market intermediaries are required to have compliance systems that are evaluated annually by the intermediary and by the regulator during inspections. - Given market size and number of participants, the enforcement program operates to identify and take action against breaches of the law in a timely and effective manner. - Reference made to comments under Principle 11 on the maximum fines that the SC may impose. *Source: Securities Commission and Bursa Malaysia (content from _cr1359 - 1. At the present time, there are 35 POs and 20 TPs.)* ### Section 124 of the Evidence Act provides that a public officer shall not be compelled to disclose certain non- ### _cr1359 - Section 124 of the Evidence Act provides that a public officer shall not be compelled to disclose certain non- ### Legal framework for information sharing - Section 124 of the Evidence Act 1950: "a public officer shall not be compelled to disclose certain non-public information if he considers that such disclosure may be prejudicial to public interest unless the head of department of the public officers certifies that such disclosure would not be prejudicial to the public interest." - Securities Commission Act (SCA) provisions relevant to information sharing: - s. 148: requires the SC to protect the confidentiality of any information obtained in the course of its duties, but permits disclosure: - For the purposes of civil or criminal proceedings under any written law; - Where it has been authorised by the SC; or - Subject to section 124 of the Evidence Act 1950 (s. 148). - s. 150: specific authority to provide assistance to a foreign supervisory authority. - s. 152 and 152A: allow publication of enforcement actions and other assistance provisions (s. 152A referenced for publication authority). - Sections 15 and 16 (read with sections 148–150): powers necessary for information sharing with domestic and foreign authorities. - Section 128: Investigating Officers (IOs) powers to obtain information, enter premises, inspect, copy, take extracts, seize and detain documents and objects for investigations. - Section 152: SC can obtain information from any person it deems expedient for the due administration of securities laws. ### Sharing with domestic authorities - The SC has full authority to share public information; much public information is posted on the SC’s website or on the website of Bursa Malaysia (for listed companies). - The SCA allows publishing of enforcement actions instituted (s. 152A) via website and Annual Report; such public information can be shared with domestic regulators and authorities. - For non-public information, disclosure to domestic authorities permitted under s. 148 and s. 149: - Section 149: SC may, on its own initiative or upon request, provide assistance to the police or a public officer and may supply: - any document seized or obtained; and - any statement recorded during an investigation. - SC may allow a police officer or a public officer access to and inspection of documents obtained in the course of an investigation. - Types of non-public information the SC may share domestically: 1. Matters of investigation and enforcement; 2. Determinations in connection with authorization, licensing or approvals; 3. Surveillance; 4. Market conditions and events; 5. Client identification including persons who beneficially own or control non-natural persons organized in the regulator’s jurisdiction; 6. Regulated entities; and 7. Listed companies and companies that seek a listing of their securities. - Evidence of domestic sharing activity: - Between 2008–September 2011, the SC shared information with domestic authorities in 274 instances in relation to possible breaches of laws under the respective authorities’ jurisdiction. - The SC shared documents and information from its investigations in relation to five cases to the Royal Malaysia Police, BNM and the Companies Commission Malaysia. - Between 2008–September 2011, the SC referred almost 270 cases of matters disclosing possible offences to domestic regulators and agencies. - Operational controls for disclosure: - A Special Committee decides on disclosure requests under s. 148; each request assessed individually. - Disclosed information must be specific and clearly identified. - Controls: information may not be disclosed to any other party than the requesting authority without specific additional consent from the SC. - No external approval is required. ### Sharing with foreign authorities - Legal basis: - s. 148: confidentiality requirement with specified exceptions. - s. 150: authority to provide assistance to a "foreign supervisory authority" to investigate an alleged breach of a legal or regulatory requirement the foreign authority enforces or administers; assistance may include other forms as the SC thinks fit. - The SC’s ability to assist foreign supervisory authorities is not dependent upon the alleged conduct constituting a breach of Malaysian securities laws. - Types of information the SC may share with foreign regulators (same categories as domestic): 1. Matters of investigation and enforcement; 2. Determinations in connection with authorization, licensing or approvals; 3. Surveillance; 4. Market conditions and events; 5. Client identification including persons who beneficially own or control non-natural persons organized in the regulator’s jurisdiction; 6. Regulated entities; and 7. Listed companies and companies that seek a listing of their securities. - Evidence of cross-border sharing activity (2008–September 2011 and specific years): - 26 requests for investigation assistance from foreign regulators involving eight jurisdictions pursuant to the IOSCO MMOU. - 2 requests for investigation assistance involving two jurisdictions pursuant to bilateral MOUs between the SC and foreign regulators. - 181 requests for information on licensing from foreign regulators. - Between 2008–September 2011, the SC responded to many requests including: - 2008: responded to four requests for assistance from foreign regulators involving three jurisdictions pursuant to the IOSCO MMOU and two requests pursuant to bilateral MOUs. - 2009: responded to four requests for assistance from foreign regulators involving three jurisdictions pursuant to the IOSCO MMOU. - 2010: responded to 12 requests for assistance from foreign regulators involving five jurisdictions pursuant to the IOSCO MMOU. - First nine months of 2011: responded to six requests for assistance from foreign regulators involving three jurisdictions pursuant to the IOSCO MMOU. - Between January, 2008 and September, 2011, the SC responded to over 180 requests for information on licensing from foreign regulators. - Between 2008–September 2011, the SC recorded three statements on behalf of foreign regulators. - Between 2008–September 2011, the SC referred 10 cases to foreign regulators on an unsolicited basis. - The SC met all requests for information from foreign counterparts. - MOUs and cooperation arrangements: - SC is a signatory to the IOSCO MMOU. - The SC has 32 bilateral MOUs in place facilitating voluntary information sharing with regulatory counterparts. - 2005 tripartite MOU with Royal Malaysian Police and Companies Commission Malaysia. - MOU with BNM to facilitate cooperation and information exchange relating to investment banks, payment and settlement systems and mutual recognition of financial advisers and financial planners; amendments being finalized to extend scope to investigation and enforcement matters, regulation of derivatives, supervision of auditors and management of systemic risk. - The SC provides unsolicited information to domestic and foreign authorities where investigations disclose possible offences under others' purview. - Specific examples of assistance where no breach was suspected: - In 2010 and 2011, the SC shared information relating to fund management companies with two foreign regulators, including the amount of shareholders’ funds held by the fund management company and SC findings from desktop reviews and reports submitted by the fund management company. - Banking and brokerage information: - Banking information for foreign regulators may be obtained where it relates to alleged breaches of securities laws or to ensure compliance with those laws from relevant banks, with written authorisation from Bank Negara Malaysia. - Regulated entities must maintain records that permit tracing of funds and securities in and out of brokerage and bank accounts; SC may share records identifying beneficial owners of brokerage accounts with domestic and foreign authorities pursuant to sections 148 and 150 of the SCA. - Assistance capabilities under section 150 and related provisions: - Section 150 may be used to obtain contemporaneous records sufficient to reconstruct all securities and derivatives transactions, including records of all funds and assets transferred into and out of bank and brokerage accounts. - The SC can offer assistance to foreign regulators in obtaining records that identify: 1. The client: a. Name of the account holder; b. Person authorized to transact business; 2. The amount purchased or sold; 3. The time of the transaction; 4. The price of the transaction; 5. The individual and the bank or broker and brokerage house that handled the transaction. ### Confidentiality and safeguards - All information shared with another competent authority, domestically or internationally, is subject to rules and statutory provisions of confidentiality. - Domestic confidentiality: - Domestic authorities are bound by secrecy provisions of their respective governing laws (example: BNM officials subject to relevant provisions under the CBA). - Section 8 of the Official Secrets Act 1972: makes it an offence for any public officer to wrongfully communicate official secrets obtained in the course of duty. - International confidentiality: - Confidentiality clause in MOUs requires foreign regulators to keep confidential all information provided and not to disclose assistance or information to third parties without the SC’s prior consent. - The SC's letter transmitting information will state that the information is provided on a strictly confidential basis and is not to be disclosed to any third parties without the SC’s prior written consent. - For information received by the SC from foreign regulators, all officers of the SC are obliged to protect confidentiality of information obtained in the course of their duties (SCA, s. 148). - Penalties for breach: - A person who contravenes the secrecy obligation contained in the SCA, if convicted, may be subject to a fine of up to RM1 million or to imprisonment of up to five years or both. ### Assessment, implementation and operational remarks - Assessment: Fully implemented. - Comments (operational observations and practice): - No MOU required as a precondition for SC sharing information with domestic or foreign regulators. - The SC regularly shares technical expertise with foreign regulators. - The SC has shared information bilaterally and through closed-door official forums and regulators’ meetings (examples: roundtable discussions at Asian Development Bank regional forums, annual Article IV consultations with the IMF and IOSCO Working Group/Standing Committee meetings). - Response times to information requests varied from a few days to several months, depending on nature and complexity of the information requested. *Source: _cr1359 - Section 124 of the Evidence Act provides that a public officer shall not be compelled to disclose certain non-* ### 2. Information located in its jurisdiction identifying persons who beneficially own ### 2. Information located in its jurisdiction identifying persons who beneficially own or control non-natural persons organized in its jurisdiction (s. 150) ### SC assistance and practical examples - Examples of information provided by the SC in response to investigations and foreign regulator requests: - 2009: brokerage account opening forms, statement of account and relevant supporting documents for an investigation involving illegal investment scheme. - 2010: information on the investment banks through which securities trades were carried out, brokerage account opening forms, details of end beneficial owner, information on the amount of securities purchased and sold and confirmation of trades for an investigation involving insider trading. - 2011: brokerage account opening forms, monthly trading statements and information in response to requests from foreign regulators. - Legal basis and scope of assistance: - The SC provides effective and timely assistance upon receiving a written request from a foreign supervisory authority (SCA, s. 148 and 150). - The SC may provide assistance as if the breach were an offence under Malaysian securities law and may exercise powers under Part V (Enforcement and Investigation) of the SCA (SCA, s. 150(3)). - Types of matters the SC can assist with include: - Insider dealing, market manipulation, misrepresentation of material information, and other fraudulent or manipulative practices relating to securities and derivatives. - Registration, issue, offer or sale of securities and derivatives, and related reporting requirements. - Market intermediaries of all types, collective investment schemes and transfer agents. - Markets, exchanges and clearing and settlement entities. - Additional investigative and enforcement assistance: - The SC can assist foreign regulators in obtaining regulatory process information in Malaysia and “any other assistance” under SCA s. 150. - The SC can provide documents and take a person’s statement or testimony under oath (see discussion under Principle 13). - The SC can provide documents to support foreign regulators’ court order applications and may assist in freezing bank accounts where a foreign offence discloses a possible offence in Malaysia. - The SC may obtain an order from the Public Prosecutor under the Anti-Money Laundering and Terrorist Financing Act (2001) (AMLATFA) to freeze relevant bank accounts where a foreign serious offence is disclosed by issuance of a Certificate of Serious Offence from the requesting country. - Financial conglomerates: - The SC may assist foreign regulators regarding: - The structure of financial conglomerates; - The capital requirements in conglomerate groups; - Investments in companies within the same group; - Intra-group exposures and group-wide exposures; - Management responsibility and the control of regulated entities. - Information on financial conglomerates related to entities licensed by the SC is obtained in routine supervision and is submitted to the SC on a monthly basis. - Information about other financial conglomerates and their shareholders could be obtained under section 152 of the SCA. - Evidence and assessment: - There is evidence that the SC has provided the described information. - Assessment: Fully implemented ### Information requests (Other than fit and proper) — numbers and nature of information - 2007: - Domestic Requests: Number of Requests 0 - Foreign Requests: Number of Requests 4; Nature of Information: Documents from broking firms, and Companies Commission Malaysia - 2008: - Domestic Requests: Number of Requests 3; Nature of Information: Documents seized during investigation - Foreign Requests: Number of Requests 6; Nature of Information: Request for affidavits, documents from Companies Commission Malaysia, telephone companies and assistance in statement recording. - 2009: - Domestic Requests: Number of Requests 1; Nature of Information: Documents seized during investigation - Foreign Requests: Number of Requests 4; Nature of Information: Documents from broking firms, banks, and assistance in statement recording - 2010: - Domestic Requests: Number of Requests 1; Nature of Information: Documents seized during investigation - Foreign Requests: Number of Requests 12; Nature of Information: Documents from broking firms, banks, leasing documents, assistance in statement recording, and information from Ministry of Health. - 2011: - Domestic Requests: Number of Requests 0 - Foreign Requests: Number of Requests 8; Nature of Information: Documents from Royal Malaysian Customs, broking firms and banks, information from telephone companies, and assistance in locating witnesses. - Source for table: SC ### Information requests (Fit and Proper) — numbers and nature of information - 2007: - Domestic Requests: Number 284; Nature of Information: Fit and proper - Foreign Requests: Number 0; Nature of Information: Fit and proper - 2008: - Domestic Requests: Number 237; Nature of Information: Fit and proper - Foreign Requests: Number 64; Nature of Information: Fit and proper - 2009: - Domestic Requests: Number 172; Nature of Information: Fit and proper - Foreign Requests: Number 36; Nature of Information: Fit and proper - 2010: - Domestic Requests: Number 158; Nature of Information: Fit and proper and adverse records - Foreign Requests: Number 53; Nature of Information: Fit and proper and adverse records - 2011: - Domestic Requests: Number 385; Nature of Information: Fit and proper and adverse records - Foreign Requests: Number 31; Nature of Information: Fit and proper and adverse records - Source for table: Securities Commission ### Additional SC authorities and practical assistance - The SC may assist foreign regulators in providing information on entities it supervises and in obtaining documents, statements, freezing accounts, and coordinating with prosecutors under AMLATFA (2001). - The SC exercises supervisory information collection (monthly submissions) for entities licensed by the SC; other information may be obtained under s. 152 of the SCA. --- ### Principle 16 — Disclosure by Issuers: full, accurate and timely disclosure of financial results, risk and other material information ### Regulatory framework and scope - Disclosure requirements apply to: - Public offerings, including prospectus content and distribution. - Annual reports. - Other periodic reports. - Information provided to shareholders prior to voting decisions. - Advertising of public offerings outside of the prospectus. - The CMSA and Prospectus Guidelines (authorized under CMSA, s. 235(1)(f)) set out extensive disclosure obligations; Listing Requirements by Bursa Malaysia supplement these for listed companies. ### Availability and channels for disclosure - Any public disclosure of material information by a listed issuer must be made by an announcement first or simultaneously to Bursa Malaysia, the press and newswire services; a listed issuer must not release material information to the media even on an embargoed basis until it has given the information to Bursa Malaysia (Listing Requirements, Para. 9.08(5)). - Since 1999, Bursa LINK requires all information/documents provided to Bursa be filed electronically; announcements are available on Bursa Malaysia website immediately. - Listing Requirements oblige listed corporations to have a website and publish all announcements made to Bursa Malaysia (Para. 9.21); announcements must be placed on issuer website as soon as practicable after release on Bursa Malaysia’s website. - Paragraphs 9.22 and 9.23: obligations to announce and issue quarterly report, annual audited accounts and annual report. ### Exemptions and excluded offers - Prospectus registration exemptions are set out in Schedule 6 and Schedule 7 (excluded offers/invitations/issues) and include typical exemptions such as government debt, private company issues to existing shareholders, rights offerings by non-listed issuers, offers to employees under share purchase plans, offers to sophisticated investors (licensed financial institutions or certain holders of CMSLs). ### General disclosure standard and CMSA powers - CMSA and Listing Requirements require public issuers to disclose all material information and all information necessary to avoid misleading disclosures. - Under the CMSA, the SC may specify the nature and extent of information to be given to investors (s. 92A), including: - Key characteristics of the capital market product; - Nature of obligations assumed by parties; - Risks associated with the capital market product; - Details of essential terms (s. 92A). ### Detailed disclosure requirements — public offerings and prospectus - A prospectus must be registered by the SC under the CMSA for public offerings, invitations to the public, issues or applications to list securities. - The SC approves Main Market listings and reviews/ registers all prospectuses regarding public offerings; Bursa Malaysia approves ACE Market listings. - The SC may refuse registration if the prospectus does not comply with the CMSA, contains false or misleading statements or material omissions, or lacks required consents/material contracts (s. 232, 233). - CMSA requires the prospectus to contain all information investors and advisers would reasonably require to make an informed assessment of: - Assets and liabilities; - Financial position; - Profits and losses; - Prospects; - Rights attaching to the securities; - Merits of investing and extent of risks involved (s. 236). - A prospectus must not contain false or misleading information or material omissions (CMSA, s. 246). - Issuers must submit a supplementary/replacement prospectus upon becoming aware of material change, false/misleading statement, or material omission (CMSA, s. 238). - Prospectus Guidelines specify minimum information including details of offering, risk factors, company operations and financial performances, shareholders/promoters/directors/key management, related party transactions and conflicts of interest; Guidelines are substantively similar to IOSCO international disclosure standards. ### Prospectus review and publication - Prospectuses undergo a detailed review process at the SC prior to registration, including publication of the draft on the SC’s website for public comment for 15 business days. - Proposals raising novel policy issues require approval by the Operational Policy and Regulations Committee and Management Committee prior to final registration. - Upon registration, hard copies available from issuer and participating organisations; electronic copy with subscription form available on Bursa Malaysia’s website. Participating organisations may distribute electronic copies governed by Electronic