Chapter 1 Introduction PDF

CHAPTER ONE Introduction  DISCLAIMER □ Brunei Darussalam Central Bank (BDCB) is not responsible for the results of any action taken on the basis of information in this licensing examination study manual or any errors or omission; □ BDCB expressly di...

CHAPTER ONE Introduction  DISCLAIMER □ Brunei Darussalam Central Bank (BDCB) is not responsible for the results of any action taken on the basis of information in this licensing examination study manual or any errors or omission; □ BDCB expressly disclaim all and any liability to any person in respect of anything and of the consequences of anything done or omitted by a person in reliance, whether whole or partial, upon the whole or any part of the contents of this licensing examination study manual; and □ BDCB do not purport to provide legal or other expert advice in this licensing examination study manual and if any legal or other expert advice is required, the services of a competent professional person should be sought.  ABBREVIATIONS AMBD Autoriti Monetari Brunei Darussalam AAOIFI Accounting and Auditing Organisation for Islamic Financial Institutions BDCB Brunei Darussalam Central Bank BDCBO Brunei Darussalam Central Bank Order, 2010 BOD Board of Directors CMSL Capital Markets Services Licence CMSRL Capital Markets Services Representative’s Licence CIS Collective Investment Scheme CFD Contracts for Differences CSD Central Securities Depository ECF Equity Based Crowdfunding FCA Financial Conduct Authority FIMM Federation of Investment Managers Malaysia FinTech Financial Technology IOSCO International Organization of Securities Commissions IFRS International Financial Reporting Standards IMF International Monetary Fund ISAF Internal Syariah Audit Framework ICM Islamic Capital Market MMOU Multilateral Memorandum of Understanding OTC Over the Counter P2P Peer-to-Peer SMO, 2013 Securities Markets Order, 2013 SMR, 2015 Securities Markets Regulations, 2015 SFSB Syariah Financial Supervisory Board SFSBO Syariah Financial Supervisory Board Order, 2006 SRO Self-Regulating Organisation SAB Syariah Advisory Body SGF Syariah Governance Framework SPV Special Purpose Vehicle CONTENTS LIST OF ABBREVIATIONS.................................................................................................................................. 2 CHAPTER 1 - INTRODUCTION......................................................................................................................... 3 Learning Goals:.................................................................................................................................................. 3 Introduction........................................................................................................................................................ 3 1.1 Brunei Darussalam Central Bank........................................................................................................ 6 1.2 The Securities Markets Order, 2013 and the Securities Markets Regulations, 2015..... 7 1.3 The SMO and SMR – overall structure............................................................................................ 11 1.4 An Overview of the SMO and SMR................................................................................................... 13 Summary........................................................................................................................................................... 17 Looking ahead................................................................................................................................................. 17 Questions.......................................................................................................................................................... 18 Additional recommended reading.......................................................................................................... 18 1  LIST OF ABBREVIATIONS BDCB Brunei Darussalam Central Bank CMSRL Capital Markets Services Representative’s Licence CMSL Capital Markets Services Licence CIS Collective Investment Scheme SMO 2013 Securities Markets Order, 2013 SMR 2015 Securities Markets Regulations, 2015 2  CHAPTER 1 - INTRODUCTION Learning Goals: LG1. To describe the principal objectives of the Brunei Darussalam Central Bank (hereafter will also be referred to as the “Authority”). LG2. To describe the role of the Securities Markets Order, 2013 (SMO) and the Securities Markets Regulations, 2015 (SMR) in facilitating the Authority’s attainment of its supervisory functions and regulatory objectives. LG3. To provide an overview of the SMO. LG4. To provide an overview of the SMR. Introduction The capital market is an avenue for individuals and companies who seek funding to meet with other individuals and companies who can provide such funds. The individuals and companies who seek funding would issue shares or bonds. Hence, they are known as the issuers. Conversely, the fund providers are the individuals and companies who are interested to participate in the issuer’s prospects. They would buy (or invest in) the issuer’s shares or bonds in exchange for the funds provided. Hence, such individuals and companies are known as the investors. In the absence of a capital market, the economy may only rely on bank financing which is less cost-effective for long term funding. The establishment of an efficient capital market provides alternative funding options. In the absence of an organised market, investors and entrepreneurs would be limited to their small networks and would not have access to various other investors. Thus, a well-functioning capital market is critical for an economy’s efficient flow of funds and to sustain economic development and growth. 