Monetary Authority of Singapore
Mr Speaker Sir, on behalf of the Senior Minister, I beg to move, That the Bill be now read a second time.
2 The Securities and Futures Act (SFA) was enacted in October 2001. It sought to provide a legislative framework for a market and disclosure-based approach to regulating our capital markets. It also provided a single comprehensive rulebook, reflecting trends towards industry consolidation and the blurring of boundaries between capital market products, for example between unit trusts, investment-linked insurance policies and structured products.
3 When the SFA was passed, we noted that the Monetary Authority of Singapore (MAS) would review the Act in the following few years to keep pace with developments in the capital markets. MAS embarked on a two-phase set of amendment to the SFA in 2003. The Securities and Futures (Amendment) Act 2003, which marked the first phase of amendments, implemented 12 recommendations of the industry-led Company Legislation and Regulatory Framework Committee (CLRFC). The CLRFC had been tasked to review and modernise the company law and regulatory framework in Singapore. It suggested rationalising some of the rules in the SFA for offers of investments to make our capital markets more globally competitive. The first round of amendments also incorporated various technical amendments, in light of industry developments and feedback received since the implementation of the SFA in 2001.
4 The second phase of amendments, represented by the current Bill, implements the remaining recommendations of the CLRFC. We are also making other substantive policy changes to the SFA.
5 MAS invited feedback from the industry and the public on the proposed policy refinements in September 2003, and on the draft Bill in April 2004. Many respondents gave detailed comments. MAS has incorporated the feedback received into the Bill, where practicable and where it is in line with its regulatory objectives. MAS has posted detailed responses to the comments received during these consultations on its website.
6 Sir, let me first set out the basic thinking behind the amendments. The Bill aims to strengthen the foundations underpinning our market and disclosure-based regulatory regime. It aims at sound standards without excessive costs.
7 First, we seek to ensure high standards of transparency and fair dealing. These standards are prerequisites for the continued growth and development of the markets. While they impose obligations on issuers of capital, market intermediaries and professionals, they ultimately benefit all participants in the capital markets. They enhance investor confidence, leading to more liquid and vibrant markets, which in turn lowers the cost of capital. A market-driven, disclosure-based approach also allows reputable market players to raise the bar over time, as they see competitive advantage in improving their standards of disclosure and fair dealing above the minimum standards prescribed.
8 The second objective of the Bill is to make our rules as clear and market-friendly as possible to support the development of our markets. The Bill provides greater regulatory certainty to the industry in some key areas such as offers of investments. The approval process and ongoing requirements for markets and clearing facilities have also been further streamlined for new entrants.
9 The Bill introduces amendments to rules across a range of capital market activities - capital raising, the conduct of intermediaries, and the provision of clearing and settlement infrastructures. On capital-raising, the amendments redefine the scope of provisions concerning investment offers, refine the liabilities of professionals involved in capital raising and simplify some prospectus rules. The Bill fine-tunes the regulation of intermediaries in light of industry experience to date under the SFA. On markets and clearing facilities, the Bill calibrates the level of regulation to better match the different levels of systemic risk posed by different entities.
10 Mr Speaker Sir, I will now go through the main amendments in the Bill. I will start with changes to our rules on capital-raising.
Capital Raising Rules
Abolition of Public Offer (in relation to Offers of Investments)
11 Sir, the SFA currently imposes rules on the conduct of offers to the public, by requiring public offers be accompanied by prospectuses. These rules aim to ensure that investors are provided with all material information needed to make informed investment decisions. However, as noted by the CLRFC, the phrase offer to the public is not defined in legislation. This can cause practical difficulties for issuers when structuring private and other exempted offerings.
12 As recommended by the CLRFC, the Bill removes the concept of offer to the public from the SFA. Instead, a prospectus will be required for all offers of investments unless they are specifically exempted. As a basic principle, such exemptions should only be given in limited circumstances where the cost of issuing a prospectus is not justified by the benefits of greater disclosure and investor protection. Our current regime already exempts offers that are not made available to retail investors, or where other safeguards exist to minimise the risk to the public interest. For example, where the information found in a prospectus may already be publicly available, as is the case for listed companies.
13 Sir, the CLRFC recommended two new safe harbours which would allow private placements and small offers to be made without a prospectus. These safe harbours provide legal certainty in the case of capital raising by small and medium enterprises (SMEs) and helps them do so efficiently, without unnecessary regulatory costs. These safe harbours are similar to those available in jurisdictions like the UK, Hong Kong and Australia.
Private Placement Exemption (Clause 72, new Section 272B)
14 Private placements are defined as offers made to 50 or fewer investors within any 12-month period. The CLRFC had recommended a limit of 20 investors. However, MAS received public feedback that this is too low, as not all persons offered the securities may accept the offer. We have decided to raise this figure to 50, which is also consistent with the practice in UK and Hong Kong. Given this limited reach, there will be no dollar cap on the amount that can be raised in each private placement.