Prospectuses and Application Guidelines. - Information memorandum for excluded offers is deemed a prospectus for liability purposes and must be deposited with the SC within seven days after initial issue (CMSA, s. 229, 230). ### Annual reports and other periodic reports - Annual reports (including annual audited accounts) content requirements under Listing Requirements include: - Particulars of each director and his/her remuneration package within certain bands; - Discussion and analysis of performance and material factors underlying results and financial position, with emphasis on trends and significant events/transactions; - Particulars of related-party transactions; - Sanctions imposed by regulatory bodies. - Filing timetables: - Annual reports must be filed with Bursa and the SC and made available to shareholders within six months of the issuer's year-end. - Annual audited accounts must be filed and made available within four months of the issuer's year-end. - Quarterly reports: within two months of the interim period end, including the fourth quarter of the year. - Quarterly report contents include review of performance, commentary on prospects, status of corporate proposals announced but not completed, and status of ongoing and pending material litigation. - Periodic reports are posted on Bursa Malaysia’s website for public information. ### Shareholder voting and circulars - Circulars relating to shareholder voting decisions must be factual, clear, not false or misleading, avoid representation of future performance without adequate justification, and avoid promotional jargon/technical language; Bursa Malaysia reviews circulars before issue (Listing Requirements, para. 9.33). - Circulars must be sent to all shareholders entitled to vote, including those abroad. - Shareholder votes are required for issues of securities, approval of material related party transactions, disposals of major assets or undertakings. - Appendices to Listing Requirements set detailed disclosure requirements and may require appointment of independent advisor for certain transactions (e.g., sale of substantial assets). ### Continuous disclosure for non-listed issuers - Issuers may offer securities to the public without being listed (rare); continuous disclosure for non-listed issuers governed by the Companies Act, which requires interim and annual financial statements, proxy circulars for shareholder meetings and annual reports to be provided to shareholders. ### Advertising and promotional restrictions - Advertising requirements set out in section 241 of the CMSA and the SC’s Advertising Guidelines address advertising before and after SC registration of the prospectus. - Advertising Guidelines cover oral representations, speeches, press interviews, and forward-looking statements by listing applicants and directors; rules prohibit misstatements or material omissions. ### Material change disclosure and immediacy - Listing Requirements require immediate public disclosure of material information/events that could affect price, value or market activity of listed securities or investor decisions; examples include change in management, material acquisition/sale of assets, joint venture/merger, event of default on interest/principal (para. 9.19). - Guidance: in practice, “immediate generally means a period within the same day as the event.” - Any announcement by a listed company must: - Be factual, clear, unambiguous, accurate and succinct; - Contain sufficient information for investors to make investment decisions; - Not be false, misleading or deceptive; - Be balanced and fair; - Avoid over-technical language; - Explain if consequences/effects on future prospects cannot be assessed why this is so; - Explain that internal targets are management targets/aspirations and not an estimate, forecast or projection (Chapter 9). ### Risk disclosure - CMSA requires prospectus to contain information for making an informed assessment of merits of investing and extent of risk involved (s. 236(1)(c)). - Prospectus Guidelines require disclosure of risk factors specific to the corporation, its industry and the securities offered; issuers encouraged to list risk factors in order of material impact. - Prospectus Guidelines – Equity and Debt require detailed disclosure about: - The corporation: history, principal activities, products/services, principal markets, marketing activities, etc. - Shareholders, promoters, directors and key management: direct and indirect shareholdings before and after offering; profiles including business activities and management experience; directors’ remuneration and material benefits-in-kind (on individual basis). - Salient details of service agreements between corporation and directors/key management. - Details on board practices. - Additional specific requirements apply to ABS, structured warrants and other special securities. ### Financial disclosure requirements - Prospectuses must contain issuer’s last three to five years financial results (depending on issuer type). - For a full prospectus, audited financial statements must not be more than six months from date of prospectus (Prospectus Guidelines – Equity and Debt, para. 12.10 and 13.13). - Interim unaudited financial statements may be provided but must have been reviewed by external auditor. - If last audited financial statements are more than six months old, prospectus must include interim audited financial statements (comparative information not required to be audited). - For an abridged prospectus or one for structured warrants, latest audited financial statements must not be more than 15 months from date of issue of prospectus. - Listed issuers must disclose latest quarterly and cumulative quarterly financial statements available, including explanatory notes, in the prospectus. - Directors must confirm no material change in condition from date of last financial statements to a date not earlier than 14 days before date of issue of prospectus; must disclose circumstances that adversely affected asset values, defaults or events likely to cause default on borrowings, material change in reserves or unusual factors affecting profits. - Listing Requirements summary of report deadlines: - Annual reports within six months from close of financial year. - Annual audited accounts together with auditors’ and directors’ reports within four months from close of financial year. - Quarterly reports within two months from end of each quarter. ### Corporate governance and review initiatives - The SC’s Corporate Governance Blueprint 2011 recommended formation of a taskforce of industry and regulators to review the periodic disclosure framework, including shortening submission periods for quarterly and annual reports. ### Accountability, liabilities and sanctions - SC measures to address sufficiency, accuracy and timeliness include pre-issue review, certification requirements and sanctions. - SC may refuse registration of a prospectus that does not comply with CMSA or contains false/misleading statements/material omissions; may refuse listing where issuer/securities are unsuitable (CMSA, s. 233). - Bursa Malaysia may reject or not accept applications/circulars where adviser has not lodged an undertaking letter. - Prospectus responsibility statements: directors/promoters required to provide responsibility statements accepting full responsibility for accuracy of information in prospectus (Prospectus Guidelines, para. 3.01). - Criminal and civil liability: - Failure to ensure prospectus contains all necessary information or material omission may attract criminal liability under section 246 of the CMSA and civil liability under section 248. - Civil recovery available to persons who subscribe/purchase securities or suffer loss/damage from false/misleading statements/material omission; liable parties include issuer and each director, promoter, principal adviser, person named in prospectus whose statements are included/relied upon, person named as stockbroker/underwriter/auditor/banker/advocate, and person who authorises issue of prospectus (CMSA, s. 248). - Defence of due diligence is available under s. 248. Civil liability does not extend to misstatements in other disclosure documents (e.g., annual financial statements) nor are investors deemed to have relied on prospectus misstatements. - Administrative sanctions: - Section 354: breach for failure to comply with Listing Requirements, any written notice, guidelines issued or condition imposed by SC, or rule of a recognised SRO. - Persons liable include: corporations submitting proposals under Part VI or listed on Bursa; directors or officers; advisers; issuers and each director at time of issue of prospectus; promoters; persons named in prospectus for statements or as stockbroker/share broker/underwriter; and any other person on whom obligation under SC guidelines imposed. - SC may issue a stop order where a prospectus does not comply with CMSA, contains false/misleading information, material omission, or issuer has contravened securities laws or Companies Act (CMSA, s. 245). - Bursa Malaysia actions under Chapter 16 include fines, suspension of trading and delisting. - For failure to comply with accounting standards regulations (Securities Industry (Compliance with Approved Accounting Standards) Regulations 1999), SC may impose sanctions including rectification of accounts and fines. ### Omitted or delayed disclosures and temporary withholding - SC may exempt disclosure in a prospectus if satisfied compliance is unnecessary for protection of persons who may normally deal in the securities or compliance would impose an unreasonable burden (CMSA, s. 235(5)); in practice relief is generally limited to trade secrets, proprietary information and other valid business purposes. - Listing Requirements allow temporary withholding of disclosure where: - Disclosure would prejudice ability to pursue corporate objectives; - Facts are in a state of flux and a more appropriate moment for disclosure is imminent (e.g., negotiation stages); - Company or securities laws restrict permissible disclosure before/during public offering or solicitation of proxies (Para. 9.05). - Trading suspension requests to Bursa Malaysia: - Up to three market days where time is required to prepare and release an announcement relating to a material transaction (reverse takeover, change in significant business direction). - Up to 1 market day where issuer intends to make a material announcement or hold a press conference before close of trading. - Any other reason justifying suspension in Bursa Malaysia’s opinion — suspension period as deemed appropriate by Bursa Malaysia. ### Insider trading prohibitions - (Section ends with heading "Insider trading prohibitions" in source content; detailed provisions are addressed elsewhere in the full document.) *Source: Securities Commission / Companies Commission Malaysia / Bursa Malaysia / CMSA and Prospectus Guidelines as presented in the source content.* ### Section 188 of the CMSA prohibits the trading of securities by a person who is in ### _cr1359 - Section 188 of the CMSA prohibits the trading of securities by a person who is in ### Insider trading and tipping - Section 188 of the CMSA prohibits trading by a person in possession of inside information (insider). - Definition of insider: person possessing information that is generally not available and on becoming available, would expect it to have a material effect on the price or value of securities, and ought to know that information is not generally available. - Tipping by the insider is also prohibited. - Criminal sanctions for breach: imprisonment for up to ten years and a fine of not less than RM 1 million under the CMSA. ### Listing Requirements and closed periods (Chapter 14) - Affected persons: directors or principal officers of a listed issuer. - Trading prohibitions for affected persons: - From the time actual information is obtained up to one full market day after the announcement to Bursa Malaysia; and - In all cases, from one month prior to the targeted date of announcement up to the date of the announcement of the issuer’s quarterly results to Bursa Malaysia (closed period). - 4th Quarter results include the cumulative unaudited results of the financial year; closed period for unaudited annual results follows the closed period governing quarterly results. - Dividend timing requirement: all dividends to be paid not later than 3 months from the date of declaration or the date on which approval is obtained in a general meeting, whichever is applicable (Para. 8.26(2)). ### Foreign issuers on Bursa Malaysia - As at 30 November 2011: - Total listed issuers: 945 - Total market capitalisation of listed issuers: RM1,228 billion - Foreign-incorporated listed issuers: 8 - Aggregate market capitalisation of foreign-incorporated issuers: RM3 billion (representing less than 1% of the total market capitalisation of all listed issuers). - Public offerings or listings by foreign issuers in Malaysia must comply with the Prospectus Guidelines. ### Assessment of disclosure timeliness and recommended reforms - Assessment: Broadly implemented. - Current Listing Requirements for public release: - Annual reports within six months from the close of the financial year of the listed issuer; - Annual audited accounts together with the auditors’ and directors’ reports within four months from the close of the financial year of the listed issuer; and - Quarterly reports within two months from the end of each quarter of a financial year. - Observations on timeliness (comparisons and norms cited): - Interim statement deadline: 60 days (noted as same as or slightly longer than many major jurisdictions which vary from 45-60 days). - Audited annual financial statements deadline: 120 days (noted as longer than the more common 90 days; 75 days becoming more common). - Annual report delivery period: six months is described as very long. - CIS audited statements deadline: within two months of the fund’s year-end. - Recommendations: - Pursue the SC’s Corporate Governance Blueprint 2011 initiative to form a taskforce of industry and regulators to review periodic disclosure, including shortening submission periods for quarterly and annual reports. - Consider requiring audited annual financial statements to be published within 90 days of the year-end, with the annual report available promptly thereafter. - Extend prompt public disclosure obligations to all public companies. - Consider amending the CMSA to: - Extend civil liability to issuers and their officers and directors in connection with misstatements in continuous disclosure documents; and - Include a provision deeming investors to have relied on misstatements in the prospectus to ease plaintiffs’ ability to establish elements necessary for civil liability claims. ### Shareholder rights and equitable treatment (Principle 17) - Governance framework: combination of companies and securities laws and the Listing Requirements of Bursa Malaysia. - Director election and nomination: - Companies Act requires individual voting on director appointments unless otherwise unanimously agreed at the meeting (s. 126). - Shareholders holding at least 10% of total voting rights may requisition an extraordinary general meeting to nominate candidates to be directors (Companies Act, s. 144). - Shareholders holding at least 5% may request inclusion of a nomination in the notice for the next annual general meeting. - Listing Requirements specifics: - Election of directors must take place each year. - One third of the directors must retire or be re-elected each year (each director can be in office for a maximum three years before re-election). - Shareholders entitled to be present and to vote at general meetings. - Notice of each candidate for director should be served on registered holders at least seven days prior to the meeting. - Voting on fundamental corporate changes (Companies Act examples): - Variation or abrogation of rights attached to any class of shares (s. 65) - Alteration of articles (s. 31) - Alteration of share capital (s. 62) - Reduction of share capital (s. 64) - Share buy-backs (s. 67A) - Issuance of shares (s. 132D) - Acquisition and disposal of the company’s undertaking or property of a substantial value (s. 132C) - Major disposal requirements for listed corporations: - Appoint an adviser/sponsor before terms agreed; - Appoint an independent adviser who is a corporate finance adviser per SC guidelines; - Include specified information in announcements and shareholder circulars; - Convene a general meeting and obtain shareholder approval of at least 75% in value of shareholders present and voting either in person or by proxy (para 10.11A). - Notice periods for meetings (Companies Act): - At least 14 days’ notice for meetings to pass ordinary resolutions (s. 145(2)); - At least 21 days’ notice for annual general meetings or meetings to pass special resolutions (s. 145(2A) and 152(1)); - Shorter notice allowed with agreement of shareholders holding at least 95% in nominal value of voting shares/95% of total voting rights at that meeting. - Listing Requirements: must immediately announce to Bursa Malaysia all resolutions put to a general meeting and immediately after such meeting whether or not the resolutions were carried (para. 9.19). ### Proxies and central depository - Proxy rules: - Section 149 Companies Act: proxy has same right as shareholder to speak at the meeting. - Restrictions in articles on proxy appointment are noted; SC’s Corporate Governance Blueprint recommends eliminating restrictive proxy rules. - Listing Requirements enhancements on proxies: - Proxy entitled to vote on a show of hands on any question at any general meeting. - Exempt authorised nominee holding shares for multiple beneficial owners in an omnibus account may appoint unlimited proxies for each omnibus account. - No restriction on the qualification of the proxy; proxy has same rights as the member to speak. - Central depository and depositor records: - All listed securities required by SICDA to be deposited with the central depository; transfers by book entry (Companies Act, s. 107C). - A depositor in the record of depositors is deemed a member and entitled to securities stated (s. 107B). - Under Listing Requirements, a person will not be regarded as a shareholder entitled to attend, speak and vote unless his name appears in the record of depositors. ### Take-over regulation, mandatory offer (MO) rules, and exemptions - Legal framework: Division 2, Part VI of the CMSA; Malaysian Code on Take-overs and Mergers 2010 (Take-over Code). - Objectives/principles for administering the Take-over Code (CMSA requires SC to have regard to): - Shareholders and directors of an offeree and the market are aware of the identity of the acquirer and offeror; - Shareholders of an offeree supplied with sufficient information and have reasonable time to consider the offer; - All offeree shareholders have equal opportunity to participate in benefits accruing from the offer, including premium payable for control; - Minority shareholders treated equally and fairly; - Directors of offeree and acquirer act in good faith and do not oppress or disadvantage minority shareholders. - Applicability of the Take-over Code: - Applies to take-over offers however triggered (including scheme of arrangement, compromise, amalgamation, selective capital reduction). - Applies to public companies listed on any stock exchange or otherwise; companies incorporated outside Malaysia but listed on any stock exchange in Malaysia; and any real estate investment trust listed on any stock exchange in Malaysia. - Mandatory offer (MO) triggers: - When a person acquires more than 33% of the voting shares of an issuer. - When an acquirer who has obtained control (i.e. more than 33% but not more than 50% of the voting shares) acquires an additional stake equivalent to more than 2% of the voting shares of a company in any period of 6 months. - MO obligation: acquirer must undertake an MO for all remaining voting shares not owned by him or his persons acting in concert (PAC). Acquisition may be effected by acquisition, holding of, or entitlement to exercise voting shares by any means (including reverse takeover, share repurchases, scheme of arrangement, selective capital reduction as defined under section 216(1) of the CMSA). - Exemptions and whitewash procedure: - Exemptions available for specific instances (foreclosure, rescue operations, company purchasing its own securities, issuance of new voting shares as consideration for asset acquisition). - For issuance of new securities or offeree share buy-backs, applicant may seek exemption before offer obligation realized and fulfill “whitewash procedure” which includes: - No disqualifying transaction by the offeror and his PAC; - Approval from independent shareholders of the offeree at a meeting to waive their rights from receiving the MO (the proposed exemption); - Separate resolution for the proposed exemption; - Voting by way of polls; result must be confirmed by an independent auditor; - All interested parties to abstain from voting on the proposed exemption; - Shareholders provided with competent and independent advice via an independent advice circular (IAC) prepared by an independent adviser; - The IAC is consented to by SC prior to dispatch; - The IAC is dispatched at least 14 days prior to the meeting. - Offeror and PAC prohibited from increasing their interests in the offeree pending consideration of the proposed exemption; interested parties not allowed to participate in voting. - If exemption not granted, offeror may rescind the triggering transaction or proceed and undertake the offer; information must be included in the circular to shareholders and considered in board and independent adviser recommendations. ### Sanctions and responsibility of directors and officers - Corporate liability (CMSA, s. 367): where an offence against the CMSA is committed by a body corporate, any person who at the time was a director, chief executive, officer or representative is deemed to have committed the offence unless he proves that: - The offence was committed without his consent or connivance; and - He exercised all such diligence to prevent the commission of the offence as he ought to have exercised, having regard to the nature of his functions and all the circumstances. - For take-over matters, the SC may take criminal or administrative sanctions against a company, its directors or officers depending on the provision breached. - Section 317A of the CMSA: a director or officer of a listed corporation or any of its related corporations shall not do or cause anyone to do anything with the intention of causing wrongful loss to the listed corporation or any related corporation irrespective of whether the conduct causes actual wrongful loss. - Disqualification under Companies Act, s. 130: where convicted of certain offences a person cannot thereafter be a director or promoter: - Offence in connection with the promotion, formation or management of a corporation; - Offence involving fraud or dishonesty punishable on conviction with imprisonment for three months or more; - Any offence under the relevant sections of the Companies Act. *Source: _cr1359 - Section 188 of the CMSA prohibits the trading of securities by a person who is in (IMF content unit).