Part III Licensing

Introduction

This set of FAQs deals with the implementation of the amendments introduced by the Capital Market and Services (Amendment) Act 2011 (the Act or the CMSA) which was effective on 3 October 2011. In line with the changes to the Act, the Securities Commission (SC) will also be making amendments to the Licensing Handbook.

The key amendments in relation to Part III of the CMSA with regard to Licensing are as follows:

(a)

Removal for CMSLs and CMSRLs to renew their licences (pursuant to Sections 60 and 61);

(b)

Revocation of licences based on non payment of licence fees (pursuant to Section 63(1)(A));

(c)

Grounds for refusing the grant of licence (pursuant to Sections 64 and 65);

(d)

Enhancing the power of the SC to enquire into transactions (pursuant to Section 66);

(e)

Cessation of representative licence on cessation of its principal’s licence (pursuant to Section 72(8)(A));

(f)

Amendments to the Minister’s powers (pursuant to Sections 61, 62, 72 and 139);

(g)

New appeal process for licence holders (pursuant to Section 80);

(h)

Standardising the process of imposing conditions and restriction of licences (Section 62);

(i)

Enabling the transfer of licences in situations of mergers and acquisitions (pursuant to Section 69(1)(c));

(j)

Pre-approval by the SC for the appointment of Chief Executive Officer (CEO) by CMSLs (pursuant to Section 75(2)); and

(k)

‘Trading in futures contracts’ will now read as ‘dealing in derivatives’ (pursuant to Section 2)

Other changes that will be effected in the Licensing Handbook are the requirement for all CMSL holders:

(l)

To seek the SC’s approval for the establishment of a new business or acquisition of shares/interests in or outside Malaysia in relation to capital market related activities;

(m)

To notify the SC on establishment of new business or acquiring shares/interests in or outside Malaysia with regard to non capital market related activities and

(n)

To notify the SC on disposal of business or shares/interests in or outside Malaysia

Removal of the Renewal of Licence

1.

What does non renewal of licences mean for the CMSL and CMSRL holder?

With effect from 3 October 2011, both CMSL and CMSRL holders are no longer required to renew their licence(s).

There will be no more references to ‘expiry period’, ‘renewal period’ or ‘licence period’. Licences are valid in perpetuity unless a licence holder surrenders or cease his licence; or it is suspended or revoked by the Securities Commission Malaysia (SC). Licences thus do not lapse. Licence holders must appropriately cease their licence by completing the relevant forms and submit to the SC. Please note that a licence fee will continue to be deducted if a licence holder does not cease his licence appropriately.

Every licence, however, will have an anniversary date.

In place of the renewal process, CMSLs and CMSRLs are required to complete and submit information on every anniversary date of their licence that is, Form 4 ‘Anniversary Reporting for Authorisation of Activity (CMSL)‘, Form 5 – ‘Anniversary Reporting for Authorisation of Activity (CMSL-Individual)‘ or Form 6 – ‘Anniversary Reporting for Authorisation of Activity (CMSRL)‘, as relevant. The submission must be made on the anniversary date of the licence. Please see Question 2 below.

2.

What happens on and after 3 October 2011?

For companies holding a valid CMSL or CMSRL on 3 October 2011, it can continue to conduct the regulated activities for which it is licensed, unless it has filed a cessation notification to the SC or its licence has been revoked or suspended by the SC.

CMSLs and CMSRLs whose licences expire on or after 3 October 2011 do not need to make an application for the renewal of their licence at least 30 days before the expiry of the licence. In place, they are only required to submit the above mentioned form accompanied with the payment of licence fee on the anniversary of their licence.

From 3 October 2011 to 31 December 2011, the SC asks for all licensed market participants to familiarise themselves with the new requirements, while allowing a temporary relief on the imposition of penalties.

