SECURITIES INDUSTRY (AMENDMENT) BILL

Order for Second Reading read.

The Deputy Prime Minister (BG Lee Hsien Loong): Mr Speaker, Sir, I beg to move, "That the Bill be now read a Second time."

Over the last two years, we have taken a series of measures to liberalise and allow freer play in the financial sector. Our aim is to create vibrant financial markets that fuel economic growth. This requires a regulatory framework that is sound, strong and in line with best practices. Financial markets work freely only with an appropriate set of ground rules operating in the background which everyone knows and plays by. Regulators and enforcement agencies must be able to promptly detect and deal with actions that harm investors. If investors lose confidence in the integrity of our securities markets, we will enter a vicious cycle. Stock valuations will be poor because there is little secondary activity. Good companies will shun listings on the market, while doubtful ones embrace the opportunity.

Rules therefore do matter. The two principal pieces of legislation governing trading on our securities markets are the Securities Industry Act and the Futures Trading Act. While the latter was substantially amended in 1995, the former has not been amended since 1986, when it was enacted. For example, our insider trading provisions, which are found only in the Securities Industry Act, were drawn from 1980 Australian legislation. Australia's practice has subsequently evolved, and their legislation was amended in 1991, but we have not yet brought our legislation up to date.

MAS has examined the provisions governing insider trading in Australia, as well as the laws in other countries with more developed markets. We have concluded that the most pressing gaps are in the lack of civil remedies for insider trading. These gaps will be remedied by this amendment.

Besides insider trading, the other main amendment in this Bill is to the rules governing the provision of assistance to foreign regulators. We propose to enact specific provisions in both the Securities Industry Act and the Futures Trading Act to extend MAS' powers in this regard.

Civil remedy for insider trading

Presently, under the Securities Industry Act, insider trading is a criminal offence. In addition, an investor can obtain civil compensation from a person convicted of insider trading. The civil action has to be brought within 2 years of the date of the offence, and depends on a criminal conviction being secured within that period. However, securing such a criminal conviction is difficult because the elements of the offence have to be proved "beyond reasonable doubt". Many developed financial jurisdictions have therefore complemented their criminal regime for insider trading with autonomous civil actions, where the burden of proof is only on the "balance of probabilities".

The Bill proposes to introduce two such civil actions, both with limitation periods of 6 years, instead of the 2 years previously. First, the proposed section 104A empowers the regulator, MAS, to bring an action to obtain a civil penalty. Where MAS succeeds in such an action (under sections 103(1), (2), (3) or (6)), the Court may impose a penalty not exceeding three times the amount of profit gained, or loss avoided, by the contravening person, subject to a minimum sum of $50,000 for an individual, and $100,000 for a body corporate. Where the insider procures another person to trade, or communicates the inside information to another person for that purpose, and thus does not himself make a profit or avoid a loss, the civil penalty will range from $50,000 to $250,000.

This penalty is in effect a fine, but the regulator only needs to meet the civil burden of proof, instead of the standard of proof of a criminal conviction. While new to our jurisprudence, there are overseas precedents. Both the United States Securities and Exchange Commission and Hong Kong's Securities and Futures Commission have successfully utilised it for some time. The United Kingdom has also proposed a civil penalty regime for market abuse, including insider trading, in their Financial Services and Markets Bill 1999.

The proposed section 104C also creates an independent civil action, enforceable by "contemporaneous" investors, to obtain damages from the contravening person. The compensation will be limited to the gains made or losses avoided by the contravening person. The phrase "contemporaneous" covers investors trading at or about the same time as the contravening person, whether or not their orders were in fact matched with the contravening person. This is because they would have been adversely affected, even if their particular orders were not matched. The price at which they traded their shares would have been quite different had the information been in the marketplace.

Under section 104E, investors can submit their claims on the coat-tail of a criminal conviction or successful civil penalty action by MAS, and will not need to re-prove all over again the elements of the contravention. They have three months from the date of the conviction or award of the civil penalty is made final to do so.

