Singapore Parliament Reports: Securities and Futures (Amendment No. 2) Bill-25!01!2005

View this Sitting's Official Report in Full
Parliament No: 10
Session No: 2
Volume No: 79
Sitting No: 6
Sitting Date: 25-01-2005
Section Name: BILLS
Title: SECURITIES AND FUTURES (AMENDMENT NO. 2) BILL
MPs Speaking: Mr Chew Heng Ching;Mr Inderjit Singh (Ang Mo Kio);Prof. Ivan Png Paak Liang (Nominated Member);The
Minister for Education (Mr Tharman Shanmugaratnam)
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SECURITIES AND FUTURES (AMENDMENT NO. 2) BILL
Order for Second Reading read.
The Minister for Education (Mr Tharman Shanmugaratnam): Mr Deputy Speaker, Sir, on
behalf of the Senior Minister, I beg to move, "That the Bill be now read a Second time."

The Securities and Futures Act (SFA) was enacted in October 2001. It sought to provide a
legislative framework for a market and disclosure-based approach to regulating our capital markets.
It also provided a single comprehensive rule book, reflecting trends towards industry consolidation
and the blurring of boundaries between capital market products, for example, between unit trusts,
investment-linked insurance policies and structured products.

When the SFA was passed, we noted that the Monetary Authority of Singapore (MAS) would
review the Act in the following few years to keep pace with developments in the capital markets.
MAS embarked on a two-phase set of
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amendments to the SFA in 2003. The Securities and Futures (Amendment) Act 2003, which marked
the first phase of amendments, implemented 12 recommendations of the industry-led Company
Legislation and Regulatory Framework Committee (CLRFC). The CLRFC had been tasked to
review and modernise the company law and regulatory framework in Singapore. It had suggested
rationalising some of the rules in the SFA for offers of investments to make our capital markets more
globally competitive. The first round of amendments also incorporated some technical amendments,
in light of industry developments and feedback received since the implementation of the SFA in
2001.

The second phase of amendments, represented by the current Bill, implements the remaining
recommendations of the CLRFC. We are also making other substantive policy changes to the SFA.
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MAS invited feedback from the industry and the public on the proposed policy refinements in
September 2003, and on the draft Bill in April 2004. Many respondents gave detailed comments.
MAS has incorporated the feedback received into the Bill, where practicable and where they were in
line with its regulatory objectives. MAS has posted detailed responses to the comments received
during these consultations on its website.

Sir, let me first set out the basic thinking behind the amendments. The Bill aims to strengthen
the foundations underpinning our market and disclosure-based regulatory regime. It aims at sound
standards without excessive costs.

First, we seek to ensure high standards of transparency and fair dealing. These standards are
pre-requisites for the continued growth and development of the markets. While they impose
obligations on issuers of capital,
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market intermediaries and professionals, they ultimately benefit all participants in the capital
markets. They enhance investor confidence, leading to more liquid and vibrant markets, which in
turn lowers the cost of capital. A market-driven, disclosure-based approach also allows reputable
market players to raise the bar over time, as they see competitive advantage in improving their
standards of disclosure and fair dealing above the minimum standards prescribed.

The second objective of the Bill is to make our rules themselves clear and market-friendly so
as to support the development of our markets. The Bill provides greater regulatory certainty to the
industry in some key areas such as offers of investments. The approval process and ongoing
requirements for markets and clearing facilities have also been further streamlined for new entrants.

The Bill introduces amendments to rules across a range of capital market activities - capital
raising, the conduct of intermediaries, and the provision of clearing and settlement infrastructures.
On capital-raising, the amendments redefine the scope of provisions concerning investment offers,
refine the liabilities of professionals involved in capital raising and simplify some prospectus rules.
The Bill fine-tunes the regulation of intermediaries in light of industry experience to date under the
SFA. On markets and clearing facilities, the Bill calibrates the level of regulation to better match
the different levels of systemic risk posed by different facilities.