* ### Part X Division 1–5 of the Companies Act sets out the provisions for the winding up of ### Part X Division 1–5 of the Companies Act sets out the provisions for the winding up of companies. ### Disclosure of material information and Listing Requirements - The requirements for disclosure of material information for investment or voting decisions are prescribed in the Listing Requirements, including content for announcements and circulars for new issue of securities, transactions, share buy-backs, arrangements and restructurings, and withdrawals of listing. - Listing Requirements impose additional information for a significant change in business direction or policy, e.g., disclosure of the new controlling shareholder’s interest in all other corporations or businesses, principal activities of such corporations or nature of such businesses. - If a conflict of interest exists or is likely to exist, the issuer must provide full disclosure of: - the nature and extent of the conflicts of interest or potential conflicts of interest, - the parties to the conflict, and - measures taken for resolving, eliminating, or mitigating the conflicts. ### Take-over Code: information to offeree shareholders and process timing - The information required to be provided to offeree shareholders is set out in the Take-over Code and the Guidelines on Take-over Applications and includes, inter alia: - the offer price, - terms of the offer, - identity and information of the offeror including the ultimate offeror and PAC, - background of the relevant transactions, - the interests of directors in the securities of the offeree and offeror, - material contracts and litigation, - the future intention of the offeror vis-à-vis the business, employees and assets of the offeree, - meeting the public spread requirement (if the offeree is listed), - maintaining the listing status of the offeree (if the offeree is listed), - invocation of the compulsory acquisition provision and - future prospects of the offeree. - The Take-over Code requires: - an offer document to be sent to shareholders of offeree after the take-over notice and a circular from the board of directors of the offeree (board’s circular), - an IAC be dispatched to offeree shareholders after the posting of the offer document. - The Take-over Code requires an offeror, the board of directors of the offeree and the independent adviser to provide information that offeree shareholders and their advisers would reasonably require and expect to find in the offer document, board’s circular and IAC to make an informed assessment on the offer and the risks involved. - Minimum and pertinent information to be disclosed in the offer documents, board’s circular and IAC is specified (Takeover Code, s .12, 14 &15). - Timing requirements (Take-over Code, section 17 and whitewash procedures): - An offeror must fulfill the acceptance condition by the 60th day of the offer, failing which the offer will lapse. - Shareholders would have a minimum of 42 days and up to 95 days from the date of the announcement of the offer to consider and decide on the take-over offer. - Under the whitewash procedures, the IAC must be dispatched at least 14 days prior to the general meeting to be held to consider the exemption. ### Equal treatment of shareholders and other classes of capital - All shareholders in a take-over offer must have equal opportunity to participate in benefits accruing from a take-over offer including in the premium payable for control. - Public announcements inform the market on the offer and documents (including take-over notices, offer documents and IAC) are sent to all shareholders pursuant to requirements under the Take-over Code. - Interests of holders of other classes of share capital and convertibles are safeguarded: - the offeror is required to make a comparable offer to holders of other classes of share capital and convertible securities and treat the holders similar to offeree shareholders in all aspects including information and offer timetable (Take-over Code, s. 30(1) and 31(3)). ### Offer price and consideration rules - Offer price: must reflect the highest price paid by the offeror for shares of the offeree during the six months prior to the start of the offer period and during the offer period. - Prohibition against favourable deals: During a take-over offer, an offeror must not enter into any agreement, arrangement or understanding to deal in or make purchases or sales of voting rights of an offeree if such arrangement contains favourable conditions not extended to all offeree shareholders (Take-over Code, s. 29). - Requirement for cash consideration: - If an offeror has purchased ten percent or more of the voting shares of the offeree for cash within six months prior to the beginning of the offer period, the offeror must provide a cash sum as consideration for the take-over offer. - In the case of a MO, it is obligatory for the offeror in all instances to provide a cash sum as consideration, or as an alternative consideration (Take-over Code, s. 22(2) and (3)). ### Conduct requirements, duties on directors and anti-frustration provisions - Section 8 of the Take-over Code provides conduct requirements for parties to a take-over offer, merger or compulsory acquisition, including requiring the offeree board to act in good faith and safeguard the interests of the offeree as a whole. - Under section 15(1) of the Take-over Code, the offeree board is required to appoint an independent adviser to provide an independent view of the offer. - Under section 15(11), the independent adviser is to provide confirmation on its independence within 3 days after its appointment and must ensure that it remains independent throughout the offer period. - Sections 14(7) and 15(7) require the contents of the IAC and board’s circular to obtain the SC’s consent prior to dispatch to shareholders of offeree. - Duties on directors: - The Take-over Code specifically provides that the board of directors of an offeree shall safeguard the interests of the offeree as a whole; and not deny the holders of securities the opportunity to decide on the merits of the take-over offer. - Section 38 prohibitions on actions by the offeree board without shareholder approval (applicable during the offer period and even prior to receipt of notice if the board believes a take-over may be imminent) include: - The issuance of any authorised but unissued shares of the offeree; - The issuance or granting options in respect of any unissued shares of the offeree; - The creation or issuance or permitting the creation or subscription of any shares of the offeree; - The sale, disposal of or acquisition or agreement to sell, dispose of or acquire assets of the offeree of a material amount; - The entering into a contract or allowing contracts for or on behalf of the offeree to be entered into otherwise than in the ordinary course of business of the offeree; - The disposal of assets or liabilities that is a condition to the take-over offer; - The selling of treasury shares into the market; or - Any action which may cause the offeree or any subsidiary or associated company of the offeree to purchase or redeem shares in the offeree or provide any financial assistance for any such purchase or redemption. - If the offeree board is found not to have acted in good faith in making any recommendation on the proposal, the SC may take action under section 220 of CMSA; the SC has reprimanded an offeree board for conduct that may have blocked an imminent offer. ### Disclosure of holdings by substantial shareholders, directors and officers - Definition of substantial shareholder (Companies Act, section 69D): - A shareholder is a substantial shareholder when his interest in one or more voting shares and the nominal amount of that share, or the aggregate of the nominal amounts of those shares, is not less than 5% of the aggregate of the nominal amounts of all the voting shares in the corporation. - If the company has more than one class of voting shares, a person who has an interest in more than 5% of any class of voting shares is a substantial shareholder. - The person’s direct and indirect shareholdings are included. - The calculation of percentage ownership takes into account ownership of securities convertible into or otherwise equivalent to ordinary shares (including options on such shares), other than rights offered to the public generally. - Substantial shareholders and their holdings must be disclosed in prospectuses under the Prospectus Guidelines. - Reporting and disclosure requirements once a person reaches 5% ownership: - A substantial shareholder is required to inform the company of his/her interests in the company within seven days of becoming a substantial shareholder. - A copy of the notice must be given to the SC. - Listed issuers are required to disclose the names of substantial shareholders and their direct and deemed interests in number and percentage of shares in which they have interest in the company’s annual reports. - Changes to substantial shareholding and circumstances giving rise to any change must be disclosed to the company within seven days of the date of the change. - A person who ceases to be a substantial shareholder must inform the company within seven days of the date of ceasing to be a substantial shareholder. - The listed issuer must make immediate disclosure to Bursa Malaysia of any of these notices. Disclosures to Bursa Malaysia would be posted on Bursa Malaysia’s website. ### Holdings of directors and senior management: IPO and listing disclosures - For initial public offering, information on direct and indirect shareholding in the corporation (before and after the offering) of the corporation’s directors, chief executive and key management and key technical personnel is required to be disclosed in the prospectus (Prospectus Guidelines, para. 9.04 and 9.07). - The cut-off date for information to be disclosed in the prospectus must be the latest practicable date available prior to the issue of the prospectus. - Once listed, the CMSA requires the chief executive or director (including his spouse, child or parent) of a listed corporation who has an interest in the securities of such listed corporation to immediately notify the listed corporation in writing of his/her interests in the securities of the listed corporation or associated corporation of the listed corporation or any change in that position. If the SC deems it necessary for the administration of securities laws, the SC may require the listed corporation to provide the same information to the SC (s. 317). - The listed issuer, under Chapter 9 of the Listing Requirements, is obliged to make immediate disclosure of the notice to Bursa Malaysia. The announcement on changes of interests by directors to Bursa Malaysia is posted on its website. - The Listing Requirements require the listed issuer to disclose a statement showing the direct and deemed interests of each director in its annual report and to contain details on the employee share scheme, such as options or shares granted to the directors, chief executive and senior management during the financial year and since commencement of the scheme. ### Gaps and timing differences in disclosure requirements for other officers and unlisted public companies - There is no immediate disclosure requirement under the CMSA for senior officers other than the CEO of listed companies or for the directors, CEOs or other officers of public companies that are not listed. There is no prompt public disclosure of the positions of these persons for non-listed companies. - The Companies Act imposes an obligation on directors of all companies to report their ownership of shares and any changes in their positions within 14 days (s. 134-135). - There does not appear to be any obligation under the Companies Act for officers to report their positions or for any timely availability of this information to the public. - Enforcement: - The SC has powers to take action for breach of any of the CMSA requirements and other disclosure requirements, such as under the Prospectus Guidelines. - Companies Commission of Malaysia may take enforcement action for non-compliance with the Companies Act provisions. ### Foreign issuers and equivalence of shareholder protection standards - Foreign issuers with significantly different standards of shareholder protection may be allowed to list on Bursa Malaysia if they can provide that the standards are equivalent to those in Malaysia by means of varying the applicant’s constituent documents. - The foreign issuer must submit a comparison of the standards of laws and regulations of the jurisdiction in which the issuer is incorporated and those provided in Malaysia, together with the proposed variations to its constituent documents to address any deficiency in such standards (Chapter 5 of the SC’s Equity Guidelines). ### Assessment, comments and recommended reforms - Assessment: Broadly implemented. - Comments and identified issues: - Legal regime provides for fair and equitable treatment of shareholders and other investors. - The law provides a fairly short notice period for shareholders meetings and there are significant limitations in the law on the use of proxies which together may not allow shareholders to exercise their voting rights effectively. This is not in full compliance with the expectations of Key Questions 1(b) and (c) of the Assessment Methodology. - The SC’s Corporate Governance Blueprint contains recommendations that encourage: - Companies to voluntarily extend the notice period for shareholder meetings to ensure investors have sufficient time to make fully informed decisions about the matters to be discussed at a meeting and to return their voting instructions in time; and - The elimination of the restrictions in Section 149 of the Companies Act that place fairly significant limitations on the actions of the proxy and who may be appointed as a proxy. - Listing Requirements were changed at Bursa Malaysia in response to the Corporate Governance Blueprint to address proxy limitations: shareholders of listed companies may appoint multiple proxies and the qualification restrictions have been removed, effective 3 January, 2012. - Consideration should be given to making these mandatory requirements for all public companies, whether listed on Bursa Malaysia or otherwise. - Gaps and inconsistencies in the disclosure regime for substantial shareholders, directors and senior officers of public companies are not in compliance with Key Questions 4 and 5 of the Assessment Methodology. - The Companies Act and CMSA expressly omit rights that were publicly offered from the definition of 'interests in securities'. Consideration should be given to widening the definition of what must be disclosed (by all of substantial shareholders, directors and officers) to include all interests in the securities of the issuer that may be convertible to or otherwise equivalent to ordinary shares. - Timing concerns: - Under the Companies Act, the first notice of acquiring a substantial shareholding must take place within seven days and a notice of change must be filed within seven days of the change. This is fairly long by international standards. - Directors and the CEO of listed companies are required to make equivalent disclosures immediately (CMSA, s. 317), but other senior management personnel of listed companies are not caught by the immediate disclosure requirement. - For public companies that are not listed there is no applicable requirement that any senior management personnel, other than directors, must disclose their share positions to the company. - The Companies Act directors' notice requirements give a 14 day notice period; if the company is not listed, no prompt public disclosure of the positions of any of these persons is available. - Recommendations: - Consider bringing the requirements into alignment with the same, shorter time period applicable to all directors, senior officers and substantial shareholders of public companies. - Require reports relating to public but unlisted companies to be filed with the SC and published on its website. ### Accounting standards used by issuers (Principle 18) - Description: - The accounting standards in Malaysia are issued by Malaysian Accounting Standards Board (MASB), established under the Financial Reporting Act 1997 (FRA). - There are two sets of accounting standards issued by MASB. Beginning 1 January 2012, Malaysia is fully converged with the International Financial Reporting Standards (IFRS) with the issuance of Malaysian Financial Reporting Standards (MFRS) framework by the MASB. - Under the MFRS Framework, IFRS is directly transposed into the Malaysian FRS. - The MFRS Framework comprises Standards as issued by the IASB that were effective on 1 January 2012 and the new/revised standards recently issued by the IASB that will be effective after 1 January 2012. - The MFRS Framework is to be applied by all Entities Other Than Private Entities for annual periods beginning on or after 1 January 2012. Transitioning entities must comply by 1 January 2013. - The FRA defines “approved accounting standards” as accounting standards issued or adopted by the MASB. - For foreign companies listed on a stock exchange in Malaysia, they must be acceptable internationally recognised accounting standards. - Audited financial statements are required to be disclosed in: - Public offering and listing documents as stipulated under the various Prospectus Guidelines; and - Publicly available annual reports. - Availability: Audited financial statements and annual reports are widely available on listed issuers’ website, on Bursa Malaysia’s website, or from the Companies Commission of Malaysia for a small fee, and other sources such as the issuers’ registered office. - FRS 101 - Presentation of Financial Statements: a complete set of financial statements consists of: - A statement of financial position as at the end of the period; - A statement of comprehensive income for the period; - A statement of changes in equity for the period; - A statement of cash flows for the period; - Notes, comprising a summary of significant accounting policies and other explanatory information; and - A statement of financial position as at the beginning of the earliest comparative period when an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements, or when it reclassifies items in its financial statements. - Disclosure requirements under FRS 101: - An entity must disclose in the summary of significant accounting policies or other notes the judgments, apart from those involving estimations, that management has made in the process of applying the entity’s accounting policies and that have the most significant effect on the amounts recognised in the financial statements. - Financial statements in public offering and listing documents and publicly available annual reports must be prepared and presented in accordance with approved accounting standards or acceptable internationally recognised accounting standards. - FRS 101 requires an entity whose financial statements comply with FRSs to make an explicit and unreserved statement of such compliance in the notes. If departing from a requirement in an FRS, Paragraph 20 of the FRS requires disclosure of: - That management has concluded that the financial statements present fairly the entity’s financial position, financial performance and cash flows; - That it has complied with applicable FRSs, except that it has departed from a particular requirement to achieve a fair presentation; - The title of the FRS from which the entity has departed, the nature of the departure, including the treatment that the FRS would require, the reason why that treatment would be so misleading in the circumstances that it would conflict with the objective of financial statements set out in the Framework, and the treatment adopted; and - For each period presented, the financial effect of the departure on each item in the financial statements that would have been reported in complying with the requirement. - Comparative information presentation requirements: - An entity disclosing comparative information must present, as a minimum, two statements of financial position, two of each of the other statements, and related notes. - When an entity applies an accounting policy retrospectively or makes a retrospective restatement of items in its financial statements or when it reclassifies items in its financial statements, it must present, as a minimum, three statements of financial position, two of each of the other statements, and related notes. - An entity presents statements of financial position as at: - The end of the current period; - The end of the previous period (which is the same as the beginning of the current period); and - The beginning of the earliest comparative period. - Where unaudited financial statements are included in quarterly financial results announcements, the financial information presented is required to comply with MASB’s FRS 134 - Interim Financial Reporting, which tracks the requirements under IASB’s IAS. *Source: _cr1359 - Part X Division 1–5 of the Companies Act sets out the provisions for the winding up of (IMF PDF).