3 Figure 1 provides an overview of Brunei Darussalam’s capital market framework. Figure 1. Overview of the Capital Market Framework 4 In essence, the capital market comprises five main groups of players: (1) suppliers of funds (investors) (2) users of funds (issuers of securities1) (3) market (4) infrastructure providers (5) regulatory body Suppliers of funds are parties who have surplus funds. They search for a place to invest their funds for prospects of business expansion opportunities. Users of funds are parties who have a shortage of funds, and thus, seek them to fund their projects or operations for prospects of strategic business opportunities. The market facilitates the exchange and transfer of these funds from the supply side to the demand side. On the demand side, the users of funds would typically issue securities in exchange for the funds. On the supply side, the suppliers of funds would provide the funds to the securities issuer in exchange for the securities. On the other hand, the infrastructure providers are supporting entities who facilitate the activity between the supply and the demand in the market. For instance, the information technology infrastructure provider may provide the trading and exchange platform to enable the market to function efficiently. Central to these players are the market regulators which in this case is the Brunei Darussalam Central Bank (BDCB). They govern the entire capital market ecosystem by administering the Securities Markets Order, 2013 and issuing rules and regulations to ensure a transparent and fair market are in place while ensuring investors are protected. This Study Manual focuses on the key requirements of the aspiring market operators and market players to obtain and maintain the pertinent licence from the Authority to run their capital market business. 1 The SMO defines securities as investment instruments such as shares, debentures and units in collective investment schemes. 5 1.1 Brunei Darussalam Central Bank The Brunei Darussalam Central Bank (BDCB), under its former name Autoriti Monetari Brunei Darussalam, was established on 1 January 2011 as a statutory body in accordance with the Autoriti Monetari Brunei Darussalam Order, 2010 now known as Brunei Darussalam Central Bank Order, 2010 (BDCB Order). As set out in the BDCB Order, BDCB acts as Brunei Darussalam’s central bank with the principal objectives of maintaining price stability, ensuring the stability of the financial system, establishing and providing oversight over the payment systems and developing a sound and progressive financial services sector. Among the main functions of BDCB is the issuance and management of the currency notes and coins of Brunei Darussalam. Under the Currency Order, 2004, BDCB has the sole right to manage and issue the currency notes and coins in Brunei Darussalam (legal tender). To ensure confidence and stability in Brunei currency, the Currency Order, 2004 also requires BDCB to back up every currency note and coin issued with foreign exchange reserves. Secondly, BDCB also conducts the country’s monetary policy. Brunei Darussalam’s monetary system is based on the Currency Board Arrangement, underpinned by the Currency Interchangeability Agreement between Brunei Darussalam and Singapore. Under the pegged exchange rate system, BDCB backs up the total amount of currency issued in the economy with an equivalent amount held in reserves of the currency board. In Brunei Darussalam, the local currency is pegged to the Singapore Dollar at par. BDCB also supervises and regulates banks and financial institutions. Financial institutions supervised and regulated by BDCB include finance companies, takaful operators, insurance companies, capital market services firms and market operators (i.e., investment providers), money changers, moneylenders and remittance companies. The banks and financial institutions are regulated through the BDCB Order and written laws administered by BDCB. Other functions held by BDCB include management of the exchange rate regulation regime, management of the foreign reserves of the Authority and issuance and management of securities issued by the Government. 6 Being a securities regulator, BDCB is an ordinary member of the International Organizations of Securities Commissions (IOSCO), an international organisation that sets the standards for securities regulation. In addition to that, BDCB has become a full signatory to IOSCO Multilateral Memorandum of Understanding Concerning Consultation and Cooperation and the Exchange of Information (MMoU) since 2016. As a member of IOSCO, BDCB ensures that our securities laws and regulations are aligned with IOSCO standards. 