Sir, I will now go through the main amendments in the Bill. I will start with changes to our rules
for capital-raising.

Capital raising rules
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Abolition of "public offer" (in relation to Offers of Investments)

Sir, the SFA currently imposes rules on the conduct of "offers to the public",
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by requiring public offers be accompanied by prospectuses. These rules aim to ensure that investors
are provided with all material information needed to make informed investment decisions. However,
as noted by the CLRFC, the phrase "offer to the public" is not defined in legislation. This can cause
practical difficulties for issuers when structuring private and other exempted offerings.

As recommended by the CLRFC, the Bill removes the concept of "offer to the public" from the
SFA. Instead, a prospectus will be required for all offers of investments unless they are specifically
exempted. As a basic principle, such exemptions should only be given in limited circumstances
where the cost of issuing a prospectus is not justified by the benefits of greater disclosure and
investor protection. Our current regime already exempts offers that are not made available to retail
investors, or where other safeguards exist to minimise the risk to the public interest. For example,
where the information found in a prospectus may already be publicly available, as is the case for
listed companies.

Sir, the CLRFC recommended two new "safe harbours" which would allow private placements
and small offers to be made without a prospectus. These safe harbours provide legal certainty in the
case of capital raising by small and medium enterprises (SMEs) and helps them do so efficiently,
without unnecessary regulatory costs. These safe harbours are essentially similar to those available
in jurisdictions like the UK, Hong Kong and Australia.

Private placement exemption (clause 72, new section 272B)

Private placements are defined as offers made to 50 or fewer investors within any 12-month
period. The CLRFC had recommended a limit of 20 investors. However, MAS received public
feedback that this is too low, as not all persons
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offered the securities may accept the offer. We have decided to raise this figure to 50, which is also
consistent with the practice in UK and Hong Kong. Given this limited reach, to no more than 50
investors, there will be no dollar cap on the amount that can be raised in each private placement.

Small offer exemption (clause 72, new section 272A)
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Small offers raising up to $5 million within any 12-month period are also exempted from
prospectus requirements. Apart from the $5 million limit, a small offer can be made only to
investors with an existing relationship with the offeror, or who have previously expressed an interest
in the offer. In addition, there will be resale restrictions on securities purchased by a connected
investor so as to ensure that offers made under the small offers exemption are not open to the public
at large.

Offers made under the private placement and small offers exemptions, if they are closely related,
must be aggregated. This will prevent issuers from breaking up a single large offer into smaller ones
which would individually satisfy the exemptions, so as to circumvent the rules. MAS will prescribe
regulations to set out the factors determining which offers are closely related.

Debenture issuance programme

Clause 54 extends the validity period for base prospectuses for a debenture issuance programme
from six months to 24 months. This addresses industry feedback that a six month period is too short
when debentures are being continuously issued. Clause 46 will also allow the base prospectus to be
updated
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in the absence of a current offer without triggering refund provisions.

Offer information statement

Currently, listed issuers are allowed to provide an offer information statement (OIS) instead of a
full prospectus if they are offering securities which are similar to those already listed. Clause 77
extends the use of an OIS to all offers of securities by a listed entity. Listed issuers are already
subject to requirements under the SFA to disclose all material information on a continuous basis.
Investors would therefore have publicly available information to evaluate fresh offerings by the
issuer.

Currently, an OIS is required for a renounceable rights issue only when the issuer is both listed
and incorporated in Singapore. Under the new provision, an OIS will also be required for
renounceable rights issues by foreign corporations which have a primary listing in Singapore. This
recognises that the pool of Singapore shareholders for such issuers is likely to be significant.

Prospectus liability for issue managers
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Sir, in a disclosure-based regime, the onus for accurate and meaningful disclosures is placed on
issuers and their professional advisers. This is achieved by imposing liability on those responsible
for preparing the prospectus. Currently, the offeror and its directors, as well as the underwriter, face
criminal and civil liability for any material deficiencies in the prospectus, such as false and
misleading statements or omissions of material information. Clauses 57 and 58 extend this
prospectus liability to issue managers. This recognises the important role that issue managers play in
bringing a company to list on SGX and in the preparation of the prospectus.