Small Offer Exemption (Clause 72, new Section 272A)
15 Small offers raising up to $5 million within any 12-month period are also exempted from prospectus requirements. Apart from the $5 million limit, a small offer can be made only to investors with an existing relationship with the offeror, or who have previously expressed an interest in the offer. In addition, there will be resale restrictions on securities purchased by a connected investor so as to ensure that offers made under the small offers exemption are not open to the public at large.
16 Offers made under the private placement and small offers exemptions, if they are closely related offers, must be aggregated. This will prevent issuers from breaking up a single large offer into smaller ones which would individually satisfy the exemptions, so as to circumvent the rules. MAS will prescribe regulations to set out the factors determining which offers are deemed as closely related.
Debenture Issuance Programme
17 Clause 54 extends the validity period for base prospectuses for a debenture issuance programme from six months to 24 months. This addresses industry feedback that a six month period is too short when debentures are being continuously issued. Clause 46 will also allow the base prospectus to be updated in the absence of a current offer without triggering refund provisions.
Offer Information Statement
18 Currently, listed issuers are allowed to provide an offer information statement (OIS) instead of a full prospectus if they are offering securities which are similar to those already listed. Clause 77 extends the use of an OIS to all offers of securities by a listed entity. Listed issuers are already subject to requirements under the SFA to disclose all material information on a continuous basis. Investors would therefore have publicly available information to evaluate fresh offerings by the issuer.
19 Currently, an OIS is required for a renounceable rights issue only when the issuer is both listed and incorporated in Singapore. Under the new provision, an OIS will also be required for renounceable rights issues by foreign corporations which have a primary listing in Singapore. This recognises that the pool of Singapore shareholders for such issuers is likely to be significant.
Prospectus Liability for Issue Managers
20 Sir, in a disclosure-based regime, the onus for accurate and meaningful disclosures is placed on the offeror and their professional advisers. This is achieved by imposing liability on those responsible for preparing the prospectus. Currently, the offeror and its directors, as well as the underwriter, face criminal and civil liability for any material deficiencies in the prospectus, such as false and misleading statements or omissions of material information. Clauses 57 and 58 extend this prospectus liability to issue managers. This recognizes the important role that issue managers play in bringing a company to list on SGX and in the preparation of the prospectus.
Change in Criminal Liability
21 At the same time, Clause 57 also refines the existing criminal liability for persons other than the offeror and its directors. Currently, third-party intermediaries (such as underwriters) must demonstrate that they have conducted the necessary due diligence as a defence against any criminal charges for material deficiencies in a prospectus. Clause 57 removes this burden of proof on the part of intermediaries. Instead, the onus will be on the prosecution to demonstrate that an intermediary has acted recklessly or intentionally. This is intended to address concerns by the industry that they may be subject to criminal liability as a result of an inadvertent oversight, or because of deficient disclosures made by the offeror (or its directors).
22 However, the civil liability provisions in the SFA will continue to apply the due diligence test. Investors will still be able to institute civil action in Court against intermediaries to compensate them for losses sustained as a result of material deficiencies in the prospectus, where underwriters and issue managers are unable to show that they have conducted the necessary due diligence. This way, the change in criminal liability will not compromise the ability of investors to seek recourse.
Pre-Deal Research Reports
23 Sir, Clause 55 will lift the current prohibition on issuing pre-deal research reports for international offers. Pre-deal research reports refer to reports that profile an issuer before an offer is made. Such reports are typically prepared by the intermediaries involved in the offer, such as the underwriter or issue manager, to stimulate interest in the offer. Previously, pre-deal research was prohibited because such reports are not subject to the same regulatory safeguards as prospectuses. There was concern that retail investors may rely on such reports instead of the registered prospectus.
24 MAS recognises that this prohibition may have placed Singapore investors, particularly our institutional investors, at a disadvantage compared to foreign investors when subscribing to international offers. If an offer is made concurrently in a foreign jurisdiction that allows such reports, MAS will allow pre-deal research reports to be distributed to institutional investors in Singapore. To reduce the risk of information in the pre-deal research reports reaching the retail public, we will put in place safeguards. Among them, the reports must not be circulated to persons who are not institutional investors, especially the media. Issuers must also observe a two-week quiet period before a prospectus is lodged.
Intermediaries
Repeal of Exemption for Financial Advisers
25 Mr Speaker Sir, let me move on to other changes in rules relating to the conduct of intermediaries, besides the changes to the capital raising framework that I have just mentioned which concern them. The SFA currently exempts financial advisers licensed under the Financial Advisers Act from licensing under the SFA, in their conduct of SFA-regulated activities which are incidental to their financial advisory services. Clause 16 removes this generalised exemption. It was not our intention to allow financial advisers to conduct SFA-regulated activities, such as the full scope of fund management activities. In its place, MAS will make explicit in Regulations the specific types of exemptions financial advisers require under the SFA to conduct their financial advisory business.
