SECURITIES INDUSTRY BILL

Debate resumed. 3.50 pm

Mr Heng Chiang Meng (Jalan Kayu): Mr Speaker, Sir, I rise in support of the Bill in the name of the Hon. Minister for Finance. However, I also support the move to refer this Bill to a Select Committee; not that the brokers or the securities industry participants are against this Bill or have questions against this Bill but more that this Bill actually affects many more people other than the stockbroking industry. It affects all those who may at some time or other purchase securities, whether for their own investment or on behalf of their parents or friends. It also affects those who may not be involved in the securities market but simply may be officers or financial controllers in companies where their securities may be listed in the stock market. Hence, I think the effect will be on a large proportion of our population and, as such, I do support the move to refer this Bill to a Select Committee.

Sir, our present situation, I reckon, will be quite similar to that of the US during the late 20s and early 30s. As such, Sir, if you will bear with me, I would like to recollect briefly that part of the Great Depression years which is relevant to the business this afternoon. The Wall Street crash, as everybody knows, occurred in 1929. However, during the period of several years before that crash, the prices of stocks and shares on the New York Stock Exchange were rising so very rapidly that they bore little resemblance or relation to the earning power or the underlying value of the corporations which issued these securities. What was not very well known then was that during this period there was very little control over the activities of the stock market. Speculation and manipulation by all and sundry, including banks, investment houses and other financial institutions, were rampant.

The Wall Street crash did not cause the Great Depression of 1930 although it precipitated the depression. In other words, Sir, the depression occurred because the US then had economic structural difficulties, high prices, over-capacity and other economic ills. The Wall Street crash was simply the first visible sign that things were wrong. However, Sir, during that emotionally charged period it was the easiest thing in the world to point accusing fingers at Wall Street and the bankers as the cause of the depression. What followed then was perhaps inevitable - a series of legislation protecting investors, curbing the financial institutions and other measures were passed. The major ones were the Glass-Steagall Act of 1933 and the "Truth in Securities" Act of 1933, the Banking Act of 1935. The Securities and Exchange Commission was established in 1934 and the purpose was to police the stock market. For those of you who are interested, the New York Stock Exchange also objected very much to the formation of the SEC. However, the objections stopped when a former Chairman of the New York Stock Exchange was jailed for larceny.

Sir, I regret taking a little while to go briefly into this little part of American financial history. However I think our present situation parallels quite closely to the situation then. What is more interesting perhaps is that the US financial and securities market did prosper since then but it was not because of the Acts. From the end of the depression years to the mid-70s, Sir, USA was the economic power-house of the world. Hence, despite the restrictive nature of the laws, US banks and financial institutions were able to prosper. I say "restrictive" because the signs were in the early 70s which continued on to the 80s that when the rest of the world caught up, the US found that its laws did allow their banks and other financial institutions to compete effectively with financial institutions from other countries in the world. Hence, we have the great Act, what they call "de-regulation", which mainly, Sir, is to remove the restrictive laws that were enacted during the aftermath of the great Wall Street crash.

Sir, I thus urge the Minister for Finance that we do not fall into the same mistake. Given the stock market difficulties and the Pan-Electric fiasco right now, it is very easy to over-react. The USA had and have the economic strength to overcome the handicaps imposed on their financial market. Unfortunately, Sir, we do not have. The financial market today moves rapidly, more so because of instantaneous communication. They must be given the flexibility and the liberty in order for them to react to changing conditions. The Bill, as is presently drafted, is a good one. Overall, the powers of the Authority are more clearly defined thus making it easier for interpretation. The clarification of the Bill over the 1973 Act makes policing of the stock market easier. However, the Bill is definitely a more restrictive Bill. This in itself may not be a bad thing because what is needed right now most urgently is perhaps the restoration of confidence. If confidence could be restored by tighter controls, so much the better for the Bill.

The Bill, however, gives almost complete power to the Monetary Authority of Singapore. Besides many sections giving various types of powers, a wide interpretation of clause 118 gives MAS the power to enact any regulation by administrative means. Penalties provided under such administrative regulations even carry jail sentences. In fact, if one looks at this clause, the rest of the 117 clauses are unnecessary. Clause 118 alone will be sufficient. May I ask whether this is necessary?

What I wish to impress upon the Minister is that the future of the securities industry lies not in the legislation before us. Instead, Sir, it lies in the hands of MAS who will implement the legislation. The MAS could rule the industry with an iron fist in a velvet glove or it could rule with an iron hammer in its iron fist. How the industry will prosper depends which method it will take. It could supervise by reducing the uncertainty in the market, ie, reducing uncertainty due to regulations to a minimum or it could supervise by creating much uncertainty by telling practitioners to do something but .....; or not to do something but .....