Example 1
A’s (representative or individual or company) licence was renewed for 12 months on 20 November 2010, and will expire on 20 November 2011. A will not need to submit an application for renewal on 20 November 2011. A will, however, be required to submit Form 4/5/6 or the Anniversary Reporting for Authorisation of Activity (ARAA) on 20 November 2011 and the relevant licence fees. Thereafter A must submit ARAA and the licence fees on the anniversary date of their licence, which is 20 November of each year.

Example 2
B’s (representative or individual or company) licence was renewed for 24 months on 20 October 2010 for two years i.e. up to 20 October 2012. B will now be required to submit ARAA on 20 October 2011 and make submissions on an annual basis thereafter, on the anniversary date of their licence, which is 20 October.

If B is a representative or individual, B is encouraged to meet 20 CPE points before the submission of his first ARAA on 20 October 2011. Additional licence fees will not be deducted as the licence fees were paid for two years on 20 October 2010.However, while B is encouraged to complete his CPE obligations of 20, before the submission of his first ARAA on 20 October 2011, he will be allowed to meet the total CPE points of 40 before the submission of the second ARAA on 20 October 2012. B will be required to meet the minimum CPE requirements on an annual basis thereafter.

B need not pay an additional RM50 for the submission of his respective ARAAs on 20 October 2011.

Example 3
C’s (representative or individual or company) licence was renewed for 24 months on 20 January 2010 for two years i.e. up to 20 January 2012. C will be required to make his first ARAA submission on 20 January 2012 and continue to make the submissions on an annual basis thereafter, on the anniversary date of his licence i.e. 20 January. If C is a representative or individual, C would have to meet the total CPE points before the submission of his first ARAA on 20 January 2012.

Example 4
D’s (representative or individual or company) licence was renewed for 24 months on 20 September 2011 for two years i.e. up to 20 September 2013. D will be required to make his first ARAA submission on 20 September 2012 and continue to make the submissions on an annual basis thereafter, on the anniversary date of his licence i.e. 20 September.

If D is a representative or individual, D is encouraged to meet the total CPE points before the submission of his first ARAA on 20 September 2012. Additional licence fees will not be deducted as the licence fees were paid for two years on 20 September 2011.
However, similar to Example 2, D is encouraged to complete his CPE obligations of 20 before the first ARAA submission on 20 September 2012. D must nevertheless meet the total 40 points before the second submission of ARAA on 20 September 2013. D will be required to meet the minimum CPE requirements on an annual basis thereafter.

D need not pay an additional RM50 for the submission of his ARAA on 20 September 2012.

3.

What are the obligations of the CMSL and CMSRL on the anniversary of their licences?

The expiry date of the licence will now be known as anniversary date of the licence. In place of licence renewals, CMSL holders and CMSRL holders will be required to make yearly submission of the ARAA, to the SC together with payment of the relevant licence fees, on every anniversary date of their licences. The relevant forms are Form 4 – ‘Anniversary Reporting for Authorisation of Activity (CMSL)‘, Form 5 – ‘Anniversary Reporting for Authorisation of Activity (CMSL-Individual)‘ and Form 6 – ‘Anniversary Reporting for Authorisation of Activity (CMSRL)‘. The forms are made available through ELA (Electronic Licensing Assess System) as well as the SC website.

Annual licence fee will automatically be deducted from the account of the licence holders on the anniversary date of the licence. Licence holders are reminded that non-payment of annual licensing fee is now grounds for revocation of licence under section 72 of the CMSA. Failure to submit payment of licence fee on anniversary date will also be subjected to an imposition of a RM100 penalty per day till the licence fees are paid in full. The imposition of penalty for late or non-payment of licence fees will take effect from 1 January 2012.

4.

When should ARAA be submitted?

Both ARAA and the licence fees are due on the anniversary date of the licence. However, licence holders may submit ARAA on the next working day, if their licence anniversary date falls on a Saturday, Sunday or public holiday.

5.

What happens if the CMSL or CMSRL submits the ARAA late?