1.2 The Securities Markets Order, 2013 and the Securities Markets Regulations, 2015 The primary legislation governing the capital markets is the Securities Markets Order, 2013 (SMO). There are three subsidiary legislations under the SMO, namely: (1) the Securities Markets Regulations, 2015 (SMR), (2) the Securities Markets (Compoundable Offences) Regulations, 2015 and (3) the Securities Markets (Fees) Regulations, 2015. The SMO and these three subsidiary legislations are available on http://www.agc.gov.bn/AGC%20Site%20Pages/The%20Laws%20of%20Brunei%20-%20S.aspx Prior to 2013, the securities sector in Brunei Darussalam was governed under the repealed Securities Order, 2001 and the Mutual Funds Order, 2001. With the current legislation, a company is required to obtain a licence known as the Capital Markets Services Licence (CMSL). Under this licence, a company may conduct any of the chosen regulated activities which are listed in the schedule of the SMO and as approved by the Authority. Another notable feature is that with the SMO and SMR, any securities being offered to the public is required to be registered with the Authority. This means that the issuer needs to submit a registration statement and prospectus to the Authority for approval before making the offer to the public. Furthermore, the issuer is required to adhere to the disclosure obligations under the law. This requirement is in line with the Authority’s objective of enhancing investor protection and fostering market confidence. 7 Accordingly, the SMO and the SMR provide a legal and regulatory framework for the regulation and supervision of: (1) market operators such as securities exchanges, clearing houses, and trading facilities; (2) market infrastructure such as depository services; (3) capital market intermediaries such as investment dealers, fund managers, and investment advisers; and (4) securities such as shares, debentures and collective investment schemes. The regulation and supervision of the abovementioned entities are underpinned by the duty of the Authority to regulate the securities markets so that “securities can be offered and traded in a fair and transparent manner in order to protect the interests of investors and the public”. Figure 2 provides an illustrative overview of the Authority’s regulatory objectives together with the pertinent key enablers. Figure 2. BDCB's Regulatory Objectives and Enablers 8 The following are the Authority’s regulatory objectives under the SMO which covers four main areas:- (1) Market confidence Rules and regulations are put in place to ensure capital market participants abide by it. When the capital market participants observe the rules and regulations and markets are transparent and fair, investors and other market participants may feel confident to participate in the market. The Authority also conducts surveillance and enforcement to detect, deter and penalise market manipulation and other unfair trading practices. This contributes to financial stability. (2) Public awareness Continuous education and information to the general public in respect to capital market is crucial to assist investors as well as potential investors to better assess the relevance and suitability of the capital market products being offered to them and make an informed decision on their investments. (3) Investors’ protection The Authority puts in place requirements and guidance on client suitability to ensure that the right products are offered to the right investors, there is adequate information disclosure and transparency to enable investors to make informed decisions, and that investors are protected from misleading and fraudulent practices, including insider trading, front running or trading ahead of customers and the misuse of client assets. Adequate capital requirements are also put in place to ensure entities meet their financial obligation from investors and any winding up of businesses cause minimal loss to its customers. Supervision of entities and individuals and strong enforcement of the law also contribute to investors’ protection. 9 (4) Reduction of financial crime Strong and rigorous enforcement of the law is fundamental to foster market confidence and maintain a fair and efficient market. This includes inspection, surveillance, and investigation. Measures are also put in place to detect, deter, enforce, sanction, redress and correct violations of the law. The SMO is the overarching legislation used to regulate the securities markets. It covers matters pertaining to the regulation and supervision of entities and products, and sets out the key requirements for the various regulated activities and entities. The SMR provides supporting regulations for complying with the SMO. It provides more details on the following items: (1) Securities registration and prospectus requirements for public offerings: information to be disclosed, items which the Authority may allow to be omitted, procedures to obtain permission for omission of such items (2) Continuing disclosure obligations: financial statements, price sensitive information (3) Capital Markets Services Licence (CMSL): requirements of licensed entity, organisation and systems, compliance, risk management and internal audit, requirements for a Capital Markets Services Representative’s Licence, revocation of licence (4) Market operators and market infrastructure: application, licensing, recognition and designation, financial and manpower resources, conduct of business, continuing obligation, supervision (5) Collective investment scheme: application process, information to be provided to the Authority, guidelines for activities (including marketing and transactions, administration, delegation and outsourcing) In general, contravention of any requirements in the SMO is an offence. Notwithstanding this, Section 265 of the SMO confers the Authority the discretion to compound any offence under the SMO which is prescribed as a compoundable offence by collecting from a person reasonably suspected of having committed the offence a sum of money not exceeding one- half of the maximum fine prescribed for that particular offence. On payment of the sum of 10 money, no legal action shall take place against that person in respect of that offence. These compoundable offences are prescribed in the Securities Markets (Compoundable Offences) Regulations, 2015. For instance, Section 158 (3) of the SMO states that any person who carry on any regulated activity without the required CMSRL is guilty of an offence and liable on conviction to a fine, imprisonment or both. However, such offence may be compounded by the Authority pursuant to Section 265 of the SMO and the Securities Markets (Compoundable Offences) Regulations, 2015. 1.3 The SMO and SMR – overall structure This section outlines the overall structure of the SMO and SMR through two tables. First, Table 1 shows the various parts of the SMO and the corresponding section number references. On the extreme right column are the corresponding chapter numbers in this Study Manual. Table 1. SMO - overall structure Title Sections Chapter in this Part Study Manual I Preliminary 1-20 All II General Application 21-50 All III Market Operators and Market 51-98 5 Infrastructure IV Self-Regulating Organisations 99-114 5 V Public Offering 115-131 7 VI Public Company Statements and Reporting 132-155 7 Requirements VII CMSL and CMSRL 156-173 3 VIII Books, Audit and Client’s Assets 174-202 3 IX Collective Investment Scheme 203-229 4 X The Intervention Powers of Authority 230-251 2 XI Complaints Committee and Investor 252-253 Compensation Scheme 3, 8 XII Financial Markets Services Panel 254 8 XIII General 255-271 Schedule – Securities and Investment Business: I Securities 1-11 II Activities Constituting Investment 12-18 business 11 Besides the thirteen parts (Parts I to XIII) of the SMO legislation, it has an accompanying Schedule. This Schedule lists and describes the various items which are deemed securities and also the activities which are deemed investment business. Next, Table 2 shows the various parts and sections of the SMR. Table 2. SMR - content structure Title Sections Part I Preliminary 1 II Securities Registration and Prospectus Requirements 2-17 III Continuing Disclosure Obligations 18-27 IV CMSL 28-50 V Market Operators and Market Infrastructure 51-73 VI Collective Investment Scheme 74-199 Chapters: I. Application and Interpretation 74 II. Marketing and Transactions Involving Collective Investment Scheme 75-82 III. Collective Investment Scheme Administration 83-87 IV. Core Regulations Applicable to Collective Investment Schemes 88-90 V. Operation and Administration of Collective Investment Scheme 91-105 VI. Delegation and Outsourcing 106-112 VII. Accounting Standards 113-114 VIII. Periodic Reports 115-122 IX. Charges and Expenses 123-127 X. Responsibility for Prospectus 128-131 XI. Auditors 132-135 XII. Specialist Funds 136-154 XIII. Public Collective Investment Scheme 155-182 XIV. Private Collective Investment Scheme 183-193 XV. General Enforcement 194-199 12 1.4 An Overview of the SMO and SMR Having outlined the overall structure through two tables in the preceding section, this section provides an overview of the SMO and SMR. Part I of both the SMO and the SMR outline the preliminary matters. Part I of the SMO specifies how it should be cited, the interpretation or definition of the key terms used, and its regulatory scope. Meanwhile, Part I of the SMR specifies how it should be cited, when it commences and applies. Discussions in the ensuing paragraphs begin with the SMO Parts and with cross-reference, where applicable, to the SMR Parts. Part II of the SMO provides for its general application as follows: (1) the areas to which the SMO applies (2) the general prohibition of persons running activities covered by the Authority’s regulatory scope without licences (3) the general application and prohibition pertinent to running Islamic investment business (4) the Authority’s function and duty to regulate the securities market (5) principle and code of practice for securities market players (6) various aspects of the Authority’s investigation powers Part III of the SMO outlines the regulatory requirements for securities market operators and market infrastructure. A market operator is defined in Section 2(1) of the SMO as a person who manages or operates the business of a regulated market; or may even be the regulated market himself. More specifically, Part III lists the following as market operators: licensed, recognised or designated securities exchange, clearing house, or trading facility. Part III discusses the following main items: (1) general requirements for market operators (2) application for licence to operate and recognised as a market operator, i.e. securities exchange, clearing house and trading system or facility (3) consequences of non-compliance of trading facility requirements 13 (4) the requirement and regulation of credit rating agency (5) revocation of licence, recognition or designation The corresponding portion of Part III of the SMO is Part V of the SMR which specifies the application, licensing, resources, business conduct, continuing obligation and supervision of market operators and market infrastructure. Part IV of the SMO deals with the regulation of self-regulating organisations which are defined as corporate bodies which regulate “the carrying on of investment business of any kind by enforcing regulations which are binding on persons carrying on business of that kind either because they are members of that body or because they are otherwise subject to its control”. Part V of the SMO deals with the public offering of securities. A “public offering” is “any offer to sell a security which has been made to at least more than fifty who are not accredited investors”. The granular implementation details are specified in Part II of the SMR which states that the person concerned should file, among others, a registration statement and a prospectus before making a public offering. Part VI of the SMO specifies the statements and reporting requirements of public companies, both on an initial and ongoing bases. More information required to be disclosed to the Authority are specified in Part III of the SMR on ‘continuing disclosure obligations’. Part VII of the SMO deals with the CMSL and CMSRL. These licences are needed for a person to carry on any SMO-regulated activity. This Part outlines the general prohibition, licence application, requirements, exemption and grant or renewal of such licences. The corresponding portion of the SMR is Part IV which provides detailed requirements not only on the part of individuals but also the organisation and systems aspects. Part IV of the SMR discusses, among others, the need for compliance, risk management and internal audit. Part VIII of the SMO specifies the requirements in terms of maintaining, recording and reporting of a regulated person’s books, audit and client’s assets. 14 Part IX of the SMO deals with Collective Investment Schemes (CIS). A collective investment scheme is an arrangement whereby those who invest in these assets can share in the profits or income generated by these assets. Any CIS that is being offered to the public in Brunei Darussalam is required to be licensed or recognised by the Authority. The SMO provides general requirements mainly on licensing, application for licensing and recognition and revocation. Meanwhile, the SMR specifies additional requirements on CIS such as marketing and transactions, CIS administration, operations and administration of CIS, delegation and outsourcing, and enforcement. Part X of the SMO specifies the Authority’s powers to intervene in a regulated person’s business if it appears to the Authority that: (1) there is a need to protect investors (2) the regulated person is not fit to run such regulated activities (3) the regulated person has contravened some provision, principles, regulations or codes It provides, among others, requirements on employment of prohibited persons, misconduct, market abuse and insider dealing. Part XI of the SMO deals with the complaints committee and investor compensation scheme. Part XII of the SMO allows the Authority to establish a financial markets services panel. Part XIII of the SMO deals with general matters such as licence fees, notification of changes and events and penalties. Finally, the Schedule at the end of the SMO (see Table 1 in section 1.3) is divided into two parts. Part I lists the securities and Part II lists the activities which are deemed investment business. Securities include the following: (1) shares: units which represent the proportion of ownership of a company; for example, shares of Bank Islam Brunei Darussalam (2) debentures: long-term debt instrument 15 (3) government and public securities: securities issued by government and marketable securities (i.e. debt or equity securities that are easily bought and sold in the market); for example, Brunei Government Sukuk Al-Ijarah (4) instruments creating entitlements to shares or