Introduction
In the rush towards full development, indeed in the midst of riches such process has already thrown up, there must be belief in and adherence to values whose absence, largely through abandonment, led to the demise of great empires in past, not infrequently at the height of their material achievement. We see today, though one wonders sometimes whether we learn enough, the abandonment of such values has led to a confusion and decay which eat away at the edifice of modern industrial civilisations. In Malaysia, where we are going through the most promising times in our history in terms of fulfilling society's material needs, the memory must not lapse of what had happened and is happening in the history of the world when purely material pursuits and gratification blind man of the higher order values that sustain civilisation, indeed that distinguish truly great civilisations. We still have some way to go before we can achieve the national vision of fully developed status, with values intact, that a break-out of value abandonment at so early a stage, overwhelmed as we may be by the early bloom of riches never before imagined with so much more to claw selfishly towards over the horizon, could extinguish what we have achieved so far, at a speed many times faster than that which took us to reach where we are today.
The national agenda invokes against the abandonment of personal and communitarian values in the pursuit of fully developed status. Indeed it defines full development to include high values of conduct and social responsibility; we cannot be deemed to have achieved fully developed status in a state intellectually of nihilism, as Turgenev posits it in his novel Fathers and Sons (1861), and sensuously of epicureanism. To borrow the words of the 17th century British philosopher Thomas Hobbes, any such status if achieved but is characterised by the abandonment of values which hold society together, would be "nasty, brutish and short." It is clearly part of our national lexicon, though perhaps not evenly part of the national psyche, that a whole value system that incorporates moral conduct and social responsibility, must be carried forward along with material development. In the contemporary debate between the dictates of liberal democracy with its emphasis on individualism and the "Asian way" where the premium is on group or communitarian interests, the superiority of the latter is demonstrable in the orderly growth of Asian economies and polities against the stagnation, confusion and decay of Western societies. Asian values, with their emphasis on order for the common good, are clearly on the ascendant but, we must concede, in this round in the cycle of world history, while the economies are growing and prosperity expanding. We must wonder whether our group oriented Asian values are truly internalised and individualised to see us through a period of slower or no economic growth, or to see us over the period of full development, which conventional wisdom has it would portend increasingly individualist demands, both in political and social life. Any dispassionate appraisal of the history of order and disorder in Asian societies, would lead to a conclusion at best of uncertainty whether the much-touted "Asian way" would stand the test of all times.
The personal and individual absorption of Asian values which emphasise ethical conduct and group responsibility, therefore, is a matter for inculcation and not of assumption. They form the basis of religious belief. They are inculcated within the family, and the family therefore must always remain a strong cohesive unit. They are taught at school, which means the availability of teachers who are respected and wise. They are practised in the work place, which should be an organised institution for economic and social benefit. They are expressed in personal and professional association as well as in political organisation and system for the common good. These are many and intricate layers of relationships, organisations and systems. They take many, many generations to form and, in this context, what we assert today could disappear tomorrow. We have to work at it. And in today's world it is no easy thing. The push and pull of other than Asian influences come right into our living rooms and into our minds through information and communication flows we cannot contain or control. Asia may be ascendant, but it has not ascended. Asian values will have a tough time to survive this onslaught and come out in an unsyncretic form. The test will be to separate the good from the bad, to absorb and not be absorbed, but not to be so arrogant or self-centred as to refuse to recognise the universal good that can be based on a bed-rock of sound Asian values. In sum, the Asian values we proclaim are not always self-evident, are not without challenge both from the pace and phase of economic development as well as by the influence, both good and bad, of other value systems in a technologically inter-penetrable world.
The securities industry
The milieu in which the securities industry operates represents one of the most inter-penetrated activities globally, with vast financial flows, widespread use of advanced communications technology, universal investor, trading and settlement requirements, generally expected norms of conduct of business and exercise of fiduciary responsibility, and continued dominance of the market by institutions from metropolitan Western centres, against a backdrop of growing Asian markets fulfilling largely national economic needs but with the local industry almost naturally developing extra-territorial predispositions conditioned by the global nature of the business. Business rules, codes of conduct and guidelines on behaviour have always governed the industry to ensure order, certainty, fairness and security. Many of these have been incorporated in securities laws. By and large, similar institutions have evolved or have been established to regulate activities in the industry. In creating markets that raise capital or transfer risks the industry fulfills a necessary and beneficial economic need. The capital markets of the securities industry are indeed vital to the economic life of the particular society. They represent interests and expectations, present and future prospects and potential gains and losses to industries, institutions and individuals whose fortunes are tied to their performance. Their performance depends not only on fundamentals and sentiments but also on the confidence and expectation that the business is properly conducted. In the securities industry confidence once lost - and it can be lost very quickly - is very hard to recover.