* ### 34. The interim statements would include a condensed balance sheet, income statement, ### 34. The interim statements would include a condensed balance sheet, income statement, ### Interim financial statements - The interim statements would include a condensed balance sheet, income statement, statement of changes in equity, cash flow statement and selected explanatory notes. ### MASB and FRF: institutional framework for financial reporting - MASB is established under the FRA as an independent authority to develop and issue accounting and financial reporting standards in Malaysia. - MASB, together with the Financial Reporting Foundation (FRF), make up the framework for financial reporting in Malaysia. - The framework comprises an independent standard-setting structure with representation from preparers, users, regulators and the accountancy profession. - Functions and powers of MASB under the FRA include: - Issue new accounting standards as approved accounting standards and to review, revise or adopt existing accounting standards as approved accounting standards; - Issue statements of principles for financial reporting; - Sponsor or undertake development of possible accounting standards; - Make such changes to proposed accounting standards as considered necessary; and - Determine scope and application of accounting standards. - MASB composition: - MASB is made up of eight members who are appointed by the Minister of Finance. - It comprises the Chairman of the MASB, the Accountant-General and six other members who possess knowledge and experience in financial accounting and reporting and in one or more of the fields of accountancy, law, business and finance. - The Minister of Finance has appointed three advisors to the MASB, one each from the BNM, the SC and the Companies Commission of Malaysia. - MASB processes: - Set out in "Foreword to Malaysian Accounting Standards Board Standards and other Technical Pronouncements" (the MASB Foreword). - Foreword explains authority, scope and application of approved accounting standards and other technical pronouncements and the procedures and due process for development and adoption. - All new/revised standards and interpretations are issued as exposure drafts for public comments and must be approved by the MASB before issuance as final. - FRF role and powers: - FRF is established under the FRA and contains representation from all relevant parties in the standard setting process. - FRF has no direct responsibility with regard to standard setting; responsibility rests solely with MASB. - FRF functions and powers include: - Providing its views to the MASB on matters MASB seeks to undertake or implement with respect to development and issue of accounting standards and a conceptual framework; - Reviewing the performance of the MASB; - Being responsible for the financing arrangements and operations of the MASB; - Approving the MASB budget; and - Administering the fund established to finance ongoing operations of FRF and MASB including management of funds not expended on operations during any period. - FRF composition: - FRF is made up of 19 members who are appointed by the Minister of Finance. - Seven members are ex-officio representing the Minister of Finance, the BNM, the SC, the Companies Commission of Malaysia, the Bursa Malaysia Berhad, the Malaysian Institute of Accountants and the MASB. - The other 12 members represent principal officers of public listed companies, senior partners of public accounting firms and persons with other relevant experience and background. ### SC enforcement of approved financial reporting standards - The SC has a system in place to enforce compliance with approved financial reporting standards by public listed companies, including: - A financial reporting issues driven review with respect to specific financial reporting standards that may have a material impact on the capital market. - An active review program on disclosures made by companies with significant market capitalisation in connection with transactions, skewed towards financial reporting disclosures and substance of transactions. - An active review program of financial statements submitted by public listed companies, focusing on auditors' reports that contain qualification such as disclaimer of opinion, adverse opinion and those that contain emphasis of matter paragraph. - Under the Securities Industry (Compliance With Approved Accounting Standards) Regulations 1999, the SC may direct a listed company, its directors or its chief executive: - To rectify the relevant financial statements; - To provide relevant undertaking to the SC with regard to compliance with the approved accounting standards; and - To make such announcement as the SC deems fit in relation to any non-compliance or any rectification required. - The SC may take administrative action as it deems fit against the listed company, its directors or chief executive; these powers have been exercised several times in recent years. ### Foreign issuers and acceptable international accounting standards - The FRA allows foreign companies listed on the stock exchange to use acceptable internationally recognized accounting standards. - MASB approved the accounting standards issued by the following standards issuing bodies as acceptable international accounting standards: - International Accounting Standards Board; - Financial Accounting Standards Board, United States of America; - Accounting Standards Board, United Kingdom; and - Australian Accounting Standards Board, Australia. ### Assessment - Fully implemented - Comments: See the comment under Principle 16 regarding the timeliness of the requirements regarding reporting financial information. ### Principle 19 — Auditors should be subject to adequate levels of oversight - Description: There is a regulatory system in Malaysia that subjects auditors of public interest entities (PIEs) to appropriate levels of oversight. - In 2010, the SCA was amended to extend the functions of the SC to include audit oversight, with functions to: - Promote and develop an effective and robust audit oversight framework in Malaysia; - Promote confidence in the quality and reliability of audited financial statements in Malaysia; and - Regulate auditors of PIEs (SCA, s. 31B). - PIEs include companies listed on Bursa Malaysia and institutions subject to supervision by BNM or the SC. ### Audit Oversight Board (AOB): structure, responsibilities and membership - AOB established under section 31C of the SCA to discharge audit oversight functions; structured as a business group of the SC. - AOB staff, including Executive Chairman, are employees of the SC and remunerated by the SC. - Statutory responsibilities of AOB (s. 31E) include: - Implement policies and programmes to ensure an effective audit oversight system in Malaysia; - Register or recognise auditors of public interest entities; - Direct the Malaysian Institute of Accountants (MIA) to establish or adopt, or by way of both, auditing and ethical standards to be applied by auditors; - Conduct inspections and monitoring programmes on auditors to assess degree of compliance with auditing and ethical standards; - Conduct inquiries and impose appropriate sanctions against auditors who fail to comply with auditing and ethical standards; - Cooperate with relevant authorities to enhance standards of financial disclosures of PIEs; - Liaise and cooperate with oversight bodies outside Malaysia; and - Perform other duties to promote high professional standards of auditors and improve audit quality. - Registration and qualification: - All auditors (audit firms and individual auditors) of PIEs are required to register with the AOB. - Fit and proper requirements are set out in the SCA, including being an approved company auditor under the Companies Act. - As at 31 December 2011, there are 75 audit firms and 298 individual auditors registered with the AOB who may conduct statutory audits on PIEs. - Licensing of statutory auditors: - Minister, through the Audit License Committee, is responsible for licensing statutory auditors. - Requirements in addition to MIA membership: - Be a resident of Malaysia; - Have attended the Public Practice Programme organized by the MIA; - Possess three (3) years of continuous audit experience (post membership of the MIA) during the four (4) years prior to submission of the application; and - Attend and pass the Audit License Committee Interview. - Continuous obligations include compliance with MIA’s Continuous Professional Education requirement, Professional Indemnity Insurance requirements, International Standards on Quality Control (ISQC1), and Practice Review requirements. - Statutory auditor license renewal is required every two (2) years and is subjected to comments on performance from the SC, Companies Commission Malaysia, MIA. - AOB membership: - AOB consists of seven members appointed by the SC including an Executive Chairman and six non-executive members. - SCA requires diversity: members must possess knowledge and experience in finance, business or relevant disciplines; be individuals of integrity and reputation committed to investor interests; and understand responsibilities for financial disclosures of PIEs (s. 31C(3)). - To ensure independence from the audit profession, the Board may not have more than two non-executive members who are members of the MIA. - Current membership includes individuals from the legal profession, investment community and regulators with qualifications in accounting, corporate finance, banking, business and/or law. - Funding: - AOB is funded principally by the SC and also collects registration fees from registered audit firms and individual auditors. ### Inspection powers, scope and reporting - Power to conduct inspections (s. 31V of the SCA): - To assess degree of compliance with auditing and ethical standards by an auditor; and - To assess quality of audit reports prepared by an auditor relating to auditing of financial statements of PIEs. - AOB access to documents: - AOB has access to all books, accounts, working papers or other related documents of audit firms or auditors and may make copies or extracts and request information by oral interview, in writing or any other manner. - Inspection officers (IOs): - All inspections are carried out by IOs who are full time officers of the SC, qualified and experienced investigation personnel, subject to the SC code of conduct. - IOs must confirm independence and declare potential conflicts of interest to the AOB Executive Chairman prior to inspections. - Scope of inspections: - Inspections conducted at firm level and engagement (specific audit) level. - Selection criteria based on risk assessments of audit firms and audit engagements. - Firm review focuses on quality control, processes, risk management practices and compliance with ethical standards. - Engagement review focuses on compliance with International Standards on Auditing (ISA). - Type of inspections: - Regular inspection: routine basis to ensure all audit firms of PIEs are inspected within a pre-determined cycle; focus on high risk areas and market/investor confidence. - Special inspection: driven by specific concerns, events or industry issues posing risk to investor protection or raising concerns over audit quality. - All registered audit firms are subjected to regular inspections. - The top 6 audit firms (with more than 10 partners) are subject to annual inspections, while the remaining audit firms are to be inspected within a 3 year cycle, beginning January 2011. - Inspection reporting: - A draft inspection report is prepared and extended to the inspected auditor at the conclusion of the inspection. - AOB discusses findings with the auditor and, after considering representations, finalizes the draft inspection report. - Transparency and annual reporting (s. 31L): - AOB must prepare an annual report containing overall findings of its inspection program and assessment of significant risks relating to quality and reliability of financial statements of PIEs; report submitted to the SC and then sent to the Minister. - AOB Annual Report is made publicly available on the AOB website. - SCA requires the AOB annual report to include: - An assessment of the AOB’s performance and effectiveness; - An assessment on significant risks relating to the quality and reliability of audited financial statements of PIEs and key measures recommended by the AOB; and - A description of the systems used by the AOB to evaluate the effectiveness of its operations. ### Auditor independence and AOB assessments - Companies Act conflicts precluding a person from acting as company auditor include being an officer, employee, or shareholder of the company or partner of someone who is, or being indebted to the company for an amount exceeding RM 2,500 (s. 9). - AOB has adopted the MIA By-Laws (On Professional Ethics, Conduct and Practice) and ISQC 1 for detailed requirements on threats to independence. - AOB regular inspections include assessments of independence, such as: - Testing effectiveness of monitoring mechanisms on independence and ascertaining whether the firm encounters possible threats to independence; - Testing client acceptance processes for gaps in independence and conflict of interest checks, professional clearance correspondence with predecessor auditors and engagement letters, and ascertaining if other services provided to PIE clients give rise to threats to independence. ### Power to sanction - Part IIIA of the SCA gives the AOB authority to stipulate remedial measures and initiate disciplinary proceedings to impose sanctions on auditors and audit firms. - The AOB may publish the inspection report if the auditor fails to take relevant remedial measures. - AOB may conduct an inquiry if there is reason to believe an auditor has contravened provisions of Part IIIA, any condition, written notice or guidelines. - Possible sanctions where breach is established include: - Directing the person in breach to comply; - Reprimand; - Requiring professional education to be undertaken; - Assigning a reviewer to oversee an audit undertaken by the auditor concerned; - Financial penalty of not exceeding RM500,000; - Prohibiting the person concerned from auditing financial statements of a PIE for a period of not exceeding 12 months or permanently; or - Prohibiting the person concerned from accepting any PIE as its client for a period not exceeding 12 months (s. 31Z). - The AOB may refuse to renew, revoke or suspend an auditor’s registration if found not fit and proper. *Source: _cr1359 - 34. The interim statements would include a condensed balance sheet, income statement,* ### section 31P of the SCA. ### section 31P of the SCA ### Inspections and enforcement activity (April 2010–December 2011) - From April 2010 to December 2011, a total of 24 inspections have been conducted - 23 regular inspections and one special inspection, covering a total of 74 audit engagements. - In addition, extensive discussions and reviews were carried out as part of the initial registration process. - 13 remediation plans have been approved and the remaining 10 remediation plans are under discussion. - As a result of the AOB’s enforcement efforts: - four inquiries have been authorised by the Board to be conducted on four audit firms based on the outcome of the inspection; - six warning letters were issued to audit firms for failure to register on time with the AOB as required; and - the registration of five individual auditors has been shortened from 12 months to six months owing to significant deficiencies found during inspection. - Assessment: Fully implemented ### Principle 20 — Auditor independence: framework and enforcement - Description: - Auditor independence requirements are set out in the MIA By-Laws (On Professional Ethics, Conduct and Practice), particularly section 290 on Independence, which requires auditors to have independence of mind and in appearance. - The MIA has adopted the latest enhancement in the Clarified IFAC Code of Ethics with effect on 1 January 2011, with some local added requirements. - The AOB has the authority to direct the MIA to establish or amend the auditing and ethical standards to be complied by an auditor where necessary. The AOB also may adopt auditing and ethical standards that are to be complied with by an auditor that is registered with the AOB. - Audit firms are required to ensure in-build processes to demonstrate auditor’s independence (where applicable) to the regulators. The onus is on the auditor to provide his or her independence. The AOB, through its inspection activities and subsequently via an inquiry, may take action against an auditor if a breach of independence rule is determined. - Paragraph 15.12 of the Listing Requirements provides that the audit committee, which shall comprise a majority of independent directors, is to recommend the nomination of external auditors. The audit committee is expected to ensure that the external auditors nominated are suitable including being independent. - MIA By-Laws restrictions and higher standards (relative to IFAC Code): - A member shall not be a key audit partner for more than 5 years as compared to the IFAC Code of Ethics requirement of 7 years; - Total fees generated by the PIE audit client or its related entities should not exceed 15% of the firm’s total fees in each year over 2 consecutive financial periods - Auditors may not provide accounting services to PIE audit clients. - Auditors may not provide internal audit services to PIE audit clients. - MIA By-Laws on non-audit services: - 290.158 - Before the firm accepts an engagement to provide a non-assurance service to an audit client, a determination shall be made as to whether providing such a service would create a threat to independence. In evaluating the significance of any threat created by a particular non-assurance service, consideration shall be given to any threat that the audit team has reason to believe is created by providing other related non-assurance services. If a threat is created that cannot be reduced to an acceptable level by the application of safeguards, the non-assurance service shall not be provided. - 290.159 - Providing certain non-assurance services to an audit client may create a threat to independence so significant that no safeguards could reduce the threat to an acceptable level. However, the inadvertent provision of such a service to a related entity, division or in respect of a discrete financial statement item of such a client will be deemed not to compromise independence if any threats have been reduced to an acceptable level by arrangements for that related entity, division or discrete financial statement item to be audited by another firm or when another firm re-performs the non-assurance service to the extent necessary to enable it to take responsibility for that service. - Quality-control and monitoring requirements: - Audit firms must establish policies and procedures designed to provide reasonable assurance of compliance with relevant ethical requirements as prescribed under ISQC 1, including communication of independence requirements, identification and evaluation of threats to independence, and application of safeguards or withdrawal where appropriate. - ISQC 1 requires firms to ensure they undertake only relationships and engagements where they are competent, have capabilities including time and resources, can comply with ethical requirements, and have considered client integrity. - ISQC 1 also requires firms to establish a monitoring process designed to provide reasonable assurance that quality control policies and procedures are relevant, adequate and operating effectively. - Governance and audit committee duties: - The Revised Code on Corporate Governance (2007) requires boards of public listed companies to establish an audit committee comprising at least three members, a majority of whom are independent; all members should be non-executive directors. - An independent non-executive director is defined in the Listing Requirements as a director who is independent of management and free from any business or other relationship that could interfere with independent judgment. - The Code recommends written terms of reference for the audit committee. All members should be financially literate and at least one should be a member of an accounting association or body. - Duties of the audit committee include: - considering the appointment of the external auditor, the audit fee and any question of resignation or dismissal; - discussing with the external auditor before the audit commences, the nature and scope of the audit, and ensure co-ordination where more than one audit firm is involved; and - discussing problems and reservations arising from the interim and final audits, and any matter the auditor may wish to discuss (in the absence of management where necessary). - Shareholder and Companies Act provisions: - Shareholders must approve the appointment, reappointment and resignation of external auditors at the annual general meeting (Companies Act, s. 172). - Under the Companies Act, shareholders may remove the company auditor via a resolution requiring special notice or by not being re-appointed at the following AGM (s. 172). - The company auditor may only resign if: - auditor who wishes to resign is not the sole auditor of the company; or - the resignation is made at an AGM (s. 172(14)). - The Companies Act and Listing Requirements require an immediate announcement about any change in the external auditors of a listed company (see Listing Requirements, para. 9.19). - If external auditors are removed from office or give notice to the listed issuer of their desire to resign as external auditors of the listed issuer, the listed issuer must forward to Bursa Malaysia a copy of any written explanation made by the external auditor at the same time as copies of such are submitted to the Registrar of Companies (Para. 15.22). - Enforcement evidence: - The AOB conducted a thematic review on partner’s rotation and requirements of the MIA By-Laws and ISA to have an Engagement Quality Control Review (“EQCR”) for all audit engagements of PIEs. - It identified 15 individual auditors from six sole proprietorships and nine audit firms with two to four partners that might not comply with the five years partner rotation requirement of the MIA By-Laws if they continued to audit for FYE 2011. - As a result, seven firms agreed to rotate partners in 2011, four agreed not to seek reappointment and four agreed to withdraw their firms from AOB registration due to their inability to comply with the partner rotation requirement. - External assessments: - In 2012, the World Bank published a Report on the Observance of Standards and Codes (“ROSC”) on Accounting and Auditing in Malaysia. The assessment concluded that the relevant auditing and ethical standards have been adopted and implemented in Malaysia as mentioned in Principle 21. - Assessment: Fully implemented ### Principle 21 — Audit standards: adoption and implementation - Regulatory requirements: - The regulatory framework in Malaysia requires that the financial statements included in public offering and listing particulars documents and publicly available annual reports be audited in accordance with a comprehensive set of auditing standards. - Adoption of international standards: - The Malaysian Approved Standards on Auditing issued by the MIA are the International Standards on Auditing (ISA) issued by IFAC. The Clarified ISAs have been adopted in full and became effective for periods beginning on or after 1 January 2010. - Other international standards adopted include ISQC 1, which became effective from 1 January 2010. - The By-Laws on Professional Ethics, Conduct and Practice (“MIA By-Laws”) issued by MIA are substantially based on IFAC’s Code of Ethics. - Disclosure and timing requirements: - Audited financial statements are required to be disclosed in public offering documents under the SC Prospectus Guidelines (Chapter 14). - The Listing Requirements state that a listed issuer must issue its annual reports that include annual audited financial statements together with the auditors’ and directors’ reports of the listed issuer, and forward them to the Exchange and shareholders within 6 months from the close of the financial year of the listed issuer. - Institutional responsibilities and standard-setting: - The MIA is responsible for the establishment and issuance of auditing standards in Malaysia. Section 6 on the “Functions of the MIA” states that the functions of the MIA should include “to promote, in any manner it thinks fit, the interests of the profession of accountancy in Malaysia”. - The Auditing and Assurance Standards Board (“AASB”) Auditing Committee was established in June 2009 under the MIA to set high quality standards for auditing, review, other assurance, quality control and related services and to facilitate compliance with such standards. - The AASB is a functionally independent standard-setting body designed by, and operating under the auspices of the MIA. The AASB considers new or revised pronouncements issued by the IFAC and issues these as exposure drafts for public - External assessment reference: - As noted above, a ROSC on Accounting and Auditing was conducted by the World Bank in 2011. The assessment concluded that the relevant auditing and ethical standards have been adopted and implemented in Malaysia. - Assessment: Fully implemented *Source: section 31P of the SCA (content unit: _cr1359 - section 31P of the SCA).