ARAA is due on the anniversary date of the licence. The SC, in assessing the fit and properness of a CMSL or CMSRL to continue to be licensed, will consider the tardiness of all submissions, including ARAA, to the SC. The SC may carry out the necessary regulatory action based on late submissions.

6.

What is ARAA? Why does the SC still need the company and its representatives to make a submission?

ARAA stands for Anniversary Reporting for Authorisation of Activity. Similar to the current Form 4, ARAA will be used to help the SC determine the fit and properness of the CMSLs and CMSRLs to continue to be licensed. In this regard, CMSLs and CMSRLs are reminded of the importance of completing ARAA adequately and to submit on a timely basis.

Currently, to facilitate the renewal process, the SC would seek relevant information from the CMSL. These requests are now clarified and streamlined through ARAA. It is expected that this process will assist the companies in compiling and providing the information and add to their efficiency as well as the SC’s assessment process. ARAA essentially asks for information in three areas, which are (i) financial performance (ii) business direction and (iii) resource. The company is expected to provide sufficient information to assist the SC in assessing the company fit and properness.

The SC, through the ELA, will return incomplete ARAA. All fields must be adequately addressed.

7.

How do we pay our licence fees and make ARAA submissions?

Companies can continue to use ELA for the submission of ARAA. The licence fees will be automatically deducted on the licence anniversary date. In this regard, companies and representatives must ensure that there are adequate funds for the payment of licence fees to avoid the imposition of penalties.

8.

Will there be any acknowledgment on anniversary date?

Licence holders will receive an acknowledgment upon the receipt of licence fees and ARAA.

9.

How will the SC impose conditions on CMSLs and CMSRLs?

Generally, the SC has imposed conditions on granting as well as on renewal of the licences. Similarly, under the new framework, the SC may impose conditions at any time and the conditions will be communicated through ELA and/or a letter.

10.

What are the CPE requirements for individual CMSL and CMSRL holders under the new framework?

There is no change to the CPE obligations of all individual CMSL and CMSRL holders. However, there will be a change from the current system where licence holders with a two year licence period, are allowed to accumulate 40 CPE points over the two year period. Under the new system all licence holders must obtain at least 20 CPE points on or before the anniversary date of their licence and must be reflected in Form 6 – ‘Anniversary Reporting for Authorisation of Activity (CMSRL)’.

However, during this transition as illustrated in the examples in Question 2 above, if a licence was renewed before 3 October 2011 for a period of 2 years, the 40 CPE point requirement for individual CMSL and CMSRL holders can be met at the submission of the second ARAA.

Grounds for refusing the grant of licence

11.

What do the new amendments mean for the CMSRL and CMSL?

Sections 64 and 65 of the CMSA have set out the conditions or circumstances where the SC may reject an application for licence. The new amendments now include the following new circumstances-

(a)

when there is a submission of a document or information to the SC from which there is a material omission;

(b)

where the applicant has committed a breach of securities laws outside Malaysia; and

(c)

where administrative sanctions have been taken by the SC under sections 354, 355 and 356 of the CMSA against the applicant.

12.

Are these circumstances applicable after a licence holder has been granted a licence, for example, if there is a breach in securities laws outside Malaysia or administrative action taken by the SC after the licence holder was granted his licence?

Yes. The SC can take regulatory action if the breach was committed after granting the licence, regardless where the breach was committed.

Enhancing the power of the SC to enquire into transactions

13.

What information can the SC enquire into?

Consequential to the removal for renewal of licence requirements, the amendments to section 66 of the CMSA clarifies that the SC may at any time inquire into the transactions of a licenced person, its directors, chief executive, managers or controller in respect of dealing in securities or trading in futures contracts.

Previously, this section stated that the right to inquire into transactions is invoked at the stage when an applicant is applying for a new licence or renewing its licence. The removal of the renewal of licences necessitates the clarification of Section 66, to state that the SC can inquire into such transactions at any time.