Indeed in the literature on the need to regulate the securities industry, the need to have laws, rules and regulations, the economic justification is the most frequently cited. The capital markets serve a vital economic function of obtaining long term capital. To enable the securities market to serve its vital economic function of efficiently allocating resources, information must be available to enable the investing public to decide on the risk, return and liquidity of investments. To this end, one of the foremost objectives of securities regulation would be to ensure that a mandatory disclosure system is in place for the sale and trading of securities to ensure that such information as needed is made available. As we have noted, an equally important consideration is the integrity and systemic stability of the capital markets which are intertwined with the vital interest of the nation's economy. Large sums of money are invested by pension funds, trust and mutual funds and individual investors - sums which represent their savings and retirement egg nests. Clearly, if the capital markets were to fail, i.e. if market intermediaries or participants fail to meet their obligations on a large scale, such failure can trigger off devastating economic consequences for the country as a whole. To avoid such circumstances, it is in the nation's interest to ensure security and integrity of capital markets.
Apart from the national interest, there is also the public interest to be protected, meaning the provision of stiff anti-fraud and anti-manipulative rules, provisions which afford the market participants with a greater degree of protection than the common law rules on fraud. The degree and efficacy of investor protection provisions is often regarded as the litmus test that separates a well functioning and efficient market from lesser ones. But why the added degree of protection? After all, should not buyers of securities be guided by the time honoured dictum of caveat emptor, or "let the buyer beware"? Were it so simple! Apart from the "widows and orphans" arguments, it has to be recognised that issuers of securities and market intermediaries have a natural advantage over investors in the access to information, and access to the trading system. This asymmetric advantage, if unregulated, could be the source of manipulation or fraud. There has to be a correcting of the balance.
With expectations and the need for laws to guard the national and public interest in place understood, a number of objectives can be addressed for the capital markets:
- Existence of a fair market
A fair market is one which enables the unfettered forces of supply and demand to be exercised, and provides undiscriminated access to small as well as big players for information and access to the trading system. Hence there must be adequate sub-requirements for timely, adequate and meaningful disclosure of all price sensitive information. Similarly there must be adequate criminal and civil sanctions against unfair practices such as insider trading, market manipulation, fraud and deception. Regulatory powers must not only adorn rule books; they must be used. Where the criminal process cannot effectively deal with the problem, civil sanctions like disgorgement of gains or restitution must be resorted to.
This means the avoidance of the contagious effects of the collapse of a single institution, or a group of institutions, on the entire market. To this end, unambiguous and enforceable provisions relating to clearing and settlement, risk management and capital adequacy must form an integral part of the regulatory structure. Adequate surveillance and enforcement powers must be given to the management of clearing houses and regulatory authorities to ensure that whatever problems that arise can be nipped in the bud or are at least localised so as to avoid harm to the entire industry.
- Orderly and smooth functioning of the market
A market that functions smoothly and in an orderly manner will enhance the confidence of all market participants. Exchange operators must have the necessary processing capacity, telecommunications diversity and resilience, and business continuity plans in place to ensure unimpaired and continuous market operations. The operational efficiency of the exchange will enhance its competitiveness and promote the internationalisation of the market.
- Adequate level of investor protection
The regulatory system cannot protect fools from their own folly. As such no system of regulation can insulate investors from the risks arising from bad investment decisions. To this end due diligence in respect of selecting prudent market intermediaries remains a good precept. The regulatory system must however ensure that there are sufficient safeguards to protect the investors from default by market intermediaries or arising from the insolvency of such intermediaries. Ensuring an adequate level of investor protection is not synonymous with the provision or maintenance of fidelity funds or investor compensation schemes.
While the existence of compensation schemes reflects a recognition of the fallibility of regulatory arrangements, it is a safety net in the last resort. The first line of protection for investors is the provision of an efficient risk management system. Investor protection demands that regulatory authorities have and do exercise sufficient powers of surveillance, intervention and enforcement so that the final net should be rarely used. Additionally, the regulatory authority must have sufficient powers over market intermediaries ¾ to determine the level of entry into the market, standards and quality of services provided within the market, and should the need arise, to ensure that any exit from the market causes little or no harm to the investors. The opportunities for exploitation of inequalities of information should be reduced if not completely eliminated by the promotion of market transparency.
- Innovation and competition
Financial markets in general have experienced considerable change in the last two decades. Some of these changes have been brought about by technology, particularly information technology. Others have resulted from deliberate efforts to deregulate. This does not mean reducing regulatory oversight. What it does mean is the scaling back of entry barriers, and enabling market participants to compete on the basis of price, quality of service and operational efficiency. The globalisation of securities markets will add a further impetus to change, and effective regulation must play a catalytic role in fostering change.