This three-pronged regime is quite similar to the existing framework in the United States. We believe it is the best approach for combating insider trading. Investors bear responsibility for their own investment decisions, but the playing field must be kept level. Strong capital markets will attract investors from abroad, boost stock valuations on the Stock Exchange, and in turn, draw dynamic and well-managed companies to list on the Exchange. More financial intermediaries will follow their customers to Singapore and a creation of such a virtuous circle begins with the quality and enforcement of our financial laws.

Assistance to foreign regulators

We have always made arrangements for mutual cooperation between financial regulators. Through Memoranda of Understanding, we have had arrangements with other regulators on a national basis. But in the past, most regulatory issues were national issues. Trans-border cases involving multiple jurisdictions were the exception. But now with the globalisation of financial markets, financial crimes too have gone international. Money laundering and complex scams straddle multiple jurisdictions, taking advantage of the gaps in oversight and co-operation between national authorities. This has called for a regulatory rethink. Individual regulators cannot go it alone, and hope to be successful in maintaining fair, efficient and transparent markets.

Over the last few years, the Singapore authorities have received more requests for assistance from foreign regulators. While we have co-operated with them as fully as we could, within the constraints of our law, on a few occasions, the legal restrictions have prevented us from providing the information they sought, even though their requests appeared legitimate.

We have also been participating in international bodies like the Financial Action Task Force (FATF). The FATF is concerned with international co-operation to combat money laundering. FATF reviews have highlighted weaknesses in our legislation, and brought home to us the necessity of cooperating more closely with other financial centres. We have to maintain our good reputation as a centre which does not shelter illegal gains. Singapore is not the place for the laundering of drug money or dodging regulatory oversight.

The formation of cross-border exchange alliance is another factor. The SIMEX, now called the Singapore Exchange Derivatives Trading, has had a mutual offset arrangement with the Chicago Mercantile Exchange (CME) for 15 years. Now this arrangement is being expanded and strengthened to become the GLOBEX Alliance, involving more exchanges in other countries. Before foreign regulators give their approval to such exchange alliances, they invariably want MAS to enter into information sharing arrangements with them. In the case of the SIMEX-CME link-up, MAS has had a long-standing arrangement for mutual assistance with the US Commodity Futures Trading Commission. Now with the GLOBEX Alliance, which includes the SBF-Paris Bourse, MAS had recently entered into MOUs on mutual assistance with the French regulators, the COB and the CMF.

This Bill will strengthen these relationships with other regulators, and further facilitate our cooperation with them, particularly regulators in developed economies like the United States, United Kingdom and Hong Kong.

The Bill proposes specific provisions on the nature of assistance, the conditions for assistance and the safeguards that apply. Upon receiving a request, MAS will examine if the pre-conditions necessary for it to render assistance have been fufilled. For example, MAS must be satisfied that a request relates to a matter of sufficient gravity, and that the information requested cannot reasonably be obtained by any other means. The granting of assistance also cannot be contrary to the public interest or the interest of the investing public. If the conditions are met, MAS will consider further factors such as reciprocity, and whether the act committed overseas would be an offence under our relevant legislation had it been committed in Singapore, before deciding whether to grant assistance.

The types of assistance MAS may provide include transmitting information in its possession, and requiring a person to furnish the requisite information to MAS for that purpose. MAS can also require a person to furnish information directly to the foreign regulator. Persons who comply with MAS' requirements in this regard receive immunity where they would otherwise have been in breach of obligations such as client confidentiality.

In parallel with this, we are also amending other laws to improve cooperation with foreign regulators. In September 1999, we amended the Drug Trafficking (Confiscation of Benefits) Act to lower the threshold requirement for mutual legal assistance, and to expand the scope of offences covered beyond drug trafficking to a range of established serious crimes. The Minister of State for Law has just introduced for First Reading the Mutual Assistance in Criminal Matters Bill which, when passed, will enable us to conclude mutual legal assistance treaties with other governments.

The new provisions therefore provide adequate safeguards to prevent foreign authorities from fishing for information, and protect the legitimate needs of investors for confidentiality of their financial transactions and arrangements. Our provisions will be similar to those in other established financial centres, including Switzerland and Hong Kong. Investors need not worry that the provisions will undermine the protection they have hitherto enjoyed. On the contrary, enhanced cross-border cooperation among securities regulators should increase their confidence in the soundness and integrity of Singapore's capital markets.