Cessation of representative licence on cessation of its principal’s licence

14.

Company ABC Sdn Bhd’s licence for the regulated activity of fund management was revoked on 1 July 2011 for breaches of securities laws. It has five representatives, who were not responsible or aware of the breaches. What happens to the licences of the 5 representatives?

Under the current framework, the said representatives’ licences are automatically revoked in the event the licence held by its principal is revoked by the SC.

So as not to prejudice the position of the representatives, Sections 69 and 72 of the CMSA have been amended to provide that a representative’s licence will cease rather than be revoked when his principal’s licence is revoked.

Amendments for the need to seek the Minister’s approval

15.

In what circumstances are the Minister’s approval required or removed?

Under the current licensing framework, the Minister of Finance (Minister) provides its concurrence on the granting and renewal of licences for the regulated activities of dealing in securities as well as trading in futures contracts. The Minister’s concurrence is also required where the SC seeks to impose any condition or restriction on these licence holders. Further, the CMSA also provides that the Minister’s prior approval is required where an application is made to the court for the purposes of facilitating the transfer of the business of dealing in securities or trading in futures contracts from a transferor to a transferee corporation.

Given the developments to the licensing landscape, Sections 61, 62, 72 and 139 of the CMSA are amended to remove the requirement for Minister’s concurrence or approval for the above transactions.

Pre-approval of the CEO of CMSL

16.

Do appointments of CEOs require the SC’s prior approval?

Given the critical position a CEO hold in a capital market intermediary, Section 75 of the CMSA has been amended to provide that, effective 3 October 2011, the SC’s prior approval will be required before a licence holder can appoint a CEO.

Chief Executive Officer has the same meaning as defined by the CMSA which refers to any person, by whatever name called, who is principally responsible for the management and conduct of the business of the CMS licence holder in Malaysia.

17.

Is the provision applicable for current CEO positions?

No. The amendment does not apply retrospectively.

18.

Licensed investment banks are already required to seek BNM’s approval for the appointment of their CEOs. Are these amendments applicable to investment banks?

Yes. Investment banks are expected to submit their application to both BNM and the SC concurrently. Both BNM and the SC will receive similar information at the same time facilitating the process for the approval of the appointment.

19.

How does a CMSL make an application for the appointment of its CEO?

CMSLs are required to submit Form 27 – ‘Application for Chief Executive Officer and Key Management’. The applications will have to be accompanied by the relevant supporting documents as described in Form 27. After obtaining the SC’s approval on the application made under Form 27, the CMSL must submit Form 14 within 14 days of the change occurring.

20.

Should the CEO be the licensed director or a director of the company?

Not necessary. This is a commercial arrangement and the capital market intermediary may undertake the arrangement suitable to its circumstances.

21.

What is expected of the CEO?

The CEO is expected to demonstrate the capability and competence to lead the company. The CEO need not be a director of the company. The CEO must be suitability qualified to assume the position, act honestly and exercise due skill and diligence.

New provision on transfer of licence

22.

What does the transfer of licence mean?

The transfer of licence in the context of the amendment to Section 139 means that companies can automatically have their licence transferred to the new entity, without needing to re-apply for a new licence.

Currently section 139 of the CMSA provides a formal process where the business of a licensed holder can be transferred to another person subject to these parties obtaining a court order. Whilst section 139 provides that the Court can make an order to transfer the business from the transferor to the transferee, there is no process in place which allows the transfer of the licence held by the transferor to the transferee. In this regard, Section 69 is amended to allow, the transferor to apply to the SC to have its licence transferred to the transferee once a court order is obtained. With this amendment the transferee no longer needs to make a separate application to the SC for a grant of a new licence when the transfer of its business to the transferee is approved by the court.

A licence can only be transferred subject to the application of Section 139 of the CMSA.

23.

What are the processes involved in transferring a licence?

Companies are required to make an application to the SC for the transfer of the licence. The application may be made concurrently with the application for the application of S139 of the CMSA.