Ethics and social responsibility
It would be apparent that the nature and rules of conduct of the securities industry are today largely globally-driven, even if the industry organises markets to fulfill essentially national needs. The raison d'être and modus operandi appear to be strictly utilitarian, very much in the realm of the secular. But, as we all know, many laws have their roots in codes of ethical behaviour and where they originate from practice or convention, they have been based on socially acceptable behaviour. Thus, for example, Section 15(1) of the Securities Commission Act, 1993, which relates to the functions of the Commission, entreats the Commission in sub-section (h)
"to promote and encourage proper conduct amongst members of the exchange and all registered persons;"
Indeed sub-section (i) goes on calling upon the Commission
"to suppress illegal, dishonourable and improper practices in dealings in securities and trading in futures contracts and the provision of investment advice or other services relating to securities or futures contracts".
Such clear invocation in the securities laws of ethical and responsible behaviour underlines the code of conduct and common good aspects expected in the securities industry.
If we were to reflect further, many of the mores of behaviour in the securities industry originated in codes, guidelines and rules and regulations forged voluntarily in association for particular activities. Many remain in such form, particularly in Britain but also in other jurisdictions, governing expected standards of behaviour for the common good. The stock exchanges perhaps represent the most advanced arrangements of such rules and requirements, and where they are deemed to be inadequate or to have failed, as in the establishment of the US Securities and Exchange Commission following the Great Depression years and shenanigans on the New York Stock Exchange in the 1930's, public laws and institutions have been placed for further deterrence and oversight. The fact remains however that voluntary association and the incumbent private rules are a continuing feature of the securities industry, and is likely to expand with the growing intricacy of the securities industry which a public authority cannot be expected to grasp in all its aspects.
Even the utilitarian imperative for good behaviour in the securities industry is founded not exclusively on individual benefit but on the greater common good as well. In any case individual gain made in a socially responsible manner adds up to the wider social good. The trouble with the securities industry is it is exciting, even showy, especially of course when the market is up. Millions are made and lost. If one makes money, of course one's clever. If one loses, somebody else is to blame. In this kind of excitement, especially with new financial instruments and products coming on and growth taking place, we tend to lose sight of the purpose of capital markets. This whole activity engaged by the securities industry could come to sound so esoteric that the process appears to be an end in itself. We should constantly be reminded the process of capital formation in the financial markets and by whatever fashion has the larger objective of funding real economic development. No excess of excitement, or excess itself, should be allowed, to borrow Drucker's term, to "uncouple" the real from the financial economy. The economy needs to be driven by financial engineering but it does not need to be driven to distraction. The utilitarian principle serves as a useful reminder of the social purpose and objective for which financial markets exist. The papers or financial instruments in the capital markets are an abstraction of underlying values. All abstractions to have a meaning must have a base in reality. As many examples show, there are great costs in getting carried away. As I have noted we must ensure the public interest is protected, so that investors are not cheated or are left holding worthless bits of paper, so-called beneficial interest in some financial instrument or others. At the same time, as we know, such instruments are a means of raising funds for economic activity and expansion. While the process should and must be facilitated, it must not be abused, for there are great social costs.
It must be a point of emphasis that what is being protected is the process of capital formation for real economic development. In the West this role emphasises protecting the individual's right, quite in line with Judaic-Christian individualistic creed best illustrated Roman legal tradition. In the "Asian way" we should emphasise also the social and national significance of this role. So when we talk about the integrity of the market, it is not just another of those esoteric, abstracted and individualistic notions, but a concept with very real significance in capital formation for national development and growth. Those who undermine the integrity of the market undermine the national economic development effort, a major social interest, which highlights the utilitarian principle of conduct with social responsibility for the greater good.
Conclusion, in the Malaysian context
How does the Malaysian securities industry shake out against the conduct imperatives of the capital markets, be they encapsulated in public laws or in voluntary private arrangements? There can be no doubt the legal and institutional infrastructure in Malaysia is highly developed and comparable to advanced market regulation. Insider-trading provisions, for instance, make very clear the criminal nature of the offence, and the deterrent sentence is heavy. Of course it is often said that that is only on the statute books, as there has been no successful prosecution of an insider-trading offence in Malaysia. Well, let me tell you this is not from any lack of trying. It is simply a very difficult offence to prove in a criminal court with its requirement and heavy burden of proof. The US is the most successful in this regard, but the number is limited. I cannot recall a case in the United Kingdom. In Germany, insider-trading was not even a criminal offence until last year and that too came about as a result of efforts to put Frankfurt in a more competitive position against London. We hope at least one of our investigations into insider-trading would bear fruit in the not too distant future. We shall see. We have the laws and we are willing to apply them, according to the law.
