FOLLOWING the attorney-general’s decision to compound an offence instead of charging a capital market participant, which was the route that the Securities Commission chose, on the grounds that it is more expeditious than a lengthy trial, it appears that the lights has switched off at the SC.

The resignations of the SC chairman, just three months into his extended contract, and three more senior executives have left the market guessing about the reasons for their abrupt departure.

Is there an urgent need for improvement of the country’s securities regulatory system?

Are we going to witness a theme emerging on the SC’s lack of ability to enforce compliance with the rules and regulations?

Capital market participants know the SC does not lack power, resources and skills for its role as regulator,  more so in matters of increasing complexity in the corporate world and the capital market, to the extent that capital market participants and issuers have consistently called for greater transparency in the SC’s decision making processes.

Effective securities regulation relies on the existence of a sound framework, including good contract and corporate law, a fair and timely judicial process, protection of property rights, good accounting and audit standards and sound taxation rules. And the SC has advocated all these for 30 years.

The ability to carry out enforcement is intimately connected to the implementation of regulatory standards because the ultimate possibility of an enforcement action gives the regulatory system its credibility. No matter how sound the rules, if the system of enforcement is ineffective or perceived to be ineffective, the ability of the system to achieve the desire outcome is undermined.

Supervision and enforcement of securities regulation are tools that support the broader objectives of market confidence and system-wide stability. Any violation of securities regulations affects market confidence and market stability. The failure to comply with disclosure and accounting standards can undermine the transparency and liquidity of markets and, given sufficient size, can have an impact on the financial stability of the capital market in Malaysia.

The possibility of criminal prosecution provided by the law is crucial to effective enforcement. Criminal sanctions, which are appropriate for serious cases involving multiple offences, large sums of moneyor widespread damage to investors or the public, are an important deterrent. 

The SC’s role has evolved over the years from merit to disclosure based for issuers. Mechanisms have been put in place to ensure the reliability of the information provided by the issuers and timely and accurate information are given to investors to enable them to make informed decisions.

The quality of disclosure by securities issuers to investors and the fair treatment of minority shareholders are key to the credibility of a market place. To appropriately value securities, the market i.e. the investors, intermediaries, analyst, etc, must be able to rely on the information – this includes financial information, business plans and disclosure of ownership interests and conflicts of interest. 

The SC’s failure to pursue the case of the capital market participant gives the impression that even when the SC has sufficient powers at its disposal, the conduct of enforcement in practice remains a challenge.

Was it because of the governance structures that allow for interference in the regulator’s daily activities, with the potential to cause regulatory forbearance, or because funding or staffing mechanisms create avenues for outside control of the regulator’s actions?

Or because all these years, efforts were concentrated on ensuring the supervisory programmes meet global best practices sidelining disciplinary powers – ability to penalise regulated entities that do not comply with rules – either in the course of supervision or as the result of a proven violation of the rules – that were used infrequently, thus hindering the credibility of the regulator?

Slow detection, insufficient deterrence and punishment delayed in this case has damaged the reputation and credibility of SC as an enforcer and undermined SC’s ability and integrity to supervise and investigate other large-scale violations of the law in the future.

As the financial incentives to break the rules can be enormous and knowing that the fight is so uneven as to not exist at all, the ability and willingness of SC to investigate and pursue any legal actions in a robust manner in the future now appear doubtful.

Given that coordination and cooperation is a challenge, as shown in the recent case between the regulator and the prosecutor, who may not have the specialised skills to successfully prosecute financial crimes, maybe it is time for the government to consider investing the SC with prosecutorial powers. – May 15, 2022.

* FLK reads The Malaysian Insight.
 

* This is the opinion of the writer or publication and does not necessarily represent the views of The Malaysian Insight. Article may be edited for brevity and clarity.