Sir, I now come to certain parts of the Bill which I hope the Minister will clarify. Clause 5 and clause 10 of the Bill empower the MAS to seek and to obtain information from, I would say, practically anybody connected with the securities industry. But if we look at clause 5, sub-clause 12, (page 17) and clause 10, sub-clause 7, (page 21) it says that if a person making a statement to MAS claims, before making that statement, that "the statement might tend to incriminate him, evidence of that statement is not admissible in evidence against him in criminal proceedings other than proceedings under this section." Therefore, it implies that any person making a statement to the MAS must know the existence or know his rights under this Act. This means that if he tells the MAS officer that, "This statement may incriminate me", then that statement is not admissible in a court of law for criminal proceedings. Whereas if he forgets to tell, then the statement becomes admissible in court. Sir, I think such a law is not fair to persons who may have no knowledge of their rights under the law, and therefore I propose that either such statements are totally inadmissible in criminal proceedings, with or without prior claim; or prior to making a statement it must be the obligation of the MAS to inform the person of his or her right under these two sections.

I would now like to come to clause 39 on page 41 on the appeal to the Minister or the High Court regarding licences. In this I wish to add that I support the Member for Whampoa because, Sir, if you look at clause 39, you will see that it is appeal to the High Court for revocation of licence and appeal to the Minister for non-renewal of licence. It, therefore, must imply that a revocation of licence is more serious than a non-renewal of licence. Yet, Sir, a licence is only issued for a year and thus effective revocation can come about through time, which means that officials in the MAS can simply wait for the passage of time and not revoke the licence but just wait for the passage of time so that the licence may not be renewed. In this case, appeal to the High Court becomes meaningless.

Sir, since this revocation as well as non-renewal of licence concerns existing practitioners, ie, means people who are already in the business, could not non-renewal appeal be also heard by the High Court instead of by the Minister where his decision is final?

Finally, Sir, I would like to come to Part IX, starting from page 74, and this deals with false trading, market rigging, share manipulations, insider trading, and etc. If we look at clause 105 in this Part, here it deals with the right of an aggrieved party to seek compensation from a person convicted of an offence under this Part. Sir, this is a good move as often aggrieved parties have nowhere to turn to. However, I question the need to limit a potential action to two years after the date of completion of a transaction. Does this mean that an aggrieved party could not wait until the guilty party is convicted as by then two years may have passed? Worse, he may not even know that he is an aggrieved party, except or until the authority brings a charge against a guilty party. By then, we may not know, more than two years may also have passed.

I would like to propose that this be amended to two years after conviction instead of two years after the date of completion of a transaction. 4.04 pm

Mr Chiam See Tong (Potong Pasir): Mr Speaker, Sir, it has been mentioned by Members of the House that there are provisions to appeal to the High Court, that is, in respect of not obeying rules and regulations and also in regard to the revocation or granting of licence to a dealer. But there is no provision, Sir, in respect of approval by the Minister on an applicant as a stock exchange member. It would appear that the Minister's decision is final and there is also no provision in the Act whereby the Minister needs to give reasons for his not approving their application as a stock exchange. So perhaps the Minister could consider putting a provision whereby reasons at least should be given, otherwise members of the public will again point an accusing finger at the high-handed manner of the Government.

This Bill was presented to members of the Stock Exchange and they have protested, as we have been informed, the stringent rules against them. Perhaps the Minister could point out to this House what in particular are the sections which they have objected to so vehemently. Now apparently they are against self-regulation. On the one hand we have the principle that the SES should be self-regulated, but on the other hand I think it is an important principle also to protect the interests of investors, in particular small investors. It is true we cannot stop speculation in the Stock Exchange and it has also been said that more professionals indulge in trading in the stock exchange but this may not be true. Look at Hong Kong. What has happened there? Trading in the stock exchange has become so widespread that it has become part of the culture there, not only professionals indulge in it, workers and even down to the very housemaids are also involved in trading at the stock exchange. We hope that Singapore one day will not take the footsteps of Hong Kong and we see the whole population glued to the stock market prices. I think that is bad for work ethics. If we really want to progress, I think we should not indulge in speculative activities, but rather in good, strong, productive activities. I think I am not exaggerating that because I think the Member for Whampoa has already pointed out that our stock market is not a place for investments but in fact it is a place for gambling. It is like a casino. I hope steps can be taken to make our stock market a place not for gambling but a place more for investments, especially on long-term investments, rather than putting your money hoping to get a quick return the next day.

