Chapter 2 Powers of the Authority and Market Misconduct PDF

CHAPTER TWO Powers of the Authority and Market Misconduct  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 o...

CHAPTER TWO Powers of the Authority and Market Misconduct  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 CHAPTER 2 – POWERS OF THE AUTHORITY AND MARKET MISCONDUCT................................... 2 Learning Goals............................................................................................................................................ 2 2.1 Role and Powers of the Authority under the Securities Markets Order, 2013................ 2 2.2 Intervention powers of the Authority.......................................................................................... 3 2.2.1 Market abuse............................................................................................................................... 5 2.2.2 Insider dealing............................................................................................................................. 9 2.2.3 False or misleading information or statements.............................................................. 12 2.3 Complaints Committee.................................................................................................................. 13 2.4 Investor Compensation Scheme.................................................................................................. 13 2.5 Other General Provisions............................................................................................................... 13 Summary.................................................................................................................................................... 15 Questions................................................................................................................................................... 15 Additional Recommended Reading................................................................................................... 16 1  CHAPTER 2 – POWERS OF THE AUTHORITY AND MARKET MISCONDUCT Learning Goals LG1. To outline the general Authority’s powers for licensees. LG2. To outline the role of the Authority. LG3. To discuss the Authority’s intervention powers. LG4. To outline the roles of the Financial Markets Services Panel, Complaints Committee and the Investor Compensation Scheme and other general provisions. This chapter discusses the Authority’s intervention powers to protect the capital market’s integrity and the investors. It also discusses the key areas of a regulated person’s violation in the form of market abuse, insider dealing and provision of false or misleading information. Finally, it outlines the key roles of the Financial Markets Services Panel, Complaints Committee, and the Investor Compensation Scheme. 2.1 Role and Powers of the Authority under the Securities Markets Order, 2013 As explained in Chapter 1, one of the four core mandates of the Authority is to ensure the stability of the financial system by formulating financial regulations and prudential standards. In delivering such a mandate, one of the functions of the Authority is to supervise and regulate banks and financial institutions including capital markets services firms. Under the Securities Markets Order, 2013 (SMO), the Authority has the duty to supervise and regulate the securities market so that the securities market can operate in a fair and transparent manner in order to protect the interests of investors and the public. For instance, the accuracy and reliability of a financial statement are crucial to assist BDCB as supervisors of licensed capital markets services firms to ascertain financial institutions’ risk exposures, as well as their capital and liquidity positions based on the information reported. It is the obligation of independent auditors appointed by the company to ensure that the financial statements are accurate, true and fair. This would enable investors to be able to gauge the value of the company and make investment decisions. If the independent auditors are not carrying out their fiduciary responsibilities, the Authority has the power to remove and replace said independent auditors. 2 Below provides several powers under the SMO that has been granted to the Authority in order to carry out its duties. (1) Grant, renew and revoke the licence of regulated entities including, securities exchanges, capital markets services firms, capital markets services representatives and collective investment schemes. (2) Refuse application of licence or grant of a licence (3) Exempt a person from a requirement (4) Recognise an entity or a Collective Investment Scheme (5) Designate an entity (6) Vary licence or requirements (7) Suspension of licence (8) Conduct investigation (9) Issue prohibition order (10) Issue supplementary regulations, directions, guidelines and codes to impose any additional requirements (11) Warn, penalise and compound (12) Approve directors of companies before an appointment (13) Impose requirements to auditors (14) Appoint an independent auditor You may refer to the relevant chapters for more information on some of the items above. 