* ### Section 8 of the Accountants Act 1967 provides that the MIA Council is made up of the Accountant General, ### _cr1359 - Section 8 of the Accountants Act 1967 provides that the MIA Council is made up of the Accountant General, ### MIA Council composition and AASB governance - Section 8 composition of MIA Council: - the Accountant General, Malaysia, or his nominee; - not more than five members appointed from the higher educational institutions; - the President of the Malaysian Association of Certified Public Accountants; - three members appointed from among the Presidents of the local branches of specified recognized accounting bodies; - one appointed from among the members of the council of the Malaysian Association of Certified Public Accountants, other than its President; - not more than nine other suitably qualified members; - 10 members elected by the annual general meeting of the MIA in accordance with the rules of the MIA. - "18 of these are appointed by the Minister on the advice of the Accountant General." - AASB structure and process: - AASB consists of a chairman and 14 members representing various sectors such as accounting firms, academia and public interest groups. - Members are appointed by the MIA Council, based on recommendations from the MIA Nominating Committee. - Five observers are appointed to AASB representing regulatory bodies and government agencies. - All AASB members are volunteers and must sign a members’ Code of Conduct declaring they will act in the public interest and with integrity. - AASB is required to be transparent and adhere to due process as approved by the MIA Council. - MIA has adopted all of the IFAC’s pronouncements, including the recently revised and redrafted by the IFAC based on its new clarity standards. ### Principle 22 — Credit rating agencies (CRA): registration, supervision, and requirements - Regulatory framework: - Guidelines on Registration of Credit Rating Agencies (CRA Guidelines) issued on March 30, 2011. - CRA defined as "a registered person under the CMSA which provides credit rating services for issuance or offerings of debentures and Islamic securities." - CRAs located in Malaysia and whose ratings are required for ringgit-denominated bonds are subject to registration and supervision by the SC. - SC had supervisory framework since 2006 including off-site review and engagement with management. - Registration and information requirements: - CRA registration requires submission of specified corporate and operational information and a declaration of compliance with the Guidelines. - Example documents: company profile; information on shareholders, directors and senior management; code of conduct; rating policies, processes and methodologies; personal investment and trading policy; whistle blower policy. - SC focus areas in assessment: - Compliance with Guidelines including capital requirement and financial resources, shareholding structure, rating policies/methodologies/processes. - Assessment of individuals nominated as directors, chief executive and Rating Committee members for fitness, properness, and expertise. - SC may require further information or clarification. - Registration outcomes and timing: - Existing local CRAs given six months to register. - One CRA registered in October of 2011 and one in March of 2012 after extensive review and engagement. - Scope of rating requirement and foreign CRAs: - Under Guidelines for Private Debt Securities and Sukuk, all ringgit-denominated bond/sukuk issues must be rated by a CRA. - Foreign CRA allowed for ringgit-denominated issues only if issuer has a current foreign-currency denominated issue rated by that foreign CRA. - Foreign CRA subject to SC review: registration in home jurisdiction and home regulator’s supervisory and enforcement authority required. - Ongoing reporting and monitoring: - CRA required to submit information to SC on annual, semi-annual, quarterly and on-going basis. - Examples of required submissions: - Latest audited annual financial statements, annual time-table on proposed yearly credit review for next calendar year; - Semi-annual CRA compliance report, staff training schedule; - Written explanations on remedial actions taken on rating policies and process upon occurrence of a sharp downgrade. - Evidence that reports are reviewed and follow-up actions taken. - Examination powers and inspections: - CRA subject to examination by the SC (SCA, s. 126(1)(f)); examination power granted when SCA amended in October 2011. - Annual examination framework for CRAs finalized while FSAP mission was in Malaysia; audits expected to begin "this year." - On-site inspection of one domestic CRA began in first week of May 2012 and was completed. - SC powers regarding registration and sanction: - SC may refuse registration if requirements not met and may impose conditions. - SC may withdraw or suspend CRA registered person status under paragraph 5.2 if CRA or its controlling holding company: - Commits a prescribed offence, such as conviction under securities laws; - Contravenes any term or condition imposed by the SC; - Does not comply with any directive issued by the SC; - Refuses to adhere to the action imposed by the SC. - Enforcement actions available: - Issue a directive to the CRA; - Issue a reprimand to the CRA; - Impose a fine on the CRA; - Limit or suspend the rating business of the CRA; - Remove any director, key personnel or member of the Rating Committee responsible for the breach; - Withdraw or suspend the registered person status of the CRA; - Take any other actions the SC deems necessary to maintain the integrity of the rating process. - Example enforcement action: complaint alleging compromised independence at a prospective CRA registrant led to SC review, engagement with board, and retirement of the senior executive involved. - Operational and conduct requirements for CRAs: - Must develop and publish written procedures and methodologies for each type of bond and industry, including rating philosophy, parameters/thresholds, and benchmarks; publish on website. - Keep proper records to support credit ratings for a period of not less than seven years. - Have sufficient resources and employ competent and qualified analysts. - Conduct an annual rating review of a bond issue and publish rating report within fifteen months from the last annual rating review. - Monitor ratings and initiate immediate review upon awareness of information that may reasonably be expected to result in a rating action. - Maintain adequate infrastructure, information systems, security, system capacity and contingency arrangements, including business continuity plan. - Publish on website: - All information and documents required under the Guidelines including rating criteria and methodologies, transparent policies, controls and procedures, available to all market participants at the same time; - All credit rating opinions and make them easily accessible to the public (detailed rationale reports may be provided only to subscribers); - A list of bonds downgraded to default on an annual basis and a historical record of this default list for at least the past five years following a template in the Guidelines. - Maintain confidentiality of client information and establish written policies to monitor and prevent misuse of non-public information; disclosure only as permitted by law or to the SC. - Independence and conflicts: - CRA must establish a Rating Committee whose chairman and at least one-third or two individual members (whichever is higher) must be external members independent from the CRA, its holding company or controllers. - External Rating Committee members can serve for two terms, with each term not exceeding four years. - CRA must not appoint more than one individual perceived to have a business development function or who initiates/participates in fee negotiations with any client as a Rating Committee member. - Analysts or family members with any interest in a bond issue must be excluded from rating and monitoring; policies required on investments and trading by employees. - Analysts and Rating Committee members must publicly disclose all conflicts of interest, including family members', in the CRA's rating report for all bond issues. - CRA must include a specific statement in its rating report if rating fees for an issuer or related issuers comprise five percent or more of its rating revenue from the preceding year. - Timeliness: - For initial ratings, CRA must publish rating reports as soon as ratings are finalized or at least seven working days prior to issuance of bonds/sukuk being rated. - For subsequent rating reviews, CRA must publish rating reports in a timely manner; SC will consider surrounding circumstances and benchmark against industry best practices. ### Principle 23 — Oversight of other analytical/evaluative services - Entities identified as offering analytical or evaluative services: Investment advisor/analyst, corporate finance advisor, bond pricing agency (BPA) and property valuer. - Regulatory treatment: - Investment and corporate finance advisory are regulated activities; entities are subject to licensing requirements under the CMSA. - Bond pricing agencies providing investment advice in relation to pricing of debentures must be registered with the SC under BPA Guidelines. - Property asset valuers making submissions to SC and Bursa Malaysia must comply with Asset Valuation Guidelines under CMSA (s. 377); valuers are registered with the Board of Valuers at the Ministry of Finance. - BPA oversight approach: - Pre-registration: minimum requirements on capital, bond pricing expertise, established pricing methodologies as set out in BPA Guidelines. - On-going supervision: compliance with BPA Guidelines, code of conduct and ethics, annual audited financial statements, notification of material changes in operations, fees or controlling shareholders. - Sell-side analysts and stockbroking entities: - Must be licensed by the SC. - Licensing Handbook requires organizational structure with clear responsibilities, adequate internal controls, and a compliance officer. - Licensed intermediaries must monitor and supervise representatives including sell-side analysts. - Sell-side analysts subject to fit and proper requirements, examination and continuing professional education as described under Principle 29 and Guidelines on Investor Protection. - SC supervision: - Routine on-site examinations of market intermediaries focus on internal control systems, procedures, resources and performance. ### Principles for Collective Investment Schemes (CIS): Principles 24–26 — eligibility, governance, operations, structure, asset protection, disclosure - Principle 24 — Eligibility, governance, organization, operational conduct - Key statutory and guideline sources: CMSA, Licensing Handbook, Guidelines on Unit Trust Funds (UTF Guidelines), ETF Guidelines, REIT Guidelines. - Licensing and roles: - Persons marketing/distributing fund securities must hold a CMSL or be a registered person under the CMSA permitted to deal in securities. - Fund manager (FMC) must be licensed by the SC (s. 58(1)). - Operator (UTMC) must be approved by the SC to manage each specific fund on a fund-by-fund basis (s. 288(2)). - A trustee must be appointed and approved by the SC (ss. 288 and 289). - Marketing and distribution channels: - UTMC may employ staff and/or appoint Individual agents ("Unit Trust Consultants" or UTC), Institutional Unit Trust Advisers (IUTA), and/or Corporate Unit Trust Advisers (CUTA). - UTCs must be registered with FIMM and attached to a UTMC, CUTA or IUTA which supervises the UTC. - Marketing Guidelines and UT Online Guidelines set duties, acceptable conduct, and promotional material standards. - Operator eligibility criteria include: - Honesty and integrity; - Appropriate and sufficient human and technical resources; - Financial capacity for launching and operation; - Ability to perform duties and manage risks commensurate with size, complexity, and risk profile; - Internal controls and compliance arrangements sufficient to carry out business diligently and fairly. - Governance specifics: - Investment committee requirement: at least 3 members with no fewer than two independent members; maintain minimum ratio of at least one-third independent members at all times (UTF Guidelines/ETF Guidelines, cl. 6.02(a) and 6.03). - REIT Manager encouraged but not required to appoint an investment committee. - Operational and compliance frameworks: - Fund manager must follow Guidelines on Compliance Function for Fund Management Companies including: - Establish risk management framework reviewed yearly (clauses 5.05 – 5.08); - Establish and implement effective internal control framework and perform yearly review (clause 4.02(d)(i) and (ii)); - Establish internal audit function with planning, recording, findings and internal audit reports (clause 5.01 & 5.03); - Board to ensure appointment of one or more compliance officers and address non-compliance matters (clause 4.02(k) and (l)); compliance officer duties (clause 4.04) include maintaining compliance manual, policies, programme, training and direct reporting to Board. - Delegation and outsourcing permitted with SC prior approval except where delegated to a SC licensee; common outsourced functions: fund management, fund accounting, fund valuations, maintaining unit holders’ register. - Outsourcing guidelines require protection of investors, limitations on delegates, prohibitions on outsourcing key tasks, and controls at the outsourcing firm. - Management company remains responsible for outsourced functions; must monitor delegates, ensure compliance with deed/prospectus/guidelines and submit declaration of compliance when appointing a delegate. - Service Level Agreement (SLA) must include reporting/monitoring, access rights for inspections, maintenance of records for stipulated retention periods; SLA reviewed by SC prior to approval. - Reporting and supervisory practices: - CMSL holders required yearly submission to SC on licence anniversary date summarizing financial performance, business direction and resources. - SC conducts on-site and off-site reviews; supervisory manual exists for UTMC/funds examinations focusing on corporate governance, client asset protection, trading/operations, compliance, AML, and financial statement analysis. - New UTMC approved by SC must submit independent operational audit report within 6 months after CIS launch covering organizational structure/key personnel; compliance policies and procedures; and key operations areas. - Foreign entities and funds: - Management company and trustee generally required to be locally incorporated for CIS marketed in Malaysia; delegation outside Malaysia requires SC approval and assessment of international cooperation between regulators. - Foreign incorporated CIS may be sold if they meet Foreign Fund Guidelines; SC recognizes funds/jurisdictions considering investor protection and mutual co-operation; Mutual Recognition Agreements exist with Dubai Financial Services Authority and Securities and Futures Commission of Hong Kong. - Principle 25 — Legal form, structure, segregation and protection of client assets - CIS organization: - Management company (UTMC) operates and manages CIS; trustee acts as custodian and safeguards unit holders’ interests. - Trustee approved by SC must be appointed and a trust deed registered with the SC (CMSA, s. 288). - Trustee is the registered/legal owner of assets holding on behalf of beneficial unit holders; trustee has fiduciary duty to safeguard unit holders’ rights. - Changes to deed and unit holder protections: - Supplementary deed registration requires either: - Resolution of not less than 2/3 of all unit holders at a meeting duly convened; or - Statement from trustee and UTMC certifying changes do not materially prejudice unit holders and do not release trustee/UTMC from responsibilities. - SC may require notification to unit holders or unit holder resolution if SC considers changes material or prejudicial (CMSA, s. 295). - Investment restrictions and diversification: - Examples from UTF Guidelines: - Unit trust fund's investment in ordinary shares issued by any single issuer cannot exceed 10% of the fund's NAV. - Investment in transferable securities and money market instruments issued by any single issuer cannot exceed 15%. - Borrowing allowed for repurchase requests and short-term bridging; aggregate borrowings cannot exceed 10% of the fund's NAV at the time the borrowing is incurred. - Reporting requirements to SC: - UTMCs must submit statistical and compliance reports electronically including total units in circulation (unlisted), total number of accounts (unlisted), NAV, sales and repurchase per month (unlisted), value invested in foreign investment, investment portfolio, and value in each asset class. - Trustee responsibilities and independence: - Trustee must ensure UTMC operates in accordance with the deed, prospectus, guidelines and securities laws (UTF/ETF/REIT Guidelines, Clause 4.10). - Trustee must be independent of UTMC in practice; UTF/ETF/REIT Guidelines prohibit trustee from holding units or other interest in CIS (clause 4.21 / 4.22). - Trustee eligibility (Chapter 4 of UTF/ETF/REIT Guidelines): - Trust company registered under Trust Companies Act 1949 or incorporated under Public Trust Corporation Act, 1995; - Registered with the SC; - Minimum issued and paid up capital of not less than RM500,000; - Adequate human resources with necessary qualifications and experience; - Adequate systems, procedures and processes to carry out duties. - Trustee must actively monitor UTMC and safeguard unit holders (cl. 4.09); trustee must ensure fund property is clearly identified and held separately (clause 4.08). - If trustee delegates custodial function, trustee must retain control and prevent delegate from releasing custody without prior consent (clause 5.12). - Winding up: - CMSA (section 301) sets out trustee’s duty to wind up scheme in specified situations, notices to unit holders, required resolutions, and need for court confirmation. - Principle 26 — Disclosure necessary to evaluate CIS suitability and value - Prospectus requirements: - Every CIS offering securities to the public must issue and register a prospectus with the SC containing sufficient information for investors to make a proper evaluation prior to investment. - Exemptions to prospectus registration set out in Schedule 6 and Schedule 7 (excluded offers/invitations/issues), including offers to sophisticated investors, high net worth individuals, licensed financial institutions or certain CMSL holders. - Prospectus content: - The content of the prospectus is set out in section 235(1) of the CMSA (further description continues beyond provided excerpt). *Source: _cr1359 - Section 8 of the Accountants Act 1967 provides that the MIA Council is made up of the Accountant General,* ### section 235(1) (f) allows the SC to require additional information to be included in