I would welcome any check by the MAS on the stockbrokers or people engaged in the stock market who would flout the law. I think the MAS has to be vigilant and to be on guard because greed will always be there. And we have seen in Singapore, and even in other parts of the world, I think people will always try to evade or circumvent the law because of greed and at the stock market we are not talking of small amounts but sometimes, as we have seen in the Pan-Electric debacle, millions of dollars are involved.

Mr Speaker, Sir, I think, on balance, between self-regulation and the interests of the investors, I would urge the Minister to make the MAS a watchdog for the interests of especially small investors. Much obliged.

Mr S. Chandra Das (Chong Boon): Mr Speaker, Sir, whilst I rise to support the Securities Industry Bill, I would also support the call made by hon. Members for Whampoa, Alexandra and Jalan Kayu that this Bill be referred to a Select Committee.

Sir, I sympathize with the Hon. Minister for Finance that time is not on his side as a result of the Pan-Electric debacle, I think it is important that a number of other quar- ters need to be consulted before this House passes this as law. I would seriously urge the Minister for Finance to consider referring this Bill to a Select Committee.

Sir, next I want to turn to the call I made during the debate on the Budget Statement. That is the opening up of the stock market. Sir, allowing the four banks to take up seats in the Stock Exchange, is a welcome move. But what has really happened is that no new business or no new activity has been created. In fact, they have taken up the businesses which were done by stockbroking firms. Some of the stockbroling firms will be in receivership shortly. I suggested to the Minister that it is opportune to open up or invite international stockbrokers into the Stock Exchange of Singapore. This can be limited to two or three large firms. The Minister in his reply suggested that some of them could take up equity participation up to 49%, giving the local stockbrokers 51%. Sir, if you really want our Stock Exchange to have an international status, I think it is important to have international stockbrokers having total or 100%-owned seats on the Exchange. This not only will give us the added image of an international Stock Exchange but I believe, Sir, it will also add on and bring in additional professionalism which is presently lacking.

Dr Hu Tsu Tau: Mr Speaker, Sir, I will deal firstly with the several requests for referring the Bill to a Select Committee. Although I understand the wish expressed by Members, in my view, it is unnecessary. We need the Bill very urgently because of the impending release of CPF monies for use to purchase shares. The reason why I suggest that it is not really necessary is that, if anything, the Bill is probably over-protective of the investor rather than of the stockbroker. So any objections which might arise would probably be from the practitioners or stockbroking community because certain regulations may be seen to be restrictive on their activities. But as far as the investor is concerned, I am convinced that the protection afforded by the new Bill would be more than adequate.

The Bill, as I mentioned earlier, was drafted on the basis of legislation as prac- tised in Australia and the United States. We have tried to extract the most relevant provisions and those which are most applicable to our markets, with adequate safeguards to ensure that the market is not strangled because of over-regulation. For this reason, I would strongly recommend that the Bill be approved as it stands. However, I recognize that in its application, the MAS could be seen to be too restrictive and this could result in a "ham-handed" application of rules which might inhibit the development of a securities market. If certain features of the Bill turn out in practice to be overly restrictive, I would be quite happy to introduce amendments. I would prefer the Bill to be approved as it stands, even though it may be over-restrictive in controlling the practitioners. As it is in the interest of investor. If particular provisions turn out to be over-restrictive, I would be quite prepared to consider amendments. And indeed we cannot really anticipate problems until we have working experience. One could argue and discuss at length in Select Committee and end up with no more than what we have now. On the one hand we could ask for introduction of more stringent regulations, which I do not think anybody really wants. In looking at the provisions of the Bill. Sir, at most, one could probably end up asking for softening of some of the regulations. Against the background of what has already happened, I think that it would be inadvisable. It is better in any case to approve the Bill as it stands and, if problems arise in specific areas, we could consider appropriate amendments.

Turning now to the other questions raised by Members. The Member for Whampoa has said that a one year licence is restrictive. Finance companies were also subject to annual licensing and thiw was also the case in many areas of the Banking Act. Licence renewal is routine for companies which do not have any problems. So I do not believe that it is unnecessarily restrictive in application.

I would like to point out that appeal to the High Court is provided for revocation of licences but not for the non-renewal of licences, although I take the point of the Member for Jalan Kayu that the passage of time would cause this to happen. I would like to point out again that the issuance of licence is not a right. Under the Banking Act, the issuance of banking licence is reviewed periodically and the Minister has full discretion to say "No" if he considers it in the public interest to do so. And the same situation would apply in the case of the securities industry. I can assure Members that it is not the intention of the Minister to be arbitrary in such decisions because it would serve no purpose. And the main reason for introducing the licensing provision is to give investors full protection.