Enhancing Regulatory Efficiency

Besides these two main amendments, the Bill proposes several changes to fine-tune provisions in the Securities Industry Act. These include empowering the MAS to issue written notices, which are deemed not to be subsidiary legislation, to licensees under the Act (this is under new section 33A); and the rationalisation of the trust account rules for dealers and investment advisers (sections 58 and 65 respectively).

The Bill also proposes to amend the fidelity fund provisions in the Act to cover defalcation or breach of trust by remisiers, as well as the financial default of members of the Exchange licensed by the MAS. Finally, the Bill strengthens the criminal sanctions for market misconduct such as price manipulation and insider trading. It proposes to raise the maximum stipulated fines in section 104 of the Act for the market offences created by Part IX from $50,000 to $250,000 for an individual, and from $100,000 to $500,000 for a body corporate.

Sir, I beg to move.

Question proposed.

Mrs Lim Hwee Hua (Marine Parade): Sir, amongst other things, the amendments, which I support, seek to tighten the rules on insider trading and to offer those aggrieved by insider trading a less onerous route towards seeking redress. I would like to begin by focusing on some of the practical issues of the related amendments.

Firstly, the civil action alternative is welcomed. However, it may still prove to be onerous for retail investors, especially for those who have already lost large sums of money to insider trading. If they are fortunate where, following action by the Authority, there is conviction or imposition of a civil penalty, they can then leverage their claims accordingly. However, if the Authority has not initiated any action, as provided for under the new section 104A, these retail investors themselves would have to mount civil suits on their own. While the level of proof in a civil suit is theoretically lower, retail investors continue to have limited access to necessary documents or information, especially if it is cross-border in nature. Would the Deputy Prime Minister consider making available a simpler process for retail investors to seek redress, whether it be opportunity to persuade the Authority to commence action or through the appointment of an ombudsman or a civil body, such as an investors' association?

Stock options

Sir, in relation to some of the inherent difficulties of initiating civil action by individuals, I would like to touch on an emerging trend, that of stock options for employees, which may add to the complexity of defining insider trading. Employee stock option schemes have a relatively short history in Singapore. There are numerous justifications for encouraging even more companies to consider this as part of the overall compensation structure, particularly as we are positioning as a hub of intellectual capital. Sir, I laud the efforts to promote such a scheme, as I believe it can indeed be an effective way of rewarding and retaining contributors to corporate innovation and energy. As the scheme takes off, it would soon be commonplace to have a larger pool of interested parties within an organisation. And, therefore, the potential for insider trading may rise in tandem. Whilst this may not be addressed specifically by any clause in the Bill, I would like to urge the relevant authorities, as a preventive measure, to help raise awareness of such possibilities of insider trading amongst the increasing pool of equity partners.

E-trading

Finally, Sir, on electronic trading, I would like to seek the Deputy Prime Minister's clarification. Fuelled by technology and further liberalisation, electronic trading is likely to increase by leaps and bounds, with many brokers already offering a variety of services. Would the amendments apply equally to those who have transacted electronically, be they the claimants or insider traders? Specifically, would the factors for consideration under the new section 104C encompass trades carried out through electronic means?

BG Lee Hsien Loong: Mr Speaker, Sir, Mrs Lim has raised three questions. First, the difficulty for retail investors to initiate civil actions. The short answer is that indeed it is difficult for retail investors to bring independent civil action. It is always the case that insiders have more information than retail investors, and if the insider trading does not come to light, the retail investor would not even know that he has been taken advantage of. Even if he suspects something, the sheer complexity of establishing the facts of an insider trade and the need to prove all the elements of the contravention requires financial and legal expertise, both of which are very costly. So, we expect most investors to wait for successful criminal prosecution or civil penalty action by MAS before filing their claims under the proposed section 104E. This is already a big improvement from the present position, because presently you can only seek compensation after a prior criminal conviction and, furthermore, you have to do it within two years of the offence. So, if there is no criminal conviction or if the criminal conviction takes more than two years, then nobody can file and claim civil damages. Now you can claim civil damages within six years and, furthermore, you can claim it on the coat-tails not just of a criminal conviction, but of the civil penalties as a result of MAS' action.