the ### _cr1359 - section 235(1) (f) allows the SC to require additional information to be included in the ### Prospectus requirements and scope - Section 235(1)(f) enables the SC to require additional information in a CIS prospectus; the SC has issued the Prospectus Guidelines for CIS setting out required disclosures. - Required prospectus disclosures include: general and specific risks; investment objectives, strategies and policies; investment restrictions; rights of unit holders; fees and charges; valuation methodologies; transaction information; historical performance (applicable for unlisted funds); details of the UTMC and its experience and expertise. - Chapter 12 of the CIS Prospectus Guidelines: prospectus must contain information reasonably required by an investor for purchasing and redeeming units and on how investors can keep abreast of investments (Part 1, clause 12.01). ### Prospectus format, key data section, and fees disclosure - A standard prospectus format is required; a key data/information summary section must appear in each prospectus (Part 1, Chapter 6). - Key data section must include: name of the fund; category and type of the fund; investment objective; brief investment strategy; performance benchmark; brief description of principal risks; brief investor profile most suitable; fees and charges and other relevant information. - A tabular format is prescribed for disclosure of fees and charges an investor may directly incur when buying/redeeming units and indirectly incur when investing in the fund. - Fees and charges to be disclosed include: - Transaction charges (entry and exit charges); - Annual management fees; - Annual trustee fees; and - Any other fee payable or imposed. - For existing unit trust funds the prospectus must disclose: - the total annual expenses of the unit trust fund in the preceding year, disclosing separately portions accounted for management fees, trustee fees, and CIS expenses; and - the Management Expense Ratio for the past three years, with a brief explanation of any significant change. ### Prospectus lifecycle, supplementary disclosures, and SC powers - Prospectus renewal: prospectus (except for a close-ended unlisted fund with a maturity date) is subject to a yearly renewal (CMSA, s. 235(1)(C)); clause 1.09 of Part I of the CIS Prospectus Guidelines restricts issuing units on a prospectus one year after the date of the prospectus. - Supplementary/replacement prospectus: issuer (UTMC) must submit a supplementary or replacement prospectus to the SC for registration as soon as practicable when aware of a material change or misstatement/omission (CMSA, s. 238). - If a supplementary prospectus is submitted before securities are issued, existing subscribers must be given notice and have a right to withdraw from their purchase obligation (CMSA, s. 239). - SC may direct UTMC to send notice to existing unit holders if SC views they are affected by a material change (e.g., increase in fees and charges; changes in fund strategy). - SC may refuse to register a prospectus if it does not comply with the CMSA, contains false or misleading statements or material omissions, issuance/offering non-compliant, approval conditions unmet, failure to comply with terms/conditions for management company or trustee, or issuer is not fit and proper. - Where a registered prospectus is found non-compliant (false/misleading statements, material omission, contravention of securities laws/Companies Act 1965), SC may issue a written order directing the management company not to allot, issue, offer, invite to subscribe for or sell further units to which the prospectus relates (CMSA, s. 245(1)). - SC may take action under Section 246 of the CMSA if a CIS is not managed in accordance with the information disclosed in the prospectus. ### Required content in offering documents and advertising controls - Offering documents or other publicly available information must include: - The date of issuance of the offering document. - Information concerning the legal constitution of the CIS and the rights of investors in the CIS. - Information on the management company and its delegates. - The valuation bases for all types of assets, including treatment for suspended securities and for REITs, and the valuation policy for real estate. - Procedures for purchase, redemption, and pricing, including valuation points, pricing policy (e.g., forward or historic pricing), numerical illustration for investors, and where units can be purchased or redeemed. - Full audited financial statements, historical financial highlights of the unit trust fund and extracts of the audited financial statements for the last three years. - Information on the trustee of the CIS (roles, duties and responsibilities). - Information on investment objectives, strategies and policies, investment focus, practice, technique and approach used in managing the portfolio, and risk management strategies and technique; additional disclosures required for derivatives. - Disclosure of all risks, including those specific to warrants, options, structured products and the likelihood of high volatility on NAV for derivatives, and how the fund manager mitigates risks. - Corporate information, roles and responsibilities of any delegate appointed by the UTMC. - Advertising outside offering documents is regulated; CMSA prohibits false or misleading advertising and empowers SC to order cessation or other actions (s. 241(10)). Advertisements after prospectus registration must include specified statements (e.g., that issue of units will only be made on receipt of application attached to a prospectus). ### Reporting to unit holders and audit requirements - UTMC must send a copy of the annual report of the CIS to every unit holder within two months after the end of the financial year (CMSA, s. 298(3)). - UTMC of unlisted CIS must send a semi-annual interim report to unit holders within two months of the end of the interim period (UTF Guidelines, cl. 12.01 and REIT Guidelines, cl. 16.01). - SC guidelines specify annual reports must include details on the CIS, its performance, the manager’s report, the trustee’s report, the auditor’s report, and the audited financial statements of the CIS. Interim reports: no auditor's report required and financial statements are unaudited. - All financial statements relating to a CIS must comply with approved accounting standards - IFRS (s. 298(4)); as of the beginning of this year, IFRS must be followed. - For Shariah-compliant CIS, the Shariah adviser/panel must prepare a report stating its opinion on whether the CIS has been operated and managed in accordance with the specific principles set out; if not, steps taken to address and prevent recurrence must be disclosed. The Shariah adviser report must also include: - Its opinion whether the CIS has been managed in accordance with applicable guidelines, rulings or decisions issued by the SC pertaining to Shariah matters; and - A statement that the investment portfolio comprises securities classified as Shariah compliant by the Shariah Advisory Council (SAC) of the SC, or, for securities not certified by the SAC, that status has been determined in accordance with the ruling issued by the Shariah adviser. ### Valuation standards, NAV calculation and pricing regime (Principle 27) - Assessment: Fully implemented. - The SC requires CIS property to be fairly and accurately valued and NAV correctly calculated. - Guidelines require: - UTMC to take all reasonable steps and exercise due diligence to ensure CIS assets correctly valued (clause 3.23 UTF Guidelines, clause 3.27 ETF Guidelines, clause 3.34/3.36 REIT Guidelines). - Trustee to ensure systems, processes and procedures employed by UTMC are adequate for correct valuation (clause 4.18 UTF/ETF/REIT Guidelines). - Fair and accurate valuation of assets and liabilities (and indicative optimum portfolio value for ETF) based on a consistently applied process that is objective and independently verifiable (clause 10.31 UTF, clause 11.01 ETF, clause 10.01 REIT Guidelines). - Prescribed valuation methodologies: - Listed securities: valued at market price. - Unlisted ringgit bonds: valued based on prices quoted by an independent Bond Pricing Agency (BPA). - Other unlisted bonds: valued at fair value by reference to the average indicative yield quoted by 3 independent and reputable institutions. - Other CIS: valued based on the last published repurchase price. - Any other asset: valued based on fair value determined in good faith by the UTMC on methods and bases verified by the auditor and approved by the trustee. - REITs: bases and methods of valuation of real estate prescribed under the Asset Valuation Guidelines issued by the SC. ### NAV calculation frequency and publication - NAV calculation frequency requirements: - Unlisted CIS: valuations at least once every business day (clause 10.32 UTF Guidelines). - Listed REITs: REIT Manager should announce NAV per unit to the Exchange on a quarterly basis (clause 10.24(a) REIT Guidelines). - UTMC may carry out additional valuations during the business day where necessary (clause 10.34 UTF, clause 11.02 ETF, clause 10.18(b) REIT Guidelines). - Unlisted CIS with limited repurchase arrangements: valuation at least once a month and must be disclosed to investors (clause 10.35 UTF, clause 10.18(c) REIT Guidelines). - Since July 2007 the SC adopted a single-pricing regime for unit trust funds: units redeemed and subscribed at NAV per unit of the unlisted CIS. - Pricing conventions: - UTF and REIT Guidelines: NAV per unit used for redemption and subscription should be NAV per unit as at the next valuation point after the application is received (forward pricing). Historic pricing is allowed for grandfathered funds but not encouraged. - For historic pricing users, clause 10.41 UTF Guidelines requires additional valuation at midday of business and re-pricing if NAV per unit differs by more than 5%. - Publication of NAV: unit prices must be published daily in at least one national language and one English newspaper (clause 10.51 UTF, clause 12.36 REIT Guidelines). As alternative, UTMCs may publish unit prices on FIMM's website. ### ETF-specific public disclosures and encouraged channels - Clause 13.48 ETF Guidelines: UTMC must provide via the ETF’s own website: - Indicative Optimum Portfolio Value per unit on a real time basis or on a frequency agreed with the SC; - Portfolio deposit and NAV per unit on daily (end of day) basis; - Number of units in circulation on a monthly basis; - Annual rate of management fee; - Annual rate of trustee fee; and - Any other transaction charges. - UTMCs are encouraged to provide information via hyperlink to stock exchange, information vendors, electronic mediums provided by the stock exchange, or any other channel acceptable to the SC. ### Mispricing remediation and reimbursement regime - UTMC must take remedial actions to rectify incorrect valuation/pricing and notify trustee and SC (clause 10.42 / clause 10.21). - Rectification must include reimbursement as required: - By the UTMC to the unlisted CIS; - From the unlisted CIS to the UTMC; and - By the UTMC to the unit holders and/or former unit holders (clause 10.43 / clause 10.22). - Reimbursement not required if trustee is satisfied incorrect pricing is of minimal significance. - FIMM’s Investment Management Standard (IMS-7) defines occasions when incorrect pricing is deemed to have occurred, sets standard practices and a significance threshold for reimbursement, the cumulative effect of unit pricing errors, and requires disclosure of the significant threshold adopted by UTMCs in the prospectus and deed. ### Suspension and deferral of dealing - Malaysian framework provides general or specific circumstances for suspension or deferral of regular redemption. - For unlisted CIS, trustee may suspend dealings in units (sales/redemption) where: - Trustee considers it not in the best interest of unit holders to permit sale of fund property/CIS assets or assets cannot be liquidated at appropriate price/terms to meet redemption requests; trustee must immediately call a unit holders’ meeting to decide next steps; or - Exceptional circumstances with good and sufficient reason considering unit holders’ interest; suspension must cease as soon as practicable after exceptional circumstances cease, and must not in any event exceed 21 days (Clauses 10.24–10.26 UTF Guidelines and clauses 12.21–12.23 REIT Guidelines). - During suspension trustee should not create/cancel units and must immediately notify the SC in writing stating reasons (Clauses 10.27–10.28 UTF Guidelines and clauses 12.24–12.25 REIT Guidelines). *Source: _cr1359 - section 235(1) (f) allows the SC to require additional information to be included in the (IMF content).* ### 12.25 of the REIT Guidelines). ### _cr1359 - 12.25 of the REIT Guidelines) ### Suspension and resumption of dealing; valuation rules - Before resuming dealing in units after any suspension, the UTMC is required to notify the SC in writing of the proposed resumption with the date of the proposed resumption. - If trading in a particular company’s shares is suspended and market price is unavailable, and the suspension exceeds 14 days, or a shorter period as agreed by the trustee, then the company shares should be valued at fair value. - Routine valuation of unlisted CIS’ assets must still be conducted daily and unit price must still be made available to investors for sale and redemption purposes, unless the trustee suspends dealing in units for reasons stipulated above. ### Enforcement, sanctions and SC powers - A breach of any of the provisions in these guidelines may attract sanctions under section 354 of the CMSA. - The SC has taken action against a UTMC for mispricing of units: the SC reprimanded the UTMC and its compliance officer and the UTMC was directed to rectify the breach (Section 354 of the CMSA). - Where the interest of unit holders is likely to be jeopardised, the SC has general powers to direct the trustee to carry on the business in a specified manner [Section 125(2) of the CMSA]. This section allows the SC to take action, to demand, delay or stop the suspension or deferral of dealings. - Assessment: Fully implemented. ### Regulatory framework for hedge funds / wholesale funds (Principle 28) - The regulatory framework for CIS in Malaysia is separated into two categories: those offered to the public generally (retail funds) and those only offered to qualified investors (wholesale funds). - "Hedge fund" is not a defined term in the jurisdiction. A hedge fund can be set up under the Malaysian wholesale framework to offer securities only to qualified investors. - Qualified investors include: - A financial institution, such as a bank, insurance company or Islamic bank; - A pension fund approved by the Director General of Inland Revenue under section 150 of the Income Tax Act 1967; - A holder of a CMSL carrying on the business of dealing in securities; - An individual whose total net personal assets exceed RM3 million or its equivalent in a foreign currency; - A corporation with total net assets exceeding RM10 million or its equivalent in a foreign currency, based on its last audited accounts; - A unit trust scheme or prescribed investment scheme; and - A company registered as a trust company under the Trust Companies Act 1949 which has discretion in the investment of trust assets of a trust with total net assets exceeding RM10 million or its equivalent in foreign currencies (Guidelines on Wholesale Funds, s. 2.01). ### Licensing and operational requirements for wholesale fund managers (FMCs) - Those who wish to operate wholesale funds must hold a CMSL in fund management (licensed to provide discretionary portfolio management). - FMCs operating wholesale funds are not required to be approved as UTMCs or be members of FIMM, but requirements that apply to them as fund management companies do not differ from FMCs dealing with retail customers or CIS offered to the public. - FMCs must have knowledge and exercise reasonable judgment when managing and/or valuing the investments to be held by the wholesale funds, which may consist of securities and/or other assets that are not securities. - Chapter 7.02(18) of the Licensing Handbook requires fund managers who wish to invest in these other assets to obtain SC’s prior approval for such investments. - All fund managers, whether they operate wholesale funds or provide fund management to retail CIS, are required to have minimum paid-up capital and shareholders’ funds (net assets) of RM2 million each. - Other requirements that apply to all FMCs are detailed in Chapter 4 of the Licensing Handbook. ### Wholesale fund establishment and governance requirements - The operator of a wholesale fund (the fund manager) must manage the wholesale fund in a proper, diligent and efficient manner, in accordance with the securities laws, the Guidelines on Compliance Function for Fund Management Companies (FMCs), any other relevant guidelines issued by the SC and the information memorandum of the wholesale fund. - The issue of the securities of the fund must be approved by the SC before any proposed issue, offer or invitation in respect of a wholesale fund is made to qualified investors. The SC reviews the information memorandum on the wholesale fund as part of that approval process. - Submissions to the SC for establishment of wholesale funds must include an information memorandum complying with the minimum content/disclosure requirements under Appendix 2 of the Guidelines on Wholesale Funds, including: objective of the fund, investment style and strategy, investment restrictions, types of financial instruments, risks, key personnel of the managers, income distribution policy, frequency of redemption and creation of units, income distribution policy etc. ### Compliance, internal controls and risk management - All FMCs are required to comply with the Guidelines on Compliance Function for Fund Management Companies. Under these Guidelines, the Board of the FMC must ensure that the company establishes, maintains and implements an effective internal control framework. - FMCs must establish a risk management framework that is reviewed yearly and commensurate with the company’s business (clause 5.05–5.08). This framework must include: - Continuous identification, assessment and monitoring of risks; - Managing and monitoring risks assumed by the company on behalf of its clients (which includes CIS); and - Mitigation actions to address such risks. - Chapter 10 of the Guidelines stipulates requirements to safeguard client assets, including that each FMC must appoint a custodian, such as a bank or trust company, to hold client assets in a trust account. - The Licensing Handbook requires fund managers operating wholesale funds to ensure there are policies and processes on conflict management and monitoring of unethical conduct and market abuse (Chapter 4.02(3)). - The SC has power to obtain books and records, request data or information from regulated entities without judicial action, in response to an inquiry (ad-hoc) and on a routine basis (SCA, s. 152). ### Reporting and disclosure to investors and the SC - Guidelines on Wholesale Funds require: - Providing each investor with a monthly statement of accounts. - Submitting monthly statistical returns as set out in the Wholesale Fund Returns to the SC. - Publishing and sending to every investor and to the SC quarterly reports and annual audited reports of the wholesale fund, within two months of the end of the fiscal period. - Quarterly and annual reports must include: financial performance, credit risk (including periodic assessment of borrowings), level of borrowing (extension of credit and other lending), market outlook, changes in key investment team (including any delegates), illiquid holdings, portfolio exposure details and information on fund performance and volatility. ### Ongoing supervision, inspections and information exchange - All fund managers, including those operating wholesale funds such as hedge funds, must meet ongoing prudential requirements in Chapter 4 of the Licensing Handbook (organizational competence, adequacy of financial resources, representative’s competencies). - The SC assesses compliance via the yearly submission on the licence anniversary date and via the SC's on-site inspection program. - As CMSL holders, FMCs are subject to inspections by the SC and other off-site monitoring (SCA, s. 126). If in breach, the SC has the full range of sanctions available. - The SC has wide power to collect and exchange information on the activities of FMCs, hedge funds and other wholesale funds with domestic and foreign regulators (CMSA, s. 346B and 346C). ### Market intermediaries and minimum entry standards (Principle 29) - Market intermediaries and their representatives must be licensed to carry on regulated activities under the CMSA. No person may carry on a business in any regulated activity, hold itself out as carrying on such a business, or act as a representative of a market intermediary, unless it holds a CMSL or is a Registered Person (CMSA, s. 58 & 59). - Generally only a company may be issued a CMSL; however, a CMSL to carry on financial planning may be issued to an individual who is fit and proper and meets requirements in Chapter 5 of the Licensing Handbook. - There are seven (7) categories of regulated activities in Schedule 2 of the CMSA: - Dealing in securities; - Dealing in derivatives; - Fund management; - Advising on corporate finance; - Investment advice; - Financial planning; and - Dealing in private retirement schemes. ### Registered Persons and parity with CMSL holders - Certain institutions licensed and supervised by BNM under banking and insurance laws are Registered Persons under the CMSA and may carry on specified regulated activities without separate registration with the SC (Schedule 4 of the CMSA). These include Islamic banks, commercial banks and insurance companies. - Registered Persons must comply with a number of obligations imposed on CMSL holders, including duties related to disclosure of certain interests in securities, making recommendations, giving priority to clients’ order and dealing as principal (CMSA, s. 91 - 93 and 97). - The SC and BNM jointly issued Guidelines on Investor Protection detailing competency and entry requirements of employees of Registered Persons to ensure parity between CMSL holders and employees of Registered Persons who carry out regulated activities. ### Marketing of unit trusts; CUTAs and IUTAs; FIMM registration - Unit trusts may be marketed to the public by entities licensed or approved by the SC for that activity or by Registered Persons, such as banks. Unit trusts may be marketed: - By the UTMC (operator of the fund) directly; or - Through: - Corporate Unit Trust Advisers (CUTAs), licensed as CMSL holders by the SC to provide financial planning services and deal in unit trust products following a financial plan; and - Institutional Unit Trust Advisers (IUTAs), which are: - Registered Persons licensed as banks, insurance companies etc. by BNM; and - Other categories of CMSL holders, such as stockbrokers, licensed by the SC. - All CUTAs and IUTAs must be registered with FIMM. FIMM requires an applicant for registration as an IUTA or CUTA submit a report on a ‘readiness audit’ performed by an external auditor following a checklist prescribed by FIMM as part of the approval process. The focus of this audit is on whether the entity has business processes in place to support the sales of unit trusts. *Source: _cr1359 - 12.25 of the REIT Guidelines).