Dealing in Derivatives

24.

If A holds a licence for futures trading contracts, does he need to re-apply for a new licence for dealing in derivatives?

No.

25.

Why is regulated activity of ‘trading in futures contracts’ now being referred to as ‘dealing in derivatives’? Aren’t they the same?

In line with global regulatory developments, section 15 of the SCA was amended to expand the SC’s regulatory oversight to cover “securities, futures contracts and derivatives”. The amendment enables the SC to develop an appropriate regulatory framework for OTC derivatives in line with global regulatory reform towards improving transparency and regulatory oversight of OTC derivatives market.

Following this, a new definition of “derivatives” in the CMSA is given, and will cover all types of derivatives, including derivatives other than futures contracts and OTC derivatives. Currently, regulation of capital market instruments in the CMSA is demarcated between regulation of “securities” and “futures contracts”. Given that the regulatory framework for “futures contracts” in the CMSA currently caters only for exchange-traded options and futures contracts, the proposed definition is required to address a regulatory gap/void in the regulation of OTC derivative contracts. The new definition will also provide the foundation for a new regulatory dichotomy of “securities” and “derivatives”.

To provide for the regulation of all derivatives, including OTC derivatives, all references to “futures contracts” will now refer to “derivatives”. Accordingly, references to “futures market” and “futures exchange” will now refer to “derivatives market” and “derivatives exchange”. References to the regulated activity of “trading in futures contracts” will then refer to “dealing in derivatives”.

Prior approval for the Establishment of New Business or Acquisition of Shares/ Interests In or Outside Malaysia for capital market-based activities

26.

When does a CMSL require an approval to establish a new business or acquire shares/interest in or outside Malaysia?

A CMSL must obtain the SC’s prior approval in circumstances where the CMSL proposes to establish a new business or acquire shares/interest in or outside Malaysia. An approval is only required if it is a capital market related business. The new business does not include opening of branches by companies licensed for dealing in securities, which are dealt with in the Bursa Rules.

27.

How does a CMSL make an application?

CMSLs are required to submit Form 26 – Application for Establishment of New Business or Acquisition of Shares/Interests In or Outside Malaysia. The application will have to be accompanied by the relevant supporting documents as described in Form 26. After obtaining the SC’s approval on the application made under Form 26, the CMSL must submit Form 15 within 14 days of the change occurring.

Example
A CMSL holder proposes to acquire 100% interest in a fund management company in or outside Malaysia. The CMSL holder is required to obtain the prior approval of the SC by submitting Form 26 – Application for Establishment of New Business or Acquisition of Shares/Interests In or Outside Malaysia. After obtaining the SC’s approval on the application made under Form 26, the CMSL must submit Form 15 within 14 days of the change occurring.

Notification on Establishment of New Business or Acquisition of Shares/Interests In or Outside Malaysia for non capital market-based activities and Disposal of business or shares/interests in or outside Malaysia including closure of business

28.

When does a CMSL holder need to provide notification to the SC?

The Licensing Handbook provides that a CMSL holder must notify the SC in circumstances where the CMSL holder proposes to establish new business or acquire shares/interest in or outside Malaysia for non capital market-based activities.

The CMSL holder is also required to inform the SC when it disposes a business or shares/interests in or outside Malaysia.

29.

How does a CMSL holder notify the SC?

CMSLs are required to submit Form 15 – Notice of Change in Corporation’s Particulars within 14 days of the change occurring. The notifications will have to be accompanied by the relevant supporting documents as described in Form 15.

Example
A CMSL holder proposes to establish a travel agency in or outside Malaysia. As the new establishment is not related to capital market-based activities, the CMSL holder is only required to notify the SC by submitting Form 15 – Notice of Change in Corporation’s Particulars within 14 days of the change occurring.

The amendments to the CMSA as well as the FAQ on the implementation of the above provisions can be accessed at the SC’s website at http://www.seccom.com.my