Also, we now allow contemporaneous investors to tag their claim to such criminal or civil proceedings. So you do not have to trade opposite the contravening trader. You do not have to sell directly to him. Even if you had sold to somebody else at about the same time when he was trading and taking advantage of the market, you can still have a case against him. So that is another significant step forward.

If the Attorney-General's Chambers and the MAS decide not to pursue the matter, then, of course, it is up to investors to chart their own course. But that is the case in every contentious court matter.

There are some jurisdictions which do not even allow an independent civil claim by investors. In other words, investors do not have a cause of action against an insider. Instead, only the state can take criminal action. That is the current position in the UK.

In Australia and Hong Kong, investors can bring civil action for damages, but they have to show that their order was matched with the insider before they have a case. So if your order was not matched with the insider but matched with somebody else at about the same time, you have no case. Whether your order was matched with the insider or with somebody else a few seconds later, it is really a matter of chance. You do not have control over it. But you were affected whether or not the matching took place. So we have decided to go for this more encompassing approach of giving contemporaneous investors a cause to sue, and that is something which the US already has.

The Americans do have widespread securities class action litigation. That means a group of people get together and sue on behalf of all the investors. The danger of this is that it could lead to frivolous law suits that may tie up innocent insiders and their companies costly litigation. So our independent civil action by contemporaneous investors with the ability to tag on their claims goes, I think, as far as is wise and acceptable in our jurisprudence. Let us gain some experience with this, and if we need to take further steps later, we will review the position after a few years.

Mrs Lim's second question was on stock options and whether this increases the pool and level of insider trading. Yes, the use of stock options will increase the number of employees holding options in their own companies, and all these employees, under section 103 of the Act, are considered to be officers of their company and therefore insiders. Therefore, they are prohibited from dealing while in possession of price sensitive information that is not generally available. This means that it includes exercising the stock options or possibly later on selling the underlying shares.

But I do not know whether stock options will necessarily raise the level of insider trading. Because if the employee has inside information, which he does, and he wants to take advantage of it, even without the benefit of stock options, he could have just gone on to the market to buy and sell the shares himself. And even if he did not do so personally, he could have procured somebody else to do so and communicated the inside information to that person for that purpose. So companies should make a timely disclosure of material information, to put it in the public domain as quickly as possible. And in cases where the information has to remain confidential for legitimate reasons, they must set up proper security procedures to limit employees access to it.

Also, if somebody is tempted to do an insider trade by his stock options, we have a good chance of detecting it. Because if an employee is dealing for himself, it is easier to detect than if somebody else was transacting whom we did not know was connected with the company. Not only will market surveillance by the Singapore Exchange pick up unusual trades to be matched against names of employees of the company, but the issuer company itself keeps record of when their employees exercise their stock options. So it is a cat and mouse game. There is never a final solution, but the cat is trying to get smarter all the time, and I think we will stay ahead.

Mrs Lim's third and last question was on e-trading, and whether the amendments apply equally to electronically traded securities. The answer is yes. The legislation is technology-neutral. This is in line with one of the principles adopted by the International Organisation of Securities Commissions, that the fundamental principles of securities regulation do not change based on the medium. Of course, the Internet does show up difficult issues, but not totally novel ones. Technology will heighten the need for fine-tuning the Act, as we have done, for example, with the definitions of stock market and investment adviser. But where insider trading is concerned, the problems posed by Internet trading are more of detection and enforcement, and they have been with us from the old days of physical delivery of share scrips and rolling settlements. Indeed, it may be that as the Internet relies on electronic systems in communications, if you design your electronic systems properly, then you will create an electronic audit trail that may enhance the monitoring of illicit transactions. So I believe that the Exchange, MAS and the Commercial Affairs Division will be able to ensure that insider trading does not grow with the projected increase in on-line securities transactions.

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. - [BG Lee Hsien Loong].

Bill considered in Committee.

[Mr Speaker in the Chair]

Clause 1 -

The Chairman: The citation year "1999" will be changed to "2000".

Clause 1 ordered to stand part of the Bill.

Clauses 2 to 26 inclusive ordered to stand part of the Bill.

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