Chapter 5 Compliance And Ethics In Securities PDF

CHAPTER 5 COMPLIANCE AND ETHICS IN SECURITIES By: NAR 2022  LEARNING OBJECTIVES At the end of the course, students should be able to: ❑ Discuss the Compliance and Ethics in Securities Industry in Malaysia. ❑ Differentiate Offences Dealing in Securities unde...

CHAPTER 5 COMPLIANCE AND ETHICS IN SECURITIES By: NAR 2022  LEARNING OBJECTIVES At the end of the course, students should be able to: ❑ Discuss the Compliance and Ethics in Securities Industry in Malaysia. ❑ Differentiate Offences Dealing in Securities under CMSA 2007. ❑ Explain the offences dealing in securities under rules of bursa securities. ❑ Apply the penalties and action taken for market misconduct.  CONTENT ❖ Offences Dealing in Securities under CMSA 2007: i. Short Selling ii. False trading and market rigging transaction iii. Stock market manipulations iv. False or misleading statements, etc. v. Fraudulently inducing persons to deal in securities vi. Insider Trading ❖ Offences Dealing in Securities under Rules of Bursa Securities ❖ Penalties for Market Misconduct ❖ Action taken for Market Misconduct  INTRODUCTION Market misconduct or security offences are referring to a type of serious white-collar crime in which a person or companies misrepresents information that investor use to make decisions. White-collar crime is a non-violent crime that is committed by someone for financial gain.  CMSA 2007 PART III CAPITAL MARKETS SERVICES Subdivision 2 – Securities 98. Short selling PART V MARKET MISCONDUCT AND OTHER PROHIBITED CONDUCT Subdivision 1 175. False trading and market rigging transaction 176. Stock market manipulations 177. False or misleading statements, etc. 178. Fraudulently inducing persons to deal in securities Subdivision 2 188. Insider Trading  1. SHORT SELLING Section 98(1) Subject to this section and any regulations that may be made, a person shall not sell securities unless, at the time when he sells them– (a) he has or, where he is selling as agent, his principal has; or (b) he believes on reasonable grounds that he has, or where he is selling as agent, his principal has, a presently exercisable and unconditional right to vest the securities in a purchaser of the securities. The sale of securities that is not owned by the seller at the day the arrangement for sale but intended to acquire before the delivery date. The seller that engages in short selling in relying on the market price of the securities dropping between the date of sale contract and the date for delivery under the contract, thus providing a profit. More relevant in bear market where chances of declining in price are better than bull market. Short selling process: 1. Short seller borrows assets, namely stocks for a fee and agree to return it back at a later date. 2. Short seller then sell the assets to someone else. 3. As deadline to return assets is nears, short seller buys new assets from the market to return to original owner. 4. If the stock’s price fall, short seller makes profits.  Penalty for short selling Section 98(2) A person who contravenes subsection (1) commits an offence and shall, on conviction, be liable to a fine not exceeding five million ringgit or to imprisonment for a term not exceeding ten years or to both.  2. FALSE TRADING AND MARKET RIGGING TRANSACTION Section 175(1) Subject to section 180, no person shall create, or cause to be created, or do anything that is calculated to create, a false or misleading appearance of active trading in any securities on a stock market within Malaysia or a false or misleading appearance with respect to the market for, or the price of, any such securities. Section 175(2) A person shall not, by means of purchases or sales of any securities that do not involve a change in the beneficial ownership of those securities, or by any fictitious transaction or device, maintain, inflate, depress, or cause fluctuations in, the market price of any securities. Section 175(3) Without affecting the generality of subsection (1), a person who– (a) effects, takes part in, is concerned in or carries out, either directly or indirectly, any transaction of sale or purchase of any securities, being a 138 transaction that does not involve any change in the beneficial ownership of the securities.  3. STOCK MARKET MANIPULATION Section 176(1) Subject to section 180, no person shall effect, take part in, engage in, be concerned in, or carry out, either directly or indirectly, any number of transactions in securities of a corporation, being transactions that have, or are likely to have, the effect of– (a) raising; (b) lowering; or (c) pegging, fixing, maintaining or stabilising, the price of securities of the corporation on a stock market in Malaysia, for the purpose which may include the purpose of inducing other persons, whether or not another person is induced, to acquire or dispose of the securities of the corporation or of a related corporation. Section 176(2) A reference in this section to a transaction, in relation to securities of a corporation, includes– (a) a reference to the making of an offer to sell or purchase such securities of the corporation; and (b) a reference to the making of an invitation, however expressed, that expressly or impliedly invites a person to offer to sell or purchase such securities of the corporation. Types of stock market manipulations: 1. Pools 2. Churning 3. Stock bashing 4. Painting the tape 5. Bear Raid 6. Wash Sale 7. Corner 1. POOLS Refer to an agreement made by investors to buy or sell stock in order to increase stock prices. Example: A group of investors made an agreement to buy GAMUDA shares by bulk to increase the stock prices. This will attract other investors to buy the stock and once the price is high, this group of investors sell the shares, thus pushing price to falls because of heavy selling. 