securities: an instrument which confers rights to the holder as if he owns the securities such as warrants (5) certificates representing securities: a certificate which confers rights to the certificate holder as if he owns the securities such as depository receipts (6) units in collective investment scheme: units in a pooled investment scheme such as the investment funds distributed by the locally licensed CMSL holders (7) options: a contract which gives the holder the right (but not the obligation) to buy or sell a financial instrument at a given price at some pre-determined time in the future (8) futures: a contract to buy or sell an item at a given price at some pre-determined time in the future, for example, commodity futures such as oil or gold futures. (9) contracts for differences (CFD): a contract that allows two parties to buy or sell on financial instruments based on the price difference between the entry and closing prices; if the closing price is higher, then the seller will pay the buyer the difference; if the current price is lower at the exit price e.g. foreign exchange CFD. (10) investment-linked insurance contracts: insurance contracts that is structured with an investment fund participation offered by locally licensed insurance companies, and (11) rights and interests in investments: some proportional rights to or interests in an investment Activities which are deemed investment business are as follows: (1) dealing in investments: this involves buying and selling of investment securities (2) arranging deals in investments: making arrangements for other parties to buy or sell securities (3) safekeeping and administration of assets: holding and management of investment securities on behalf of customers (4) managing securities: handling investment securities on a customer’s behalf (5) investment advice: provide customers advice on the merits of an investment 16 (6) establish collective investment schemes: set up an arrangement so as to pool resources and enable the participants to share the investment risk and potentially earn profits from the investment assets (7) using computer-based systems to give investment instructions: instead of issuing a typical written order pertaining to an investment, a firm may use a computer-based system to send such instructions on its customer’s behalf Please refer to BDCB’s website for a list of the companies which are licensed to run the above activities. Summary This chapter discussed the following items: (1) the objectives of the Authority in overseeing Brunei Darussalam’s financial sector (2) the role of the capital market in Brunei’s economy (3) the primary and subsidiary legislations for the capital market sector as administered by the Authority (4) the four regulatory objectives of the Securities Markets Order (SMO) and the Securities Markets Regulations (SMR) (5) the overall structure of the SMO and SMR Looking ahead The remainder of this study manual will be arranged as follows: Chapter Content 2 Powers of the Authority 3 Capital Markets Services Licence and Capital Markets Services Representative’s Licence 4 Collective Investment Scheme 5 Market Operator and Self-Regulating Organisation 6 Islamic Investment Business 7 Public Offering and Public Company Requirements 8 Financial Markets Services Panel 17 Questions 1. What is the role of the capital market in a financial system? 2. Discuss the objectives of BDCB and its role in the financial system, particularly in the capital markets. 3. What are the roles of the SMO and the SMR? How do these roles help the Authority to attain its regulatory objectives? 4. What is the key difference between the SMO and the SMR? 5. What are the compoundable offences or breaches under the SMO? 6. What entities are supervised and regulated by the Authority? Additional recommended reading 1. Ahmad, N., Koh, E.H.Y., Chan, S.G., Ramly, Z., Abu, N.Z., Idris, K.H., Ho, C.S.F. and Chong, J.Y. (2018). Corporate Finance: An Asian Perspective, Oxford Fajar: Shah Alam 2. Brunei Darussalam Central Bank (2019), Autoriti Monetari Brunei Darussalam Annual Report 2018, available at https://www.bdcb.gov.bn/SiteAssets/AMBD%20ANNUAL%20REPORT%202018%2028082019.pdf 3. Brunei Darussalam Central Bank (2010), Brunei Darussalam Central Bank Order, 2010, available at https://www.bdcb.gov.bn/images/Legislation_Regulations/Appendix_1/AMBD%20Order%202010.PDF 4. Brunei Darussalam Central Bank (2013), Securities Markets Order, 2013, available at https://www.bdcb.gov.bn/SiteAssets/Download/SMO2013.pdf 5. Brunei Darussalam Central Bank (2015), Securities Markets Regulations, 2015, available at https://www.bdcb.gov.bn/SiteAssets/Pages/Securities-Market-2015,-Compunding-Offenses-and- Fees/Securities%20Markets%20Regulations,%202014%20V2.pdf 6. Berk, J; DeMarzo, P and Harford, J (2018), Fundamentals of Corporate Finance, 4th edition, Pearson: Essex 7. International Organisation of Securities Commissions (2017), Methodology for Assessing Implementation of the IOSCO Objectives and Principles of Securities Regulation, available at https://www.iosco.org/library/pubdocs/pdf/IOSCOPD562.pdf 18