Cases of suspected manipulation we have also investigated, although the evidence we are able to adduce may lead to lesser charges, which we have mounted successfully. Right now we are involved in the prosecution of a case under Section 87A of the Securities Industry Act, 1983 which refers to the use of manipulative and deceptive devices in connection with the purchase or sale of securities.
These are exceptions which, I hope, proves the rule. The rule being that the securities industry is by and large conducted in an orderly and organised fashion in accordance with behavioural and legal requirements that support and sustain our capital markets. We sell ourselves short if we compare ourselves unfavourably against so-called advanced markets. I have seen no empirical evidence to convince me we are any worse or, indeed, any better. One of the excesses of our market, the speculative frenzy that sometimes grips it, can sometimes get out of hand but is not, in law, wrong. Notice however that the KLSE has rules against such over-speculation and cornering of stocks, and that they have been applied. As you may know, rules referred to as circuit-breakers have also been introduced on the New York Stock Exchange, following the market meltdown in October 1987. Clearly speculation and other excesses are not an exclusive Malaysian or Asian trait. They exist in Occidental cultures as well in more subtle but no less rampant forms. In the securities industry as in other fields we are often lectured at and influenced into believing that our standards are not up to the mark. Actually, we are being asked to do as we are told, and not as the teller does. We have seen financial scandals everywhere, yet the impression is created they are endemic to a particular non-metropolitan region, or country. We have seen, through gross incompetence and mismanagement, venerable institutions with impeccable high standards, and indeed I have been lectured at by one or two of them when I was in the private sector, disappear like a thief in the night. We have seen serious failure of regulation elsewhere, yet we are sometimes made to think it is only at home that regulation is ineffective. No, we are doing many things right. Investment funds keep coming in. Fund Managers do not take unsupportable risk, whatever the return. They do move out fast, as from Mexico, and other countries too by far-fetched association, in December last year. Then again, they do come back if it is an over-reaction and not a fundamental loss of confidence. After all, developed countries have mismanaged their economy and devalued their currencies too.
Don't get me wrong. I am not being complacent or smug. I have concerns about the Malaysian securities industry. But my concerns are absolute to the Malaysian securities industry, with reference to other countries only in the context of excellence and doing better competitively, with apologies to no one. I am concerned that local investors do not sufficiently understand risk, and expect never-ending higher returns in a never-ending spiral. They should understand better diversification, consolidation and loss-limitation. There must be greater educational efforts and increased professionalism in asset management, which are all being planned. I am concerned that the capital markets are not sufficiently diversified that all hope for all time will be on the performance of the stock market. Other liquid markets must be established, not just for better diversification and risk management but also because capital raising in different circumstances and at different cost require to be facilitated. I am concerned that the issuers of securities and their advisers do not plan sufficiently well the company's capital expansion because we have never had it so good. The capability to service dividend, a prognostication of the amount of paper that might be in the market, and what implication that might have in leaner times should be more seriously addressed. Some sensitivity analysis, perhaps a bit of humility, might be a good thing in times of plenty as well. Market intermediaries have also been having a whale of a time that one wonders what process of acculturation is taking place. Much as we take pride in the "Asian way" and values, would they be lost in the pull of the individualistic creed that characterises much of the securities industry. It is not a case of all or nothing of course, but one wonders whether it might so become.
As a regulator, my concern is whether we would be able to balance competing interests within society with wisdom and fairness. We must allow markets to develop freely but we must avoid systemic risks; there is the need to develop a market which is free from legal constraints against the need to protect market participants; the government desires to protect the public interest by regulating the industry whereas the industry wishes to be self regulating; in business terms we have to weigh the promotion and protection of the domestic market against the need to promote a market which is globally competitive.
In balancing the competing interests, it has to be recognised that the role of the regulatory authority in the securities industry is not merely to police the market to ensure discipline; the regulatory authority also has a developmental role. It has also to be recognised that, while it is a fact of life everywhere that regulation of an economic activity will involve cost and may be unpopular, yet it is indispensable. At the end however, no amount of regulation can protect investors from themselves and any regulation that attempts to do so is not only extremely expensive and paternalistic, but also unrealistic. There exists no fool-proof system of regulation which can eliminate all risks and guarantee against all market failures. The best any system of regulation can reasonably seek to achieve is to minimise such risks, and to educate the investing public over time to recognise risk, and understand their own risk reward preferences. While ethics and the concept of social responsibility do find expression in the Malaysian securities industry, no amount of regulation can allow us to abdicate responsibility and to blame others for our own actions. It is dishonest, and unethical, to want to have a system that countenances such transfer of blame.