2.2 Intervention powers of the Authority Under Section 230 of the SMO, the Authority may exercise its powers if it believes that: (1) it is desirable to protect investors, or (2) the regulated person: 3  a. is not fit to carry on its regulated activities or b. has contravened the SMO Such powers may be in the following forms as stated in Sections 231 to 239 of the SMO: (1) Prohibit a person who is not fit and proper to be employed by a regulated person (2) Publish a statement of misconduct if a regulated person or any other person contravenes the SMO or employed a disqualified person, for example, a person who has been convicted of wrongdoing. (3) Prohibit a regulated person from entering into transactions or carrying on businesses (4) Prohibit a regulated person from dealing with assets, be it in Brunei Darussalam or elsewhere (5) Require assets belonging to, or held by, or to the order of, a regulated person, to be transferred and held by a third party approved by the Authority (6) Require a regulated person to maintain in Brunei Darussalam assets of an appropriate value to meet its investment business liabilities (7) Apply for a Court injunction to restrain a person’s likely action of conducting regulated activities without a licence (8) Present a petition to the Court to wind up a regulated person who is unable to pay his debts or who defaults in payment obligations. (9) Impose, rescind or vary a prohibition or requirement by giving a written notice to the regulated person. The next three subsections discuss three market misconducts for which the Authority has the powers to intervene: (1) Market abuse (2) Insider dealing (3) Providing false or misleading information or statements Securities regulators around the world including BDCB consider the issue of these market misconducts a serious threat or risk to the stability and soundness of one’s financial system, thus they supervise and monitor trading activities that can amount to market misconduct 4 very closely. Given the seriousness of these market misconducts, the commission of these market conduct is tantamount to a criminal offence and if the person is found guilty, the person is liable to a hefty fine or imprisonment, or both which implies the seriousness of the offences. 2.2.1 Market abuse Section 241(1) defines market abuse as behaviour which: (1) occurs in relation to qualifying securities traded on a market, (2) a regular market user would deem it as a failure to observe the reasonably expected standard of behaviour for his position in the market, and (3) satisfies one or more of these conditions under Section 241(2), namely: a. behaviour which is based on information that is not generally available but relevant in deciding the terms on which investment transactions are effected; or b. behaviour which is likely to give a regular market user a false or misleading impression of the supply, demand, price or value of the investments; or c. a regular market user would see the behaviour as distorting the market. In practice, various strategies were utilised by errant traders to manipulate the market such as wash trades, pump-and-dump schemes and layering. Each of these strategies has distinct methodology and execution such as trading of the same securities without transfer of beneficial ownership (wash trades), providing false information to generate interest (pump- and-dump) and quoting fictitious orders before deleting (layering). The errant traders are motivated to manipulate the market which includes obtaining illicit gains and preventing losses. These activities impede the integrity of the capital market industry. Under Section 241(11), a person may be guilty of market abuse by: (1) being or having been engaged in market abuse, or 5 (2) taking or refraining from taking any action, has required or encouraged another person to engage in market abuse. 'A history of human greed:' The 26 different ways people have cheated markets over 200 years Camilla Hodgson Sep 22, 2017, 2:00 PM Andrew Burton/Getty Images FICC Markets Standards Board analysed 200 years of enforcement cases, reviewing 400 cases from 19 countries. FMSB report found 26 common types of market misconduct, including insider trading and spoofing. The data is "a history of human greed," according to FMSB Chair Mark Yallop. LONDON – For as long as there have been markets, there have been participants trying to gain an illegal edge. The FICC Markets Standards Board (FMSB), the industry body overseeing standards in fixed income, currency and commodity trading, compiled a database of legal cases stretching back 200 years to try to understand the root causes of this market misconduct. FMSB Chair Mark Yallop called the data "a history of human greed." The analysis done by the FMSB, the first of its kind, reviewed over 400 enforcement cases from 19 countries, over a 200 year period, to identify behavioural patterns in market manipulation. Although they stopped at just over 400 cases, says Yallop, they "could have gone to 4,000." There were 250 cases between 2000 and 2017 alone. Here's a timeline of just some of those: 6 FMSB According to Yallop, they found "relatively few common causes," but 26 types of behavioural misconduct, which repeat and recur over time. These behaviours are "jurisdictionally and geographically neutral," and cut across asset classes. "This is rational," says the report, since "asset classes do not generate conduct risks — people do." The patterns were also found to be "strikingly similar" to those found by the US Senate Committee in 1934, in its investigation into the causes of the 1929 Wall Street Crash — suggesting that malpractice has changed little. Mark