TWO former senior employees of UOB Kay Hian Private Limited (UOBKH) were charged on Wednesday for allegedly lying to the Monetary Authority of Singapore (MAS) in relation to reports on a then Catalist aspirant. Lan Kang Ming, 38, and Wee Toon Lee, 34, each face three charges of providing MAS with false information in October 2018 in relation to due diligence reports on an unidentified company applying to list on the Catalist board of the Singapore Exchange. MAS said in a media statement on Wednesday that it was performing an onsite inspection of UOBKH between June and August 2018, to assess the latter's controls, policies and procedures in relation to its role as an issue manager for Initial Public Offering (IPOs). During the examination, Lan and Wee were said to have provided different versions of a due diligence report relating to background checks on a company applying to be listed on the Catalist board of the Singapore Exchange. UOBKH had acted as the issue manager
Comments
R Sivanithy
12 February 2014
It’s probably not that widely known, but stockbrokers and trading representatives (TRs) are obliged under current Singapore Exchange (SGX) rules not only to refrain from indulging in suspicious trades but also to report such trades to the authorities. Given that there have often been calls for regulators to do more to stamp out market manipulation and rigging, it is necessary to remind the broking community of this duty.
Under SGX’s Rulebook’s Practice Note 13.8.1, TRs are urged not to engage in trades which would amount to creating a false market. Although the rule allows for legitimate trading strategies based on genuine forces of demand and supply, it also states that TRs should not blindly execute trades on behalf of clients which might be construed as suspicious.
There is guidance on what might be construed as suspicious: whether the trade would result in a material change in price; whether it is unusual for that client, given his or her investment profile (which, of course, means that TRs have to know their clients well); and whether the order is placed far beyond the prevailing bid-ask spread.
Practice Note 13.8.9 goes further: it requires broking houses to have in place compliance processes to study suspicious trades, keep a record, report them to SGX, and warn the TRs concerned. From the point of view of those interested in tackling market manipulation and the ramping up of penny stocks, this rule classifies as suspicious those trades in which there is no beneficial change in ownership but are aimed at creating the impression of active trading.
These rules make perfect sense as a major constraint regulators face in policing capital markets is the sheer volume of transactions involved. When the market is “hot” and trading is frenetic, for example, it is virtually impossible to detect all wrongdoing, regardless of how vigilant and robust the surveillance system might be. Also, as systems evolve and become more sophisticated, so too do the strategies employed by manipulators and insider traders, making regulation a difficult task.
If we accept that all stakeholders from listed companies to the exchange operator to the small retail investor have a common interest in ensuring a robust, transparent and well-governed stock market, then it is only reasonable to ask which stakeholder is best positioned to assist regulators in keeping an eye on the market. The logical answer is, of course, stockbrokers - since these are the participants who have their eyes peeled on the market all the time and are therefore in the best position to assist the authorities in stamping out insider trading, rigging and other forms of market manipulation.
Recently, Australia formalised a Suspicious Activity Reporting law that broadly follows the rules described earlier but is more detailed. It states that the regulator - the Australian Securities and Investment Commission (ASIC) - should be notified if the market participant “has reasonable grounds to suspect that a person has placed an order or entered into a transaction while in possession of inside information, or which has the effect of creating or maintaining an artificial price or a false or misleading appearance in the market”.
There is no duty to conduct a detailed analysis to see if the matter contravenes any specific rules. Rather, if the broker - in the course of business and complying with existing obligations - becomes aware of a transaction that may be suspicious, the regulator has to be notified.
In its Regulatory Guide 238 dated August 2013, ASIC gives detailed examples of transactions which might be reportable. These would include transactions which make no economic sense, reap unusually high profits in a short space of time, are unnaturally large, and do not fit in with the known investment behaviour of profiles.
Insider trading is also targeted. If the client is a company official and trades ahead of a price-sensitive announcement by that company and if the broker knows of that official’s position as an insider, then this would necessitate official notification. It appears that Australia takes a dim view of insider trading. Since 2009, ASIC has prosecuted 32 insider trading cases. Of these, 23 have been successful.
Also, in the first month of the suspicious activity reporting law coming into force, ASIC received 17 notifications, though it is not known how many have led to full-scale investigations or action.
The point to note is that brokers are a valuable source of market intelligence and can play a pivotal role in corporate governance. In view of the current heightened scrutiny of penny stock trading, it might be a good idea for the authorities to remind brokers of their responsibilities.