The Member for Whampoa has also said that the penalties appear small relative to the millions of dollars which might be involved. I have the opinion of the Attorney-General's Chambers that the penalties are adequate for the size of crimes envisaged. In any case, where a stock manipulator engages in malpractices, often these infringe on areas involving criminal breach of trust in which case the penalties are far more severe under the existing laws.

The Member for Alexandra has commented that he was disturbed by the fact that objections from stockbrokers was allowed to delay the introduction of the Bill. I think another Member also suggested this. I did mention earlier that it is MAS's practice to allow full discussion with all parties involved when proposed changes in legislation are considered. The normal procedure is to circulate draft legislation to affected parties for their comments. This is in lieu of Select Committee procedure because it is more practical to do this before the Bill is finalized rather than introduce in Select Committee after the Bill is presented. Usually this process of consultation takes many months. We had similar experiences when we introduced Bills involving the Banking Act, the Finance Companies Act and other Acts which were reviewed by the MAS. The procedure could take anywhere between three and six months so that all parties concerned are able to study the Bills in depth and to raise objections. If the MAS considers that objections are valid, amendments will be introduced. Stock- brokers, even though some have turned out to be imprudent, like bankers or finance company people, have every right to protest against regulations which they believe would affect their livelihood.

While we are on this subject, I will discuss the question raised by the Member for Potong Pasir on what were the objections raised by the stockbrokers when the draft Bill was introduced. The main objections related to the need to make disclosures to the MAS, for right of the MAS to appoint members to the Stock Exchange Committee, the right of MAS to amend the rules of the Stock Exchange and power of the MAS to issue directives. All these were seen to undermine the concept of self-regulation and would take away the autonomy of the Exchange to make its own rules, a right which was jealously guarded.

One point which they raised which is still valid is that if we introduced more restrictive legislation, not in parallel with the legislation in Kuala Lumpur, a lot of their business would be lost across the Causeway.

The Member for Alexandra also expressed concern that the MAS may not have sufficient experienced officers to administer the Act. The intention is to set up a new unit within MAS, specifically to administer the Act and, staffed with people experienced in the securities industry. It is well recognized that banking is a distinctly different business from the securities industry.

In this connection, I would like to correct the impression of the Member for Alexandra that the MAS has been high-handed in administering the Banking Act. We do not believe so, although some bankers would like to say so. Where regulations are not observed or flouted, I think the MAS has no choice except to take action. And we hope that the same procedure would apply in the application of the Securities Industry Act in view of our experiences.

I have often heard that we have been high-handed in some areas. But in the normal course of business, I meet many senior foreign bankers who pass through Singapore and pay me courtesy visits. And I can honestly say that I have yet to meet a really senior banker who has made these allegations. Most of them were in fact quite pleased that MAS is so strict because they feel more comfortable operating in this environment. You may or may not believe me but this is the truth.

On the question as to why the Big Four banks which have started stockbroking affiliates are allowed to solicit business by letters, I am not aware of this but I will look into it.

The Member for Whampoa wants a Select Committee to consider the Bill. I think it is unnecessary and I would prefer to see it working as quickly as possible. If necessary, amenements will be made.

The Member also said that the terms may be too tough and that there is no appeal to the courts. I have said earlier that there is appeal to the courts for the revocation of licences.

On the issue of the possible of manipulation of contract notes, the intention is to have all contract notes time-stamped to eliminate manipulation.

On the problem of common regulations in Singapore and Kuala Lumpur, this is indeed a problem. But in our discussions with the Exchange on the other side, we understand that they are in the process of introducing amendments to their existing laws. They have asked for a copy of our proposed legislation. Hopefully, with time, we would end up with similar legislation which would be the ideal solution rather than a separation of the Exchanges, which is bound to depress business on both sides. However, this is something which I think we will have to work at.

On the question as to why Singapore shares command such high price earning multiples, is it because there is no capital gains tax? I think the primary reason is that, like Japan, this region is seen as a very high growth area. Where you have national growth rates of around 10% per year, you would expect that industries would also grow at such rates. The prospect of capital gain overrides dividend yield considerations. A similar situation exists in Japan where high price earning multiples are also common place. In fact, for the more glamorous companies and key ratios in the region of 20 or 30 are not uncommon. In the case of Singapore, despite the depressed state of our market, average price earning multiples are now still in the region of 16 or 17, against a booming New York Stock Exchange where stock multiples have risen from around 5 or 6 to around 14 or 15. So we are converging. This suggests that despite the present depressed state of the market, the confidence of investors in the Singapore market still appears remarkably high.