Steward, a senior UK market enforcement official, highlighted a case from over 100 years ago. In 1878, he said, the directors of the City of Glasgow bank were investigated, convicted and jailed for fraud, all in the space of a few months. Comparing this to the speed and efficiency of current practices, he said, "where did we go wrong?" at a conference in London on Wednesday. Patterns of behaviour The FMSB's report calls for a "new and additional approach to the conduct problem." Despite existing rules and regulations, it says, "misconduct has not only continued, but the same patterns of behaviour have repeated and developed." It gives the example of the Myanmar stock exchange, which had been open for just 16 weeks, and had listed only two stocks, before it issued its first warning against "spoofing" – when traders trick the market into thinking there's more demand to buy or sell than there actually is – in 2016. 7 Spoofing is one of the 26 types of misconduct the report identifies, alongside "wash trades," when traders buy and sell the same securities at the same time move money, "ramping," when traders artificially raise or depress the market price of securities, and insider trading. Although electronic trading has improved transparency and auditability, says the report, market abuse cannot be "coded out." New technologies have come with potential new vulnerabilities, which are "growing in scale." The increasing use of online trading systems, for example, risks unauthorised individuals logging on, either using false identities or by stealing the identities of legitimate traders. New concerns have prompted the development of new controls, such as "kill switches," which cut off trading when pre-set limits are breached, and "speed bumps," which slow down trading by introducing microsecond delays. The map denotes where spoofing, wash trades, ramping and reference and closing price manipulation have been detected. FMSB An increase in investigations According to Steward, there was a 75% rise in the number of FCA investigations into suspected wholesale or markets misconduct begun in the last year. This was aided by legislative changes introduced by the Market Abuse Regime (MAR), he said: "MAR has extended the scope of the reporting regime," resulting in "more participants reporting more data." Steward also mentioned lawyer Andrew Green QC's assessment that the FCA had been misguided in its judgment that further investigations into the failure of HBOS would not have been successful, and were therefore not done. "While there is little doubt that 'prospects of success' is an important element in considering whether enforcement resources should be deployed, I think it must be right that the merits of a case cannot be assessed before you have the relevant evidence, or even the key evidence," he said. 8  But, he said, Green's points had "prompted some thinking around what should be the starting point for an investigation." Weighing in on the problem at the AFME conference, Linklaters Partner Martyn Hopper said the world had "become a more complex place," which "poses problems, including for prosecutors." Continued malpractice, says FMSB's report, is partly due to "the frailty of collective memory," as past scandals get further away. But both principles-based and rules-based regulation "struggle to address the causes of conduct failure." What is also clear, says the report, is that "the lessons learnt by one firm or one generation do not necessarily pass to the next." Read the original article on Business Insider UK. Copyright 2017. Follow Business Insider UK on Twitter. 2.2.2 Insider dealing An employee of Company A, a publicly tradable company, was made aware that a significant client of Company A decided to terminate a contract. This information is material to be deemed as price-sensitive information. Before the information was publicly announced, the employee sold off all his/her shareholdings of Company A to avoid loss. The actions committed by the employee is an example of insider dealing and any person committing insider dealing is deemed guilty of an offence under the SMO. Insider dealing includes the following: (1) An insider person transacting any deal directly or indirectly involving securities using inside information (2) An insider person discloses or passes inside information to others (3) An insider person suggests or recommends to another person to engage in dealing in securities using the inside information The following, however, are not considered insider dealing: (1) Any transaction performed under an agreement that was concluded before one gained access to inside information (2) Disclosure of inside information by an insider person as part of his job. Meanwhile, insider information includes: (1) Non-public information relating to securities issuer(s) or securities; if such information were made public, it would likely significantly affect the prices of those securities (2) Non-public information relating to derivatives on commodities 9 (3) Information that a client conveys to a person to execute his pending orders Examples of insiders include: (1) Executive officers, directors or board members of a securities issuer (2) Executive officers, directors or board members of a legal firm or unincorporated business association which the issuer holders a share or voting rights of 25 percent or more (3) Executive officers, directors or board members of a legal