Unsecured Credit Facilities to Employees
26 Clause 20 lifts the current prohibition against licensees under the SFA granting unsecured credit facilities to their directors, officers, employees or representatives for trading purposes. This prohibition has posed practical difficulties to licencees such as stockbrokers. For example, staff who trade through their principals need to settle their securities transactions upfront, rather than in accordance with market rules. They do so to avoid situations where credit is inadvertently extended to them if settlement is delayed. The risk arising from allowing unsecured credit facilities is however minimal, as unsecured loans to directors, officers and employees are already capped at one years emoluments.
False Statements to MAS
27 Clause 12 will make it an offence for applicants for a licence under the SFA to submit any false statements to MAS without reasonable excuse. Currently, it is only an offence if the false statements are made knowingly and wilfully. The Bill clarifies that false statements can be used as a reason for rejecting an application. For MAS to perform its regulatory role well, applicants should bear responsibility for ensuring that their submissions to MAS are accurate and truthful.
Key Infrastructure
Clearing Facilities
28 Mr Speaker Sir, I will now discuss the refinements to our regulatory framework concerning clearing facilities and markets. Entities engaging in clearing or settlement services are vital components in the infrastructure of the entire financial sector. Such clearing facilities currently require approval from MAS before commencing operations. However, the term clearing or settlement is not explicitly defined in the current SFA. Clause 106 introduces a definition for clearing or settlement which covers any of the activities comprising post-trade matching and confirmation, clearance and settlement. This gives greater clarity to the industry, and takes into account the broad-ranging nature of clearing and settlement activities. This is also consistent with recent practices in other developed markets where an entity may specialise in a specific aspect of clearing or settlement, but would still be subject to regulation.
29 However, MAS anticipates that such a comprehensive definition could potentially become too inclusive over time and dilute our approach of regulating and supervising an activity in line with the risks that it poses. To pre-empt such problems, the new Part III inserted by Clause 4 also introduces a new designation approach for clearing facilities. Clearing facilities will have to notify MAS 60 business days before commencing their operations. MAS will only designate and regulate clearing and settlement systems which are systemically important, so as to focus our regulatory resources where the risks are more significant.
Markets (Clause 4, new Part II)
30 The Bill likewise improves the provisions relating to markets. These changes will clarify MAS' intention to classify markets as approved exchanges or recognised markets depending on their systemic importance. The more systemically important ones will be regulated as approved exchanges. Recognised markets will typically be smaller-scale trading platforms or organised exchanges which are already regulated in other reputable jurisdictions. Recognised market operators will be subject to a more limited set of mandatory regulatory provisions, though MAS still retains the flexibility to tailor conditions to each specific recognised market.
Conclusion
31 Mr Speaker Sir, the key building blocks for a market and disclosure-based regime for the capital markets are in place, and are being enhanced with this Bill. However, the SFA will remain very much a work in progress. With constantly evolving capital markets, MAS will continue to engage in discussions with industry practitioners, monitor developments in regulatory practices internationally, and keep our capital markets legislation relevant.
32 Singapore is not alone in this process of continued refinement and reform of capital markets legislation. In Hong Kong, the Securities and Futures Commission has been reviewing various aspects of its regulatory framework, less than year after its Securities and Futures Ordinance came into effect in April 2003.
33 There has also been a flurry of reforms in the United States, including major reforms regarding conflicts of interest on the part of analysts and corporate governance found in the Sarbanes-Oxley Act and in the managed funds industry. There have also been recent moves in the US to modernise the process of securities offers and update the regulation of markets to keep pace with technological and industry developments.
34 Capital markets regulation in Singapore as around the world will have to continue evolving to respond to new developments and concerns, while allowing for innovation, liquidity and growth of the markets.
35 Sir, the market-driven and disclosure-based regulatory regime that we have adopted is the most effective way of governing a modern and rapidly innovating capital market, with a growing range of investment offerings and a wide spectrum of investors with differing levels of risk tolerance. Market discipline is at the heart of this approach. The responsibility for making market discipline work is shared amongst all participants in the system, not just the regulator. In particular, the onus is on issuers and their professional advisers to provide meaningful, accurate and timely information to investors. The regulator, on its part, stands ready to take effective enforcement action when laws are breached or prescribed standards of market conduct are not upheld. But market discipline also means that investors have to accept the risks of a business failing for legitimate reasons, or an investment not performing up to expectations.
36 In conclusion, Sir, the market and disclosure-based regulatory approach that underpins the SFA and the amendments that this Bill proposes will enhance confidence in our markets and encourage continued innovation and growth. The Bill continues MAS' efforts to establish a framework of laws, rules and standards that encourages complete and clear disclosure of information, markets that operate with integrity, intermediaries who deal fairly with their customers, consumers who are empowered and educated of the risks involved in investments, and a regulator able to take effective enforcement when breaches occur.
37 Sir, I beg to move.