2. CHURNING An action where traders places buy or sell orders through different brokers, usually in large quantities, in order to create the demand in that particular security, thereby increase the price. An investor churns if he/she has a long position on the securities and wishes to sell it at an artificially high price. 3. STOCK BASHING A situation where a person spread the fake claims against the specified public company. This may cause other investors to sell their stock, thus decrease the price. The bashers take advantage by buying the stock at lower price. 4. PAINTING THE TAPE An illegal trading of securities by manipulators among themselves in order to create the illusion of heavy trading activities. This activity will increase the trades and once the stock prices increase, the manipulators pull out, hoping to make profits. 5. BEAR RAID A concerted effort to drive down the price of stock by heavy selling or short selling. Usually accompanied by unfavourable rumours and stories about the target firm. The goal of the raid was to involve other investors in a selling stampede that would drive the stock’s price down. 6. WASH SALE Refer to the selling and repurchasing the same securities through two different brokers. The main goal is to create impression that the security is undergoing heavy trading for the purpose to increase stock’s prices. 7. CORNER Means to own a significant enough amount of a stock to be able to manipulate its price. A corner situation is created when individual or group investors buy up a large amount of particular stock in the market. When corner is arising in any counter of Bursa Malaysia, it means that a person or group investors has acquire the control of listed counter thus, trigger a sell-off if the sell the stocks.  4. FALSE AND MISLEADING STATEMENT Section 177 A person shall not make a statement, or disseminate information, that is false or misleading in a material particular and is likely to induce the sale or purchase of securities by other persons or is likely to have the effect of raising, lowering, maintaining or stabilising the market price of securities if, when he makes the statement or disseminates the information– (a) he does not care whether the statement or information is true or false; or (b) he knows or ought reasonably to have known that the statement or information is false or misleading in a material particular. When a person spread the information, he/she are either did not care whether the information is true or false, or not knowing that the information is false or misleading. Other offences relating to false and misleading statement are: False statement made to the Securities Commission in connection with an application for a license renewal. False report made with an intention to deceive. False statement or information in a prospectus.  5. FRAUDULENT INDUCING PERSONS TO DEAL IN SECURITIES Section 178(1) A person shall not– (a) by making or publishing any statement, promise or forecast that he knows to be misleading, false or deceptive; (b) by any dishonest concealment of material facts; (c) by the reckless making or publishing, dishonestly or otherwise, of any statement, promise or forecast that is misleading, false or deceptive; or (d) by recording or storing in, or by means of, any mechanical, electronic or other device, information that he knows to be false or misleading in a material particular, induce or attempt to induce another person to deal in securities Section 178(2) In a prosecution for an offence under paragraph (1)(d), in relation to the recording or storing of information, it shall be a defence if the defendant establishes that when the information was recorded or stored, he had no reasonable grounds for expecting that the information would be available to any person. Person who subjected to this prohibition includes officers of a company in relation to a company prospectus or brokers or officers to a stockbroking company who advising clients about a sale of securities or an issue.  Penalty for offence under Subdivision 1 Section 182 A person who contravenes section 175, 176, 177, 178, 179 or 181 commits an offence and shall be punished on conviction to imprisonment for a term not exceeding ten years and to a fine of not less than one million ringgit.  6. INSIDER TRADING Section 183 For the purposes of this Subdivision, “information” includes– (a) matters of supposition and other matters that are insufficiently definite to warrant being made known to the public; (b) matters relating to the intentions, or likely intentions, of a person; (c) matters relating to negotiations or proposals with respect to– (i) commercial dealings; or (ii) dealing in securities; (d) information relating to the financial performance of a corporation; (e) information that a person proposes to enter into, or has previously entered into one or more transactions or agreements in relation to securities or has prepared or proposes to issue a statement relating to such securities; and (f) matters relating to the future. Section 188 (1) A person is an “insider” if that person– (a) possesses information that is not generally available which on becoming generally available a