The Member for Radin Mas has asked whether the provisions are comprehensive. I think they are because they are based on what we think are the best features of the Australian and US laws, without some of the more restrictive aspects.

He has also said that the penalties for insider trading seem to be less tough than under previous legislation. The Attorney-General does not think so and he is the one who prescribes the penalties. Seven years for insider trading, I think it is quite a stiff sentence. And $50,000 fine, of course, is an option which the judge can use.

Mention was also made on whether there would be enough officers to administer the law. I can confirm that specialist officers will be recruited for this purpose.

The question was raised on whether the information supplied by electronic means on computer terminals could be caught under the section dealing with the disseminating of information. Information of this sort is not caught under the new laws because such information is of a general nature.

I have covered the point about relations with Kuala Lumpur. If the rules are not similar in Kuala Lumpur, then we could have possible loopholes. The best advice one could give is that investors in Singapore should use Singapore investment advisers.

The Member for Potong Pasir has said that there is no provision for appeal beyond the Minister in the licensing of stockbrokers. The answer is that there is no God-given right for anyone to have a licence, just as we do not issue licences as of right to banks. And the Minister retains the right to say yes or no depending on circumstances.

The Member for Jalan Kayu has a very long list of questions, some of which I have already covered. I was not quite clear about the story of the 1929 crash but it was interesting.

I take the point that the revocation of licences would in fact automatically come about if licences were not renewed. But I have said that this is not the intention. Revocation is seen as a much more serious matter because it can take place any time during the year and it would only be invoked for exceptional offences. Routine renewal of licences is quite a different matter.

On the question as to why there is a limitation of two years on claims by clients for compensation, I would like to point out that claims for compensation are a civil matter as no criminal offence is involved.

The Member for Chong Boon has also asked for a Select Committee. I would not go through this again. He wants to know why the SES has not opened its doors to 100% foreign-owned stockbrokers. The answer to that is that we will eventually allow this. But for the moment, because of the relative weakness of our stockbroking companies in Singapore, it is not opportune to open the door fully to foreign stockbroking companies because they are much more powerful and experienced. And if we let them in at this stage without restriction, they will swamp our stock exchange members. I think we should give our stockbrokers some time to rebuild their strength but eventually they will have to meet competition.

Mr Tan Soo Khoon: Mr Speaker, Sir, the Minister has not answered this part of my question. Would the Minister make provisions to protect the interest of the remisiers? In other words, can the deposits which the remisiers are required to place with their firms be put on a trust account?

Dr Hu Tsu Tau: Mr Speaker, Sir, this is an issue which is currently under discussion to see how remisiers' interests can be better protected than they are at present.

Mr Chng Hee Kok: On the penalties, the point I made earlier was that in the 1973 Act it was both a jail term and a fine. In the Futures Trading Bill, it is also a jail term or a fine or both. In other words, you have both. In the present case, clause 104 of the present Bill does not allow for both a fine and imprisonment. In a case where the offence might be a border-line case between a civil case and a criminal case, the court will be given the flexibility of making it a registrable offence and at the same time impose a fine. In this instance you can't because the court does not have the flexibility. It is only a jail term or a fine. So I think that point has been overlooked by the Attorney-General.

Dr Hu Tsu Tau: Mr Speaker, Sir, I am not a lawyer or a judge. So I have to take the advice from the Attorney-General who considers that the sentence is adequate for the purpose.

Mr Heng Chiang Meng: Mr Speaker, Sir, regarding clauses 5 and 10, where a person makes a statement, and before making the statement he does not disclose that the statement may tend to incriminate him, then by virtue of the subsections, it appears that the statement can be used against him in court. So here it depends on the person. If he knows his rights under these two subsections, he can make the statement that the statement that he is going to make may incriminate him. If he does not know and without making that prior statement, then the statement can be admissible in a court of law in criminal proceedings against him. I think here, Sir, it is not fair on the person because it requires the person to be knowledgeable in law, or knowledgeable of his rights. I therefore think that it might be a good point for the authority to make it as a part of the procedures that they should inform anybody making a statement of their rights under these two subsections. Could the Minister please clarify?

Dr Hu Tsu Tau: Mr Speaker, Sir, I think the Member for Jalan Kayu has a point and we will ensure that the authority does ensure that this happens.

Question put, and agreed to.

Bill accordingly read a Second time and committed to a Committee of the whole House.

The House immediately resolved itself into a Committee on the Bill. - [Dr Hu Tsu Tau].

Bill considered in Committee; reported without amendment; read a Third time and passed.