SFA changes to make it easier for MAS to prosecute market misconduct
Changes to the Securities and Futures Act (SFA), announced
this week, are set to make it easier for regulators to prosecute cases of
market misconduct and insider trading - with a case in point being that
involving air cargo firm Airocean some years ago.
Comments
Michelle Quah, Business Times
12 January 2017
Changes to the Securities and Futures Act (SFA), announced this week, are set to make it easier for regulators to prosecute cases of market misconduct and insider trading - with a case in point being that involving air cargo firm Airocean some years ago.
Among the changes to the SFA that were passed into law on Monday was a section on strengthening the enforcement regime against market misconduct.
The change to Section 199 of the SFA clarifies that a disclosure made by a company can be considered false or misleading even if it did not affect the company's share price.
The Monetary Authority of Singapore's (MAS) brief on the changes said that the new section "will clarify that the SFA prohibits disclosures where a material aspect of the statement is false or misleading and is likely to have an effect on the market price of the securities, securities-based derivatives contract or CIS (collective investment scheme) unit, regardless of the significance of the price effect".
The MAS explained that false or misleading disclosures may not necessarily result in significant price movements "because of other contemporaneous and irrelevant market factors such as general market sentiment or market liquidity", and yet may wrongly influence investors to trade in the market.
It stressed that the word "material" in Section 199 is meant to describe only the nature of the false or misleading statement and not the extent of the market effect that the statement has.
The change came about because of the eventual result of the case involving Airocean and its directors.
The case centred on an announcement made by Airocean's board in 2005; it concerned then-chief executive, Thomas Tay, but the announcement omitted to state that Mr Tay had been questioned by Corrupt Practices Investigation Bureau (CPIB) officers on matters involving Airocean subsidiaries.
The announcement made it appear that the CPIB investigations concerned other companies in the industry rather than Airocean itself.
The directors were charged, found guilty of making a false and misleading statement under the SFA, but eventually acquitted upon appeal in 2012 (with the last director, Ong Chow Hong, acquitted in 2014).
In a landmark ruling then, Chief Justice Chan Sek Keong said there was a lack of evidence to prove that the announcement was materially misleading or that it was likely to materially impact Airocean's share price.
Corporate governance advocate associate professor Mak Yuen Teen said then of the ruling: "While I respectfully accept that the judgment may be legally correct given the SFA provisions and the burden of proof, it essentially makes the SFA provisions virtually unenforceable in my opinion."
Of the amendments to the Act, Prof Mak said, "The amendment to Section 199 is important because it had (previously) set too high a bar. For example, if a company falsely discloses that it has an internal audit function but does not have one, it would be difficult to prove that such a clearly false disclosure would have an impact on price or investment decisions.
"With the amendment, companies, directors and officers will have to be much more careful about making patently false or misleading statements, including those in their corporate governance reports."
Lawyer Nicholas Narayanan, who was involved in the Airocean case, told The Business Times: "The current amendments to Section 199 appear to have dispensed with the market enforcers' burden of proving under the current law that the false or misleading statement had the likely effect of a significant change in the price or value of the securities in question. These amendments, when in force, will have a major impact on market enforcement actions moving forward."
A statutory definition has been introduced of "persons who commonly invest" to better reflect market participants who are accustomed to or likely to invest in the particular product in question.
This term will be a reference point in determining liability for insider trading - it will help to assess whether a particular piece of information is generally available and whether it is likely to have a material price impact by influencing the behaviour of common investors.
This change came about because of the case that the MAS took against Kevin Lew, a former executive of WBL Corporation, for suspected insider trading. The Court of Appeal ruled in 2012 that "persons who commonly invest" in securities were the "reasonable investors" who possessed general professional knowledge about when to buy or sell securities.
However, its definition of "general professional knowledge" was of a very high standard and not reflective of the average investor in the market, the MAS said. The Court of Appeal had also excluded the daily retail investors and the expert investors who specialise in the research of investing in securities.
The new definition will enable the MAS to pursue insider trading cases without having to meet the unrealistically high standard for "persons who commonly invest". It would also allow the courts to take into account the reality that there can be different classes of "persons who commonly invest", each with a different level of knowledge and expertise.