reasonable person would expect it to have a material effect on the price or the value of securities; and (b) knows or ought reasonably to know that the information is not generally available. Section 188 (2) An insider shall not, whether as principal or agent, in respect of any securities to which information in subsection (1) relates– (a) acquire or dispose of, or enter into an agreement for or with a view to the acquisition or disposal of such securities; or (b) procure, directly or indirectly, an acquisition or disposal of, or the entering into an agreement for or with a view to the acquisition or disposal of such securities. Example of insider trading: The CEO of the company or his family or his relative or his employee sells stocks on behalf him after discovering that the company will be losing a big government contract next month. The CEO of the company or his family or his relative or his employee buy stocks on behalf of him after discovering that the company could generate high profit when the company is expected to gain new projects. Section 188(3) Where trading in the securities to which the information in subsection (1) relates is permitted on a stock market of a stock exchange, the insider shall not, directly or indirectly, communicate the information referred to in subsection (1), or cause such information to be communicated, to another person, if the insider knows, or ought reasonably to know, that the other person would or would tend to– (a) acquire, dispose of, or enter into an agreement with a view to the acquisition or disposal of, any securities to which the information in subsection (1) relates; or (b) procure a third person to acquire, dispose of or enter into an agreement with a view to the acquisition or disposal of, any securities to which the information in subsection (1) relates.  Penalty for insider trading Section 188 (4) A person who contravenes subsection (2) or (3) commits an offence and shall be punished on conviction to imprisonment for a term not exceeding ten years and 143 to a fine of not less than one million ringgit.  ENFORCEMENT by SC No Action Common Offences Penalty 1. Administrative 1. Insider Trading 1. Reprimands Actions 2. Breach of section 354(1)(a) of the Capital Markets 2. Public Statements and Services Act 2007 3. Penalties 4. Directives 5. Restitution 6. Refusal to accept or consider any submission to the SC under Part VI of the CMSA 2. Civil Actions 1. False trading and market rigging transaction 1. Restitutions & Regulatory 2. Stock market manipulation 2. Restrained from trading in the stock Settlements 3. Insider Trading exchange 4. With intent to deceive furnished a false statement to 3. Barred from becoming a director. Bursa Malaysia 5. Securities Fraud 6. Submission of misleading information to SC in connection with a proposal 3. Criminal 1. Money Laundering 1. Imprisonment Prosecution 2. Insider Trading 2. Fines 4. Cases 1. Submission of misleading information to SC in 1. Compound Compounded connection with a proposal 2. With intent to deceive furnished a false statement to Bursa Malaysia  Powers of Commission to take action Section 354(1) Where a person– (a) contravenes the provisions of this Act other than the provisions of Part V and Division 2 of Part VI or any securities laws; or (b) fails to comply with, observe, enforce or give effect to– (i) the rules of a stock exchange, approved clearing house or central depository; (ii) any written notice, guidelines issued or condition imposed, by the Commission; or (iii) any rule of a recognised self-regulatory organisation, in circumstances where the person is under an obligation to comply with, observe, enforce or give effect to such rules, written notice, guidelines or conditions, that person has committed a breach.  Civil liability of person in contravention of the securities laws Section 357(1) A person who suffers loss or damage by reason of, or by relying on, the conduct of another person who has contravened any provision of Part VI or any regulations made under this Act may recover the amount of the loss or damage by instituting civil proceedings against the other person whether or not that other person has been charged with an offence in respect of the contravention or whether or not a contravention has been proved in a prosecution.  Power of court to make certain orders Section 360 (1) Where– (a) on an application by the Commission, it appears to the court that– i. (i) there is reasonable likelihood that any person will contravene a relevant requirement; ii. (ii) any person has contravened a relevant requirement; or iii. (iii) any person has contravened a relevant requirement and that there are steps which could be taken to remedy the contravention or to mitigate the effect of such contravention, including making restitution to any other person aggrieved by such contravention, whether or not that person has been charged with an offence in respect of the contravention or whether or not a contravention has been proved in a prosecution.  General penalty Section 372(1) A person who contravenes any requirement or provision of this Act, commits an offence under this Act and, where no penalty is expressly provided, shall, on conviction, be liable to a fine not exceeding one million ringgit or to imprisonment for a term not exceeding five years or to both. Section 372(2) In the case of a continuing offence the offender, in addition to the penalties under subsection (1), shall, on conviction, be liable to a fine not exceeding five thousand ringgit for every day or part of a day during which the offence continues after conviction.  