Better investor protection with amended securities laws

Investor protection, a cornerstone of capital market regulation, was the key driver of the recent amendments to the securities laws, which saw the coming into effect of the Securities Industry (Amendment) Act 2003 (SIA), the Securities Commission (Amendment) Act 2003, the Futures Industry (Amendment) Act 2003 and the Securities Industry (Central Depositories) (Amendment) Act 2003, on 5 January 2004.

The significant changes introduced allow for better safeguarding of investor interests and further enhancement of corporate governance. The changes cover areas ranging from management and custodianship of client funds to whistle blowing to civil and administrative actions available for breaches of the laws. Additionally, the amendments were effected to provide for a more effective regulatory framework, and to this end, the new provisions have rationalised and clarified the scope of regulation, strengthened the Securities Commission’s (SC) enforcement capabilities and enhanced the provisions relating to clearing and settlement arrangements on the exchange.

Highlights of the amendments include:

Enhancing client asset protection

Provisions relating to custodianship of trust accounts now require fund managers to appoint third party custodians to hold clients assets. Other measures geared towards safeguarding clients assets include the transfer of clients assets to a trustee if such assets are deemed to be in jeopardy.

Introducing whistle blowing provisions

The amendments introduce whistle blowing provisions within the SIA in order to enhance corporate governance in public listed companies. Generally, whistle blowing provisions provide for the reporting of breaches of the law to the relevant authorities and usually build in legal protection to informants for their actions in bringing transgressions to light. In the context of the SIA, the new whistle blowing provisions seek to assist in curbing corporate abuses and promoting better corporate governance in public listed companies. They impose a mandatory duty on auditors to report breaches of securities laws and the rules of the exchange to the relevant authorities and provide an auditor with statutory protection from any action in court where a report is made in good faith.

A similar obligation is not imposed on officers of the company such as chief executives, chief financial officers and internal auditors to report wrongdoings by the company, but where the officer makes a disclosure in good faith and in the intended performance of his duties, the provisions provide him protection against retaliation in the form of dismissal, harassment or discrimination at work or any action in court.

Strengthening framework on investment advice

The SIA has also been amended to streamline the requirement of an investment advisory licence to better reflect the range of investment advisory activities in the capital market. An investment adviser is now defined to include any person whose activities involve an analysis of another person’s financial circumstances and the provision of a financial plan to meet that person’s needs and objectives. As such, persons who act as or represent themselves as being financial planners are required to be licensed as an investment adviser under the SIA.

(see latest Guidelines for Application for Investment Adviser’s and Investment Representative’s Licences under the Securities industry Act 1983 (SIA)

Enhancing civil and administrative action powers

Amendments to section 100 of the SIA expand the range of situations in which the SC can apply to the High Court for the various orders under that provision. This section can now be invoked where there is a breach of any securities laws, conditions of a licence issued under the laws or rules of the exchange. The amendments also provide for an expansion of the range of civil remedies which the SC can apply to the High Court for. This includes an order requiring a person to make restitution for any breach committed by him. These amendments would also enhance the civil remedies available to the exchange, clearing house and central depository in the event of rule breaches.

As this provision can also be used by investors who suffer loss as a result of a breach of the laws, the amendments are seen as a potential tool for private litigation by aggrieved investors.

The amendments have also enhanced the SC’s ability to take administrative actions by broadening the scope of the existing powers and expanding the administrative remedies available to the SC. This has been achieved primarily by the amendments to sections 11 and 28B of the SIA.

Strengthening clearing and settlement arrangements

A new Part XA of the SIA has been introduced in order to better ensure the systemic integrity of the clearing and settlement arrangements of the recognised clearing house. The provisions seek to ensure that settlement of trades executed on the exchange are not compromised in the event of the insolvency of any market participant who is a party to the trade.

For further information, a set of frequently-asked-questions (FAQs) on the amendments to the securities laws are available here. The set of amendments are also available for purchase at the Securities Industry Development Centre (SIDC) Corporate Services (tel: 03- 6204 8667/8669), while the amended legislation will be available on the SC website in the near future.

25 February 2004