firm or unincorporated business association who holds a share or voting rights of 10 percent or more in the securities issuer (4) Employees of the issuer or an organisation that participates in the issuing and marketing who have had access to insider information during his employment (5) Any person with controlling shareholding i.e. anyone who holds at least 10% of the issuer’s capital (6) Executive officers, directors or board members of the issuer’s credit institution (7) Persons obtaining inside information as part of employment or through criminal activities (8) Spouses, children, step-children, parents or nominees of the individuals stated above Listed companies and publicly tradable companies shall regularly update a list of its employees (under contract or otherwise) who have access to inside information and submit it to the Authority upon request. These persons must acknowledge the SMO’s prohibition to conclude transactions with the use of insider information. An individual is not conducting insider dealing if he shows that at the time of dealing, he: (1) did not expect the dealing to result in a profit (or avoiding a loss) arising from having price sensitive information (2) believed that the information had been disclosed widely (3) would have done what he did even if he had not possessed the information 10 SEC Charges Couple With Insider Trading on Confidential Clinical Trial Data FOR IMMEDIATE RELEASE 2021-94 Washington D.C., June 7, 2021 — The Securities and Exchange Commission today charged a New York-based couple with insider trading in the stock of the pharmaceutical company where one of them worked as a clinical trial project manager. The defendants have agreed to pay more than $325,000 to settle the charges. According to the SEC’s complaint, Holly Hand was the senior project manager overseeing a clinical drug trial for a company then known as Neuralstem Inc. As alleged, after Hand learned of negative efficacy results from the trial, she tipped Chad Calice, who then sold all of his Neuralstem stock ahead of the public announcement of the negative news. The complaint alleges that while selling his shares, Calice tipped off his uncle, who then also sold his entire Neuralstem position that day. According to the complaint, after the negative news was announced the next morning, the price of Neuralstem stock dropped by approximately 50%. As alleged, by selling their stock in advance of the news, Calice avoided losses of $103,875 and his uncle avoided losses of $14,434. “Public company employees owe shareholders a duty to safeguard the confidentiality of company information and not to personally benefit, directly or indirectly, from the misuse of such information,” said Richard R. Best, Director of the SEC’s New York Regional Office. “The complaint alleges that Hand improperly shared confidential information with Calice, allowing him to trade on and benefit from information that other Neuralstem shareholders did not possess.” The SEC’s complaint, filed in federal district court in Manhattan, charges Calice and Hand with violating the antifraud provisions of the federal securities laws. Without admitting or denying the complaint’s allegations, Calice and Hand have consented to the entry of a final judgment that enjoins them from violating the charged provisions and requires each of them to pay a civil penalty. Calice has agreed to pay a $222,184 penalty, and Hand has agreed to pay a $103,875 penalty. The proposed settlement is subject to court approval. The SEC’s investigation was conducted by Cynthia A. Matthews and George N. Stepaniuk of the New York office. The case was supervised by Sanjay Wadhwa. The SEC appreciates the assistance of the Financial Industry Regulatory Authority. Source: U.S Securities Exchange Commission, 2021 11 2.2.3 False or misleading information or statements In relation to communication or application under the Order, the following are also offences: (1) A person provides material false or misleading information in the context of any SMO- related application (2) A non-regulated person describes or holds himself out as being a regulated person (3) A person who knowingly or recklessly provides an auditor with material false or misleading information is also an offence under the Order. 2.3 Financial Markets Services Panel Section 254 of the SMO enables the Authority to establish the Financial Markets Services Panel (hereinafter referred to as ‘the Panel’). The aim of establishing the Panel is to give a licence applicant or licence holder (who is impacted by the Authority’s decisions) the right to make representations or refer the matter to the Panel. This avenue provides a system of checks and balances in the implementation of the rules and regulations under the SMO, 2013. It assures the accountability and procedural fairness of the Authority as a securities regulator in the exercise of its functions and powers to maintain its integrity and credibility. This is in line with Principles 21 and 42 of the International Organisation of Securities Commissions (“IOSCO”) Objectives and Principles of Securities Regulation. In particular to the Authority’s refusal to grant or renew a licence, refusal to vary a licence or revocation or suspension of a licence as provided under section 173 SMO, any person who is aggrieved by any decision of the Panel may appeal to the Minister of Finance whose decision shall be final. 