BURSA MALAYSIA OFFENCES DEALING IN SECURITIES UNDER THE RULE OF BURSA MALAYSIA The need to maintain a fair and orderly market is imperative and for this, Bursa Malaysia has zero-tolerance on any acts or omissions by any party which might threaten/affect the integrity of the market that Bursa Malaysia operates. Bursa Malaysia believes that the market should reflect genuine supply and demand. Bursa Malaysia would not hesitate to take appropriate action including imposing a fine and/or suspension/strike off a person from the Register and bar the person from trading on or through the stock market of the Exchanged for any violation which hampers the maintenance of a fair and orderly market.  RULE 510.1 All persons trading on the Exchange shall not commit or attempt to commit any or all of the offences stated hereunder. Offences under these Rules shall be classified into major offences and minor offences.  RULE 510.2 Major Offences 1. Accepting orders from clients for contracts without causing such orders to be executed on an Exchanged or in accordance with the rules, by-laws, regulations, customs and practice of such Exchanged. 1. Being guilty of fraud or any Act of bad faith or of any dishonest conduct. 1. Making or reporting a false or fictitious trade. 1. Knowingly acting as both buyer and seller in the same transaction except when permitted under the Rules. 1. Manipulating prices or attempting to manipulate prices or to corner or attempt to corner any contract in the market. 1. Making a material miss-statement to the Exchanged or to a committee, or an any information supplied to the Exchanged of its officers. 1. Knowingly disseminating false or misleading reports concerning market information or conditions that may affect the price of any instrument. 8. Accepting orders from clients for contracts without causing such orders to be executed on an Exchanged or in accordance with the rules, by-laws, regulations, customs and practice of such Exchanged. 9. Being guilty of fraud or any Act of bad faith or of any dishonest conduct. 10. Making or reporting a false or fictitious trade. 11. Knowingly acting as both buyer and seller in the same transaction except when permitted under the Rules. 12. Manipulating prices or attempting to manipulate prices or to corner or attempt to corner any contract in the market. 13. Making a material miss-statement to the Exchanged or to a committee, or an any information supplied to the Exchanged of its officers. 14. Knowingly disseminating false or misleading reports concerning market information or conditions that may affect the price of any instrument.  RULE 510.3 Minor Offences Circulating or aiding in the circulation in any manner of rumors which cast doubt on the integrity of any Contract. Violating any rule, the violation of which is not a major offence.  RULE 508: Action Against Participants 1. Decide that no action be taken. 2. Issue a private warning or public reprimand or a notice of censure. 3. Issue such recommendations, or give such advise, or issue such directions to remedy any matter, as it sees fit. 4. Order the Defaulting Participant to cease and desist from the conduct found to be in violation of these Rules. 5. Direct that the Defaulting Participant shall not open any new Client Account without the express consent of the Exchange. 6. Order the Defaulting Participant to liquidate such portion of the Defaulting Participant’s Open Position on its Proprietary Account or Clients’ Accounts, or both, as the committee deems necessary to ensure the integrity of any Contract or to ensure an orderly and liquid market. 7. Order the Defaulting Participant to transfer existing Open Positions to another Trading Participant or prescribe restrictions on positions, as the committee deems necessary 8. Impose a fine against the Defaulting Participant not exceeding RM500,000 in respect of a major offence and RM25,000 in respect of a minor offence or such other amount as may be prescribed by the Exchanged 9. Direct, by the way of compensation order that the Defaulting Participant recompense any Client who has suffered a readily determinable loss arising as a direct result of any matter on which the committee has adjudicated and in respect of which such Defaulting Participant is at fault 10. Determine that any reports or any extract or summary thereof, or any finding of, or sanction imposed to be published  RULE 508: Disciplinary Action Major offences may be dealt with by a termination of participantship, suspension, fine not exceeding RM1 million or by both suspension and fine or by any other action deemed appropriate pursuant to and Rule 508.1. A Participant found guilty of having engaged in conduct which is substantially detrimental to the interest of the Exchanged may, in addition to the disciplinary actions prescribed for a major offence, be required to pay the Exchanged an amount computed to include the costs and expenses, including lawyer’s fees, incurred by the Exchanged in defending or responding to such Participant’s action.  TUTORIAL Discuss the terminologies terms of penalty in aspect of capital market in Malaysia: 1. Reprimands 2. Public Statements 3. Penalties 4. Directives 5. Restitution 6. Refusal to accept or consider any submission to the SC under Part VI of the CMSA 7. Restitutions 8. Restrained from trading in the stock exchange 9. Barred from becoming a director 10. Imprisonment 11. Fines 12. Compound