* ### Chapter 4 of the SC's Licensing Handbook details the licensing criteria for both ### _cr1359 - Chapter 4 of the SC's Licensing Handbook details the licensing criteria for both ### Licensing criteria for companies and individuals - Applicants must have an organisational structure with a clear line of responsibility and authority, adequate internal control systems, necessary IT systems and infrastructure, and risk management policies and processes. - Required policies and processes include: - on conflict management and the monitoring of unethical conduct and market abuse; - to ensure compliance with applicable laws and regulations; - to monitor and supervise the activities of their representatives. - Prior SC approval is required for appointment of chief executive officer and key management (e.g., head of regulated activity, head of compliance, compliance officer). - Governance and personnel thresholds: - At least one (1) director with a minimum of ten (10) years relevant experience. - Compliance officer required if a stockbroking, futures broking or fund management company. - Individuals performing regulated activities must be approved as CMSRL holders and pass fit-and-proper assessments via SC Adverse Record System (SCAR) and external vetting with foreign/local regulators where applicable. - Unit Trust Consultants (UTCs) must be registered with FIMM and meet FIMM/SC qualifying exam and registration requirements. ### Application assessment, documentation and review - Licensing assessments include detailed review of: - Capabilities and capacities (knowledge, business conduct, resources, skills, ethical attitude). - Internal control manuals: disclosure of interest (s. 91), procedure for making recommendations to clients (s. 92), record keeping (s. 108). - Corporate business plan vis-à-vis company resources and skills. - Financial resources: evidence of authorized and paid-up capital, capital structure, share allotments, and bankruptcy records. - Qualification, experience, fitness and properness of controllers, directors and key management. - SC engages closely with key management and directors during assessment. - For firms seeking PO/TP registration with Bursa Malaysia, Bursa Malaysia conducts parallel on-site and off-site assessments; SC will not approve licence until Bursa Malaysia is satisfied. - For a new UTMC, an independent operational audit must be submitted to the SC within six months after launch. - As part of licence application, SC requires management and organizational structure and operational and compliance manuals (including risk management and internal audit procedures) (Licensing Handbook, Appendix 3). - All market intermediaries must meet and maintain prescribed minimum capital requirements at all times (Table 2 of chapter 4.04). ### Key reporting and on-going obligations - Reporting requirements: - Yearly report submitted by all licensed intermediaries and representatives on their licence anniversary date. - Reports on capital position. - An auditor’s report submitted by all licensed intermediaries within three (3) months after the close of their financial year (CMSA, s. 127). - Material changes: Licensing Handbook specifies which changes require notification vs prior approval (e.g., prior approval required for establishing new capital-markets business or change in controller). - License variation/withdrawal/suspension: SC may vary, withdraw, suspend or impose conditions on licence (CMSA, s. 62, 69, and 72); opportunity to be heard before revocation or suspension (CMSA, s. 72). - Public availability: SC posts status and category of all CMSL holders and updates monthly; Bursa Malaysia and FIMM maintain public registries or verification functions. ### Capital and prudential requirements (Principle 30) — key minimums and metrics - Minimum capital requirements by firm type (initial and on-going): - Stockbroking company: - Minimum paid-up capital of RM20 million - Maintain at all times: - Minimum shareholders’ funds of RM20 million; and - Minimum Capital Adequacy Ratio (CAR) of 1.2. - Universal Broker: - Minimum paid-up capital of RM100 million; - Maintain at all times: - Minimum shareholders’ funds of RM100 million ; and - Minimum CAR of 1.2. - Futures Broking Company: - Minimum paid-up capital of RM5 million; and - Maintain at all time minimum Adjusted Net Capital (ANC) of the higher of – - RM500,000; or - 10% of aggregate margins required. - Fund Management Company (FMC) - discretionary portfolio management: - Minimum paid-up capital of RM2 million; and - Minimum shareholders’ funds of RM2 million to be maintained at all times. - Corporate Finance Adviser and Investment Adviser: - Minimum paid-up capital of RM500,000; and - Minimum net tangible assets of RM50,000 at all times. - Financial Planner: - Minimum paid-up capital of RM50,000; and - Minimum net tangible assets of RM50,000 at all times. - Financial planner (CUTA) - dealing in unit trust products following a financial plan: - Minimum paid-up capital of RM100,000; and - Minimum shareholders’ funds of RM100,000 to be maintained at all times. - Fund Supermarket (dealing in unit trust products as a principal business): - Minimum paid-up capital of RM5 million; and - Minimum shareholders’ funds of RM5 million to be maintained at all times. - Unit Trust Management Company (UTMC) - CIS operator/management company: - Minimum shareholders’ funds of RM10 million to be maintained at all times. - Note: If an intermediary carries on more than one regulated activity, the highest of the minimum financial requirements applies. - Investment Banks (IBs) under IBCAF: - Minimum capital funds unimpaired by losses of RM500 million or minimum capital funds unimpaired by losses of RM 2 billion on a banking group basis; - Minimum Risk-Weighted Capital Ratio (RWCR) of 8%. - Stockbroking CAR mechanics: - CAR = liquid capital / total risk requirement; minimum CAR of 1.2 required (i.e., liquid capital at least 1.2 times risk assumed). - Haircuts on Bursa-listed securities vary from 15 to 21%; securities on recognized foreign exchanges haircuts 12-16%; other securities subject to 100% discount (Bursa Malaysia Securities Rules, Sch. 8C). - Liquidity standards: - Net Surplus Requirements (rule 1107.1) vary from 3% to 9% depending on maturity buckets (realizable within 3 days up to 30 days). - Futures broking ANC and marking-to-market of open positions; suspension if ANC falls below RM500,000 or fails to pay margin call next business day. - Sensitivity & monitoring: - Exposures are marked to market; CAR/IBCAF and ANC are sensitive to market movements and margin/large exposure risks. - Stockbroking companies required to calculate and monitor CAR daily; reporting frequency to Bursa Malaysia Securities varies by CAR level: - CAR< 2.0 times — Daily reporting - CAR ≥ 2.0 times but < 4.0 times — Reporting every two weeks - CAR ≥ 4.0 times — Monthly reporting - ARMADA system used for daily CAR monitoring; SC has direct access. - Audit and records: - Independent audit required; auditors must report breaches and are overseen (PIE auditors registered with AOB). - Bursa Malaysia on-site examinations verify capital adequacy returns. - Monitoring indicators for FMC proprietary positions (intervention thresholds): - Proprietary investments to total assets under management – 20% or more - Proprietary investments to shareholders’ funds – 30% or more - Changes in cash or money market allocations of more than 20% of total cash and bank balances - Revenue contribution of proprietary investment/client asset management activities – 20% or more of total revenue from proprietary investment activities ### Internal organization, compliance and operational conduct (Principle 31) - Pre-licence requirements repeat organisational, supervisory and control expectations (clear lines of responsibility, supervisory policies, SC prior approvals, director experience, compliance officer where required). - Outsourcing guidelines: Board and senior management retain clear responsibility and accountability; periodic assessments of service providers required; rights to examinations and access to records (Outsourcing Guidelines, para. 6.09(e)). - Supervisory rules and internal controls: - Stockbroking: Rule 506.5, Rule 509.6, Rule 510.1 require management structure, written policies, internal audit (minimum one internal audit annually), Audit Committee oversight. - Futures broking: Rule 601.2E and Rule 610.1 require structures, policies, internal controls and annual internal audit. - FMCs and UTMCs: Guidelines require compliance functions, yearly reviews of internal control and risk management frameworks. - Compliance function specifics: - Compliance officer registration and qualifying exams required; compliance officer must not deal in securities/derivatives or manage funds to avoid conflicts. - Branch offices must have at least one (1) compliance officer. - Monthly compliance reporting to SC and Bursa Malaysia. - Systems and segregation: - Chinese walls/information barriers required for firms carrying on more than one regulated function. - Requirements for segregation between dealing, middle and back office; prohibition on mixing proprietary investments with client asset management. - Client protection, KYC and recordkeeping: - Client assets segregation and trust/custodian requirements (CMSA, s. 111–124). - Records must be retained not less than seven (7) years (CMSA, s. 108); AMLATFA requires records for not less than six (6) years (s. 17). - "One beneficial owner for one securities account" condition (SICDA, s. 25(4) and 25A(1)). - Investment management agreements (IMAs) required for FMC clients specifying risk profiles, authorizations, scope and fees. - Investor complaints and disclosures: - Firms must maintain written complaints procedures and designate an officer at assistant manager level or above. - Statements of account: monthly/semi-annual requirements depending on firm type; contract notes required (s. 90(1)) with fees and levy disclosures. - Supervision program: - SC uses risk-profiling to determine on-site audit cycles: - High risk — yearly audit - Medium high — audit once every two (2) years - Medium low — audit once every three (3) years - Low risk — four (4) year audit cycle - SIFI — two year audit cycle regardless of risk category - On-site inspections by Bursa Malaysia follow a four-group risk categorization with high risk inspected every year and others at least once every three (3) years. - Assessment: Fully implemented; regulators note potential future move towards external audits for largest intermediaries if frequency of on-site reviews declines. ### Failure management, early warning and compensation (Principle 32) - Intermediaries At Risk Intervention Framework provides staged interventions and communication protocols with other regulators and public dissemination. - SC powers under CMSA include imposing restrictions/conditions (s. 62), suspending operations (s. 67), suspending/revoking licences (s. 72), issuing directives including transfer of client monies/properties (s. 125), appointing auditors (s. 130–131), and applying to court for receiver/liquidator or winding up (s. 360–361). - Early warning systems: - Daily CAR calculation; projected ANC weekly; clearing houses continuously monitor clearing members’ positions. - Off-site reviews of complaints, AUM changes, financial statements, custodian confirmations. - Possible SC actions for ANC/margin failures (futures broking): - Liquidate all open positions; - Transfer clients’ open positions of derivative contracts to other futures broking company. - Compensation frameworks (four existing regimes under CMSA): - Compensation Fund (equity market) administered by Bursa Malaysia Securities — current maximum claim RM100,000 per claimant. - Fidelity Fund (derivatives) administered by Bursa Malaysia Derivatives — current maximum claim RM500,000 for each futures broking company. - Deposits lodged with SC by FMCs or CMSL holders (s. 70) administered by SC — coverage up to RM150,000 per fund manager (CMSR, reg. 7). - Deposits lodged with SC by TPs or FMCs dealing in derivatives (s. 106) administered by SC. - Consolidation plan: - Capital Market Compensation Fund (CMC) Bill passed by Parliament in May 2012 and awaiting royal assent to consolidate compensation schemes. - Examples of past actions: - 1998: Revocation and suspensions of licences and trading restrictions during 1997 Asian financial crisis. - September 2010: Bursa Malaysia suspended Sunny Futures’ participation; required liquidation or transfer of clients’ open positions within 14 market days. - 1998 Halim Securities default led to exchange control after consultation with SC. - Cross-border and inter-agency arrangements: - SC has 32 bilateral MOUs with foreign regulators for information sharing relevant to supervision and financial disruption. ### Establishment, oversight and operation of trading systems and exchanges (Principles 33–34) - Legal/authorisation framework: - Establishment of markets governed by Part II CMSA and Guidelines on Regulation of Markets. - Markets classified as: approved market, registered electronic facilities (REF), and exempt market; regulation level reflects risk posed. - Bursa Malaysia approved as: exchange holding company; stock exchange; futures exchange; clearing house for securities; clearing house for futures; and central depository under SICDA. - Registered Electronic Facilities examples: - Bursa Malaysia Bonds Sdn Bhd (ETP Bond) — reporting system for OTC bond trades; post-implementation review required 6 months after go-live. - Citibank Berhad LM eTrading — RFQ system for Malaysian Government debt securities via Bloomberg for Citibank clients. - Exempt markets: - FAST and RENTAS (BNM systems) are exempt markets. - Exchange approval criteria include orderly and fair market operation, prudent risk management, investor protection, enforcement powers over members, and sufficient financial/human/IT resources (CMSA, s. 8). - Clearing and prudential protections: - Clearing Guarantee Fund (equity) currently RM100 million (Bursa Malaysia 60%, Bursa Malaysia Securities Clearing 25%, TCPs 15%). - Derivatives Clearing Fund currently RM26 million (CPs 81%, Bursa Malaysia Derivatives Clearing 19%). - Derivatives clearing participant deposits: - General CP security deposit at least RM1 million; - Direct CP deposit the higher of RM500,000 or 10% (or other percentage determined) of total amount paid by Direct CP to clearing house (Rule 206B). - Mandatory margining and continuous monitoring for derivatives. - Surveillance, safeguards and continuity: - Parallel surveillance by SC and Bursa Malaysia using SMARTS (SC) and ARAMIS (Bursa) for real-time monitoring and alerts. - Trading safeguards: trading halts, circuit breakers, trading restrictions, Designation status, suspension, UMA queries, Market Alerts. - Business Continuity Plan maintained and reviewed annually by Bursa Malaysia. - Technical and IT security standards and IT Security Codes for POs/TPs require confidentiality, integrity and availability protections. - Market access, order handling and execution controls: - Access to exchange facilities requires member approval per Bursa Business Rules; SC oversight of rules and amendments. - Order matching: price-time priority; orders matched in priority of price then time. - DMA controls: firms must have automated risk filters to screen DMA orders (trade exposure, order size, price limits); order size limit example — 5000 board lots per order in BTS. - Co-location services available under terms/fees. - Market data, audit trail and dissemination: - Audit trail records capture order entry/execution timestamps, buying/selling participants, price, quantity, client code, CDS account number, dealer representative code, etc.; ARAMIS → SMART feed enables trade replay. - Public trade messages include stock code, price and quantity; private messages include counterparty broker code for brokers only. - ETP Bond system can provide pre-trade and post-trade information to members when used for trading; LM eTrading is an RFQ one-to-one principal relationship. - Oversight and rulemaking: - SC may require Bursa to amend rules, impose remedial actions, and conducts annual regulatory audits and readiness reviews. - SC may recommend amendment, revocation or imposition of new terms on exchanges (s. 8(5)); SC may require exchanges to amend rules after consultation (s. 9(9)). *Source: Chapter 4 of the Licensing Handbook and related sections and principles as presented in the supplied _cr1359 content.* ### section 16(4) of the CMSA. The scope of the 2009 annual regulatory audit included the ### _cr1359 - section 16(4) of the CMSA. The scope of the 2009 annual regulatory audit included the ### Surveillance audit and recommendations - The 2009 annual regulatory audit assessed Bursa’s process and procedures for supervising the equity market through the ARAMIS system. - The audit focused on: - how alert data are processed and followed up, - the handling of watch-list stocks, - the issuance of surveillance query, - the quality of the surveillance report. - Based on the findings, the SC made specific recommendations to strengthen the surveillance process conducted by Bursa Malaysia. ### Monitoring conduct of market intermediaries — regulatory remit - Both the SC and Bursa Malaysia regulate market intermediaries including equity, bond and derivatives brokers. - The SC has wider regulatory reach, with powers over fund managers, investment advisers, corporate finance advisers, and financial planners. - Supervision by SC: see Principles 10, 12, 29 & 31 (discussion referenced in source). - Supervision of intermediaries by Bursa Malaysia: - Bursa conducts both on-site inspections and off-site monitoring of participants. - Rule 1203.1 of Bursa Malaysia Securities Rules and Rule 515.1A of Bursa Malaysia Derivatives Rules require participating members to be subject to inspections and/or audits by the Exchange, with or without notice, to ensure compliance with Rules and internal policies. ### On-site inspection scope and reporting - On-site inspection reviews records within a timeframe of 12 months from the inspection reference date. - The scope of on-site inspection covers: - Compliance with the Bursa Malaysia Securities Rules, Bursa Malaysia Securities Clearing Rules, Bursa Malaysia Derivatives Rules, Bursa Malaysia Derivatives Clearing Rules and Bursa Malaysia Depository Rules; - Conduct of trading in shares in compliance with the Rules and measures to minimise conflicts of interest in underwriting services; - The effectiveness of compliance, internal audit and risk management functions; - The disciplinary policies and procedures governing the conduct of staff; - Compliance with IT standards and codes, and; - Compliance with financial requirements i.e. CAR. - Inspection outputs: - Reports and analysis from inspections are forwarded to the SC. - Information gathered is used to develop best-practice examples and to determine participants’ risk profile for selection of high-risk intermediaries for annual inspections. ### Risk-based approach and inspection frequency - Bursa has established a risk-based approach to profile and select intermediaries for on-site inspection. - Risk-based assessment is carried out annually. - Inspection frequency by risk category: - all high-risk intermediaries are inspected every year, - inspections of medium-risk intermediaries are spread over a period of 3 years, - low risk intermediaries are inspected once in 3 years. - Non-periodic inspections: - Bursa conducts ad-hoc/surprise inspections based on complaints, market issues or events. - Between 2008 and 2011: - a total of 51 routine inspections and 18 surprise inspections were conducted on POs, - 26 routine and 7 surprise inspections on TPs. ### Oversight of exchanges, trading systems, and access to trading information - The SC performs regulatory oversight of Bursa’s surveillance of bond trading activities via the ETP Bond Surveillance system and may examine Bursa Malaysia Bonds; the SC determines scope and schedule for such examination (Regulatory Guidance, Part II, Para. 3.4). - The SC has online, real-time access to trading information (pre-trade and post-trade) fed through Bursa Station. - SC has access to the ETP Bond and ETP Bond Surveillance systems to extract all relevant trade information. - LM eTrading (Citibank) conditions: - Citibank required to provide daily published and historical data of bid and ask prices, yield and size quotes as provided on the LM eTrading system. - For post trade data, Citibank is required to report executed trades to the ETP Bond system. - ETP Bond system function and reporting: - ETP Bond functions as a post-trade repository system. - All transacted financial instruments, either on the platform or off ETP, by trading participant members and executing participant members are required to be reported to the ETP system within 10 minutes of a transaction. - Post-trade bond