1 Principle 2 requires that the Regulator should be operationally independent and accountable in the Exercise of its functions and powers. 2 Principle 4 requires that the Regulator should adopt clear and consistent regulatory processes. 12  2.4 Complaints Committee Section 252 of the SMO provides power to the Authority to establish a Complaints Committee. Its role is to investigate the complaints in respect of a regulated person and also any complaints regarding the Authority. Investigations into such complaints must be done independently of the Authority and the complained regulated persons. If the investigation findings suggest that the complaint is not called for, the Committee shall recommend for the complaint to be dismissed. 2.5 Investor Compensation Scheme Section 253 of the SMO gives the power to the Authority to establish an Investor Compensation Scheme. It aims to compensate eligible investors when a regulated person is in financial difficulty. 2.6 Other General Provisions This section discusses some key highlights of Part XIII of the SMO. 2.5.1 Licence Fees Each licensed person has to pay to the Authority an annual licence fee, periodical fees or administrative charges as the Authority may determine. Failure to pay any of the fees as the Authority may direct is subject to a late payment penalty. These are described in Section 255. 2.5.2 Offences by body corporate In the event that a body corporate commits an offence and it was proven that the offence committed was consented, supported or attributable to the neglect of relevant persons under the body corporate such as a director, manager, secretary, members or equivalent, the said person and the body corporate is guilty of that offence and is liable to be charged (Section 260). 13 2.5.3 General Penalty Anyone who contravenes the SMO or any regulations is subject to the general penalty of a fine of up to $10 million, imprisonment for up to 10 years or both. This general penalty may be overridden by a specifically stated penalty (Section 261). A person is guilty of an offence not only through his direct acts. He is deemed to have committed the offence even in the following situations (Sections 262 to 264): (1) he abets the commission of an offence under the SMO or even if done overseas relating to a Brunei Darussalam-based business (2) he attempts to commit an offence (3) he is party to a criminal conspiracy 2.5.4 Tax and filing exemptions Section 269 of the SMO exempts collective investment schemes from: (1) Taxes in the form of income, capital gains or other taxes (2) Estate, inheritance, succession or similar tax (3) Duty on instruments relating to: a. property transfers to/by a collective investment scheme, or b. transactions/assets/activities relating to a collective investment scheme Accordingly, a collective investment scheme is not required to submit any filing, return or financial information pertaining to taxes, duties or other levies. The exemption from taxes (in the form of income, capital gains or other taxes) also applies to a CMSL holder who conducts the management of securities in respect of: (1) such a collective investment scheme (2) any dividends or earnings attributable to any unit share, partnership interest, debt or securities, or (3) any fees or other earnings received in that capacity 14 Summary This chapter discussed the Authority’s intervention powers and the possible reasons triggering the exercise of such powers. It also defined the meaning of market abuse and insider dealing. There are, however, some acts that do not constitute insider dealing. Finally, it discusses the roles played by the Authority to establish the Financial Markets Services Panel, Complaints Committee and the Investor Compensation Scheme. Questions 1. What are the bases of the Authority’s powers in governing the securities market? 2. What are the two main reasons for the Authority to intervene in the running of a securities markets services provider? 3. Does the Authority have the power to disallow a regulated person from dealing with assets outside Brunei Darussalam? 4. Suppose X, a regulated person does not directly participate in market abuse. Also, suppose X is merely knowingly allowing another party to participate in market abuse. Is X deemed innocent? 5. Discuss the key features of insider dealing. 6. Suppose Ali is a clerk in Company X which is, in turn, a regulated person governed by the SMO. Ali notices that a client is initiating a merger deal. This information is not yet known to the public. Discuss whether each situation below constitutes insider dealing: (a) Ali highlights this information to a colleague who advises the clients in dealing with regulatory matters. (b) Ali does not tell his wife for fear that she may disseminate the information. However, Ali discusses the impending merger with Ahmad, his stepson who is a finance expert. 8. What are the respective key roles of the following: (a) Financial Markets Services Panel (b) Complaints Committee (c) Investor Compensation Scheme 15 9. It is within the Panel’s jurisdiction to hear and determine a wide range of the Authority’s actions or decisions. How may this facilitate the attainment of the objectives for the establishment of the Panel? Additional Recommended Reading 1. Brunei Darussalam Central Bank (2013), Securities Markets Order, 2013, available at https://www.bdcb.gov.bn/SiteAssets/Download/SMO2013.pdf 2. 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 16