information is published by Bursa Malaysia and BNM on their websites with a 15-minute delay from the time the trade is reported. ### Rule review and approvals - CMSA requires a stock exchange, derivatives exchange and approved clearing house to submit proposed rules or amendments for SC approval; the SC may require amendments by written notice. - Between 2008 and 2011, the SC considered and approved 46 proposals for rules amendments from Bursa. - Under the Regulatory Guidance, amendments to the Rules of the ETP Bond (as a subsidiary of Bursa Malaysia) are to be submitted to the SC for prior approval. - Between 2008 and 2011, the SC considered and approved 2 proposals from Bursa Malaysia Bonds to revise its rules. ### Available regulatory actions for non-compliance (CMSA provisions) - The SC may impose a range of actions including placing restrictions or conditions on Bursa Malaysia as provided under the CMSA, including: - Issue directions to the exchange holding company, stock exchange, derivatives exchange, approved clearing house, central depository or relevant body corporate if conflict exists between the interest of operating an exchange with the interest of statutory duties as an exchange under CMSA and if it is necessary to ensure fair and orderly markets, maintain investor protection, ensure integrity of capital markets and effective administration of securities law (s. 26) - Discharge any of the duties of the stock exchange and derivatives exchange in relation to the supervision of the capital market and market participants and enforcement of the listing requirements and business rules (s. 26). - In the interest of the public, protection of investors or to maintain fair and orderly market, give a written notice to a stock exchange, a derivatives exchange or an approved clearing house, impose the necessary prohibitions or restrictions such as prohibiting the trading of particular securities or a particular class of securities, to terminate or suspend trading on the stock exchange or derivatives exchange (s. 28). - Take administrative sanctions against the stock exchange, derivatives exchange or exchange holding company for non-compliance with conditions of its approval or the provisions of the law (Part XI). - For REFs, the CMSA grants the SC wide powers to prescribe, add, vary or revoke any conditions it deems appropriate for operators of electronic facilities (s. 34). - Ministerial powers, on recommendation of the SC: - Withdraw an approval granted under section 8 to an exchange, or; - Direct the exchange to cease to provide or operate such facilities, or to cease to provide such services. - The Minister may direct that trading on the exchanges be suspended until Bursa Malaysia has complied with such term or condition, or rectified the matter forming the basis of the recommendation by the SC, or until the Minister revokes the direction (s. 12). - The CMSA authorizes the SC to withdraw registration of an REF if in the interest of investors, public interest or maintenance of an orderly and fair market (s. 36). ### Principle 35 — transparency of trading (Assessment: Fully implemented) - Bursa Malaysia provides pre-trade and post-trade information through the PO and TP Order Management System and to authorised information vendors on a real time basis. - Investors can view: - Pre-trade information (up to 5 levels of bid and offer quotes); and - Post-trade information (last sale price and volume of transaction, and settlement price for derivatives market) - via the Bursa Station shared information display system maintained by the POs and TPs. - Authorized information vendors (e.g. Bloomberg) provide the same pre- and post-trade information to subscribers. - Bursa Malaysia provides post-trade price and volume information for listed securities and derivatives on its public website on a 15 minute delay. - ETP Bond system: - Only functions as a post-trade repository system. - Members must report transactions to the ETP system within 10 minutes of a transaction; information is made available to all members. - Bursa Malaysia and BNM publish post trade bond information on their website with a 15-minute delay. - Citibank LM eTrading: - Displays quotes and facilitates communication among clients; trades are not executed on the system and are executed “manually”. - Back office confirmation, clearing and settlement are not activated or available on LM eTrading. - Access is only available to Citibank clients. - Executed trades must be reported by Citibank to ETP Bond, as for all other OTC trades. - Direct Business Transactions (DBTs): - Permitted without first entering orders into the automatic trading system. - Include "crossing" transactions (two POs) and "married" transactions (within one PO). - Transactions are permitted without pre-approval provided that the trade involves a block of more than 50,000 securities and the price falls within a prescribed range (+/- 15%) around the prior trading day's volume weighted average price. - Transactions must be keyed into the trading system within 15 minutes of the counterparty’s input for clearing and settlement purposes. - POs must report DBTs to the Exchange if the transacted price is out of the prescribed range (+/- 15%), by 12:30 p.m. (at the latest) on the following trading day. - The exchange and the SC have access to all necessary information to assess these transactions. - There are no dark pools operating in the jurisdiction. ### Principle 36 — detecting and deterring manipulation (Assessment: Fully implemented) - Regulatory prohibitions and offences (Part V of the CMSA) include: - False trading and market rigging (sections 175, 202 & 204), - Market and price manipulation (sections 176 & 205), - Making false or misleading statements (sections 177 & 207), - Fraudulently inducing persons to deal in securities (section 178), - Using manipulative and deceptive devices to defraud (sections 179 & 206), - Dissemination of information about illegal transactions (section 181), - Insider trading (subdivision 2), - Front running (sections 93 & 104), - Any other fraudulent and deceptive conduct, or market abuse governed under Part V of the CMSA. - Bursa Malaysia provisions prohibit market abuses, including: - Engaging in unethical practices that may damage investor confidence; - Participating in acts leading to a false or misleading appearance of active trading or market manipulation; - Accepting a share in the profits of a client’s accounts or arrangements to share client profits; executing personal trades in a client’s account or using a client’s account to trade for a third party (Chapter 4). - Market maker obligations (Chapter 3A) prohibit acts that: - Lead to a false or misleading appearance of active trading or market price, or - Are tantamount to stock market manipulation. - Bursa Malaysia Derivatives Rules (Rule 510.2) prohibit: - Fraud or dishonesty, - Making or reporting a false or fictitious trade, - Knowingly acting as both buyer and seller in the same transaction except when permitted, - Manipulating prices or attempting to corner any contract, - Making material misstatements to Bursa Malaysia, - Knowingly disseminating false or misleading reports concerning market information. - Listing Requirements impose accurate, adequate and timely disclosure obligations (para 2.18, 9.16 and 9.32) and prohibit insider trading (para 14.04); Chapter 14 imposes disclosure requirements on dealings by directors and principal officers. - Mechanisms to detect and deter market abuse include: - Monitoring compliance through real time surveillance, inspection of intermediaries, investigation of abnormal and suspicious transactions and reporting requirements; - Imposing trading safeguards such as position limits, price limits or market halts; - Product listing and product design requirements vetted by the SC to ensure products are not readily susceptible to manipulation. - Reporting requirements for POs and TPs to Bursa Malaysia include: - Monthly Compliance report; - Internal audit report upon completion and minutes of the Audit Committee meeting on a quarterly basis; - Off balance sheet report on a monthly basis; - Margin report on a monthly basis; - CAR/ANC reports. - Compliance Officer obligations: - Report to Bursa Malaysia when there is a breach of Bursa’s Rules; - Report to the SC when there is a breach of the securities law or AMLATFA. - Bursa Malaysia periodically provides the SC with: - Inspection reports - upon completion of an inspection; - Enforcement action reports - within 3 days of the date of action taken; - CAR/ANC reports - as and when reports are received from POs and TPs. - The SC reviews reports and has access to Bursa Malaysia's ARMADA system. - Position limits: - SC and Bursa Malaysia may impose limits on positions under CMSA, s. 101 and Bursa Malaysia Derivatives Rules, Rule 613. - The SC may specify position size thresholds for reporting (CMSA, s. 102). - Price limits: - Bursa Malaysia Securities Rules impose upper and lower price limits for board lots and odd lots. - Bursa Malaysia Derivatives Rules allow the exchange to stipulate upper and lower price limits in Rules and/or Trading Procedures. - Sanctions: - Section 354 of the CMSA empowers the SC to take action on any persons for breaches of securities laws, including the rules of the stock exchange, approved clearing house or central depository; any written notice, guidelines issued or conditions imposed by the SC; or any rule of a recognized SRO. *Source: _cr1359 - section 16(4) of the CMSA. The scope of the 2009 annual regulatory audit included the (IMF PDF excerpt).* ### Section 8(2)(d) of the CMSA requires Bursa Malaysia to take appropriate action against ### _cr1359 - Section 8(2)(d) of the CMSA requires Bursa Malaysia to take appropriate action against ### Disciplinary framework and sanctions - Legal basis: Section 8(2)(d) of the CMSA requires Bursa Malaysia to take appropriate action against its POs or affiliates for any breach of its rules. - Rule references: Rule 1301.2 of Bursa Malaysia Securities Rules; Rule 508 and 511 of Bursa Malaysia Derivatives Rules. - Types of actions available: - Caution or reprimands, both private and public; - Imposition of fines; - Imposition of a period of suspension or restrictions on any activities; - Striking off or termination. - Sanctions pursuant to Bursa Malaysia’s Listing Requirements (2008–2010): - 2008: 160 sanctions; included 106 public and private reprimands and 54 public reprimands with fines amounting to RM1.3 million - 2009: 308 sanctions; included 117 public and private reprimands and 191 public reprimands with fines amounting to RM3.8 million - 2010: 280 sanctions; included 173 public and private reprimands and 107 public reprimands with fines amounting to RM7.47 million - Sanctions pursuant to Bursa Malaysia’s Business Rules (2008–2010): - 2008: 127 sanctions; included approximately 47 fines amounting to RM610,000; 47 reprimands (private and public); 1 suspension and 1 striking off. - 2009: 133 sanctions; included approximately 65 fines amounting to RM1,512,700; 34 reprimands (private and public); and 7 suspensions. - 2010: 212 sanctions; included 107 fines amounting to RM793,200; approximately 50 reprimands (private and public); 3 suspensions and 3 striking off. ### Market surveillance systems and information sharing - Real-time surveillance: Bursa Malaysia operates a real-time surveillance system capturing real time and historical trading information on the equity and derivatives markets. - Data feed to SC: Trading information is provided to the SC through a feed into SC’s SMARTS system. - Trading activity data fields captured include: date, time, security/contract name and code, price, transaction volume, transaction value, broker name and ID, client name and ID for orders and trades. - ARAMIS (equity market surveillance): - Provides alerts highlighting suspicious trading patterns and transactions. - Triggers investigation on irregular trading activities, including significant and unexplained changes in price and/or trading volume. - Cross-access: SC has direct access to Bursa systems (e.g., ARMADA, ARAMIS) for additional daily monitoring and analysis. ### Equity market monitoring and investigative procedures - Online screen monitoring: Conducted on active stocks in addition to ARAMIS alerts. - Review elements for active stocks: - Any prior direct business transactions on these issues; - Identifying the parties involved with large transactions; - Concentration by brokers, dealers or clients; - Change of beneficiary ownership. - Announcements review: Determine whether disclosed information is price sensitive and could explain unusual trading activity. - Further analysis when violations suspected: - Trend analysis; - Identification of major buying/selling broker and detailed transaction enquiry; - Detection of trading patterns indicating stock market manipulation, false trading, insider trading and short selling. ### Derivatives market monitoring and investigative procedures - Derivatives analysis elements include: - Reviewing the client’s background and its core business activities; - Studying trading patterns and patterns of open positions; - Analysing client’s orders, frequency of cancellation and changes in price and volume of the contract; - Comparing price spread of contract month with other contract months' price spread within the product group; - Establishing counterparties to the trade. - For derivatives with commodity underlyings: monitor build ups of positions, unusual price movements and irregular delivery patterns; inquiries initiated with traders in the commodity market if concerns arise. ### Cross-market surveillance and international cooperation - Domestic cross-market surveillance activities: - Ad-hoc and monthly domestic cross market surveillance for unusual price and volume patterns, correlations between cash and futures prices, and participant impact; - End-of-month cross checking, particularly 30 minutes prior to cash market close, between equities and derivatives trading by participants in major component stocks and large exposures in derivatives; - Cross-market checks when inter-market issues arise (e.g., unusual movements, circuit breaker triggers). - Foreign participation statistics (November 2011): - Foreign investors represented 27.7% in value and 6.1% in volume of the equity market trading. - Foreign shareholdings in listed companies accounted for 22.9% in value and 17.2% in number of shares of total shareholdings held at the depository. - MOUs and information-sharing arrangements: - SC: signatory to IOSCO Multilateral MOU since May 2007; Boca Declaration signatory since 1997; 32 MOUs with foreign regulatory counterparts. - Bursa Malaysia: MOUs with 23 established exchanges to share general information; member of Inter-market Surveillance Group (ISG) since 2010. ### Enforcement coordination and referral procedures - Bursa Malaysia enforcement scope: - Empowered to take enforcement action when analysis shows possible breach of Bursa Rules. - Required to refer to the SC when analysis shows possible breach of securities law. - Coordination where breaches implicate both exchange rules and securities laws: - Process exists to coordinate SC and Bursa Malaysia actions; parallel enforcement may be taken. - Regulatory Guidance requires the exchange holding company to provide co-operation and assistance to the SC. ### Large exposures, capital and margin monitoring - Equity market monitoring: - Clearing participants’ ability to meet net amount due to Bursa Malaysia Securities Clearing for three market days, assessed on cash and banking facilities, underlying securities, CAR ratio position and Clearing Guarantee Fund contributions. - Monitoring of each participant’s CAR ratio. - Monitoring of each participant's Large Exposure Risk Return (LERR) to a single client or where debt exceeds 30% of Effective Shareholders’ Funds (ESF) and LERR to single equity where it exceeds 250% of ESF. - Clearing Guarantee Fund at risk is stress-tested for the single largest projected liquidation loss. - Automation and data submission: - Monitoring activities automated in ARMADA system; ARMADA provides reports/alerts when warnings/violations triggered. - POs required to upload data from back-office systems into ARMADA at end of business day. - SC has direct access to ARMADA for daily monitoring. - Derivatives clearing monitoring and margining: - Derivatives clearing monitors concentration of open positions held by a CP; may require additional deposit if concentration threatens the Clearing Fund. - Intraday margin process: clearing house may revalue open positions and calculate margins using latest price and open position information. - Intraday margin is initiated in practice when the margin erosion is greater than 60% for any product and/or any contract month; affected CPs are advised to pay necessary additional margin amounts. - Market Surveillance client exposure monitoring: - Alert trigger level for single client exposure is set at 30%. - Once alert triggered, Market Surveillance calls the relevant broker to monitor client trading; if exposure continues to rise beyond levels determined by Market Surveillance, broker instructed to cease creating new positions for that client. - Information on positions and beneficial ownership: - Equity market: available from the Central Depository System operated by Bursa Malaysia Depository. - Derivatives market: available within ARAMIS. - For omnibus accounts, requests for size and beneficial ownership information can be made to participants if necessary. - Regulatory powers for non-cooperation: - Under the CMSA, failure to provide relevant information is an offence subject to substantial fines and possible imprisonment (e.g., CMSA, s. 353 and 346B). - Bursa Malaysia may take action against participants who fail to comply with its rules, including imposing restrictions or conditions. ### Capital adequacy and exposure limits - Bursa Malaysia Securities Rules (Rule 1105.3) impose pre-determined exposure limits requiring: - Liquid capital above total risk requirement; - Core capital above operational risk requirement; - Minimum capital adequacy ratios for brokers and risk weighted capital ratios for investment banks, as defined in the Rules. - Total Risk Requirement components: Operational Risk Requirement, Counterparty Risk Requirement (credit risk), Position Risk Requirement, Underwriting Risk Requirement and Large Exposure Risk Requirement. - Required actions when capital tests fail: - If Liquid Capital is equal or less than Total Risk Requirement; or Core Capital is equal or less than Operational Risk Requirement, the participating organization must immediately notify the Exchange and take steps to increase Liquid Capital or reduce risk exposures. - Exchange may give directions or impose appropriate conditions upon receipt of notice. ### Default procedures and continuity arrangements - Default rules published in Bursa Malaysia Business Rules and clearing house rules; available to market participants via Bursa Malaysia’s website. - Default actions to isolate a failing firm: - Securities clearing house can settle the defaulting TCP’s novated contracts by liquidating contracts at best prevailing market price and give instructions for transfers of securities for settlement (Bursa Securities Clearing Rules, Rule 4.2.2). - Derivatives clearing house can liquidate open contracts and/or novate rights and obligations under open contracts of the CP in default (Bursa Malaysia Derivatives Clearing Rules, Rule 1001 and 1002). - Equity market settlement and buy-ins: - Strict settlement procedures; if selling CP fails to make securities available by T+3, Exchange can institute an automatic buy-in against the defaulting CP (Bursa Malaysia Securities Clearing Rules, rule 5.2). - Statutory priority and insolvency: - CMSA provides for modifications to insolvency laws so default proceedings of clearing houses take precedence over law of insolvency (s. 43); trades remain enforceable if participant becomes insolvent. - Interaction with PIDM (Perbadanan Insurans Deposit Malaysia): - Under section 115(3) of PIDM Act, upon notification by BNM that a member institution has ceased to be viable, PIDM may assume control and facilitate transfer of agreements to a bridging institution or qualified third party to ensure exercise of rights and manage financial stability. - Invocation of Part VII of PIDM Act does not affect clearing house ability to enforce default procedures promptly. ### Market controls: circuit breakers and short selling - Circuit breakers: - Triggered when FTSE based Composite Index (FBM KLCI) declines 10%, 15% and 20% below previous market day closing index. - A 10% decline in a day triggers a one hour halt; a further decline of 5% triggers a further one hour halt. - If, when trading resumes, there is another 5% decline (20% overall drop in the day), trading ceases for the rest of the day and resumes the next morning as scheduled. - Trading halts are immediately announced to the public. - Short selling regime: - Governed by section 98 of the CMSA and Bursa Malaysia Securities Rules. - Naked short selling is not permitted. - Regulated short selling (RSS) allowed: selling of approved securities where seller has borrowed the approved securities prior to execution. - Permitted short selling (PSS) allowed for ETF market makers; PSS activities subject to specified limits (Bursa Malaysia Securities Rules, Rule 305A.4(1)). - Short selling for day trading activities allowed for POs taking proprietary intraday positions. - Reporting and transparency: - Short sale turnover for a particular approved RSS security is displayed in real time through the BTS price dissemination system. - RSS (including PSS trades) are tagged to a designated CDS account and transparent to exchange and regulators. - POs undertaking proprietary day trading must report when net Sell positions are not closed off by end of trade date and net Buy positions not closed off by T+2; surveillance system can detect compliance. - No reporting requirement for PSS under PSS framework (limited to ETF market makers); market makers monitored via market making monitoring system. *IMF staff report content.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr1359.pdf_