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Change in criminal liability

At the same time, clause 57 also refines the existing criminal liability for persons other than the
offeror and its directors. Currently, third-party intermediaries (such as underwriters) must
demonstrate that they have conducted the necessary due diligence as a defence against any criminal
charges for material deficiencies in a prospectus. Clause 57 removes this burden of proof on the part
of intermediaries. Instead, the onus will be on the prosecution to demonstrate that an intermediary
has acted recklessly or intentionally. This is intended to address concerns by the industry that they
may be subject to criminal liability as a result of an inadvertent oversight, or because of deficient
disclosures made by the offeror (or its directors).

However, the civil liability provisions in the SFA will continue to apply the due diligence test.
Investors will still be able to institute civil action in Court against intermediaries to compensate them
for losses sustained as a result of material deficiencies in the prospectus where underwriters and
issue managers are unable to show that they have conducted the necessary due diligence. This way,
the change in criminal liability will not compromise the ability of investors to seek recourse.

Pre-deal research reports

Sir, clause 55 will lift the current prohibition on issuing pre-deal research reports for international
offers. Pre-deal research reports refer to reports that profile an issuer before an offer is made. Such
reports are typically prepared by the intermediaries involved in the offer, such as the underwriter or
issue manager, to stimulate interest in the offer. Previously, pre-deal research was prohibited
because such reports are not subject to the same regulatory safeguards as prospectuses. There was
concern that retail investors
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may rely on such reports instead of the registered prospectus.

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MAS recognises that this prohibition may have placed Singapore investors, particularly our
institutional investors, at a disadvantage compared to foreign investors when subscribing to
international offers. If an offer is made concurrently in a foreign jurisdiction that allows such
reports, MAS will allow pre-deal research reports to be distributed to institutional investors in
Singapore. To reduce the risk of information in the pre-deal research reports reaching the retail
public, we will put in place safeguards. Among them, the reports must not be circulated to persons
who are not institutional investors, especially the media. Issuers must also observe a two-week
"quiet period" before a prospectus is lodged.

Intermediaries

Repeal of exemption for financial advisers

Sir, let me move on to other changes in rules relating to the conduct of intermediaries, besides the
changes to the capital raising framework that I have just mentioned which concern them. The SFA
currently exempts financial advisers licensed under the Financial Advisors Act from licensing under
the SFA, in their conduct of SFA-regulated activities which are incidental to their financial advisory
services. This reflects the principle of not requiring an entity to be licensed under two separate
Acts. Clause 16 removes this generalised exemption. It was not our intention to allow financial
advisers to conduct the full scope of SFA-regulated activities, such as the full scope of fund
management activities. In its place, MAS will make explicit in Regulations the specific types of
exemptions financial advisers require under the SFA to conduct their financial advisory business.
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Unsecured credit facilities to employees

Clause 20 lifts the current prohibition against licensees under the Securities and Futures Act
granting unsecured credit facilities to their directors, officers, employees or representatives for
trading purposes. This prohibition has posed practical difficulties to licensees such as stockbrokers.
For example, staff who trade through their principals, ie, through their own companies, need to settle
their securities transactions upfront, rather than in accordance with market rules. They do so to
avoid situations where credit is inadvertently extended to them if settlement is delayed. The risk
arising from allowing unsecured credit facilities is however minimal, as unsecured loans to directors,
officers and employees are already capped at one year's emoluments.

False statements to MAS

Clause 12 will make it an offence for applicants for a licence under the Securities and Futures Act
to submit any false statements to MAS without reasonable excuse. Currently, it is only an offence if
the false statements are made knowingly and willfully. The Bill clarifies that false statements can be
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used as a reason for rejecting an application. For MAS to perform its regulatory role well, applicants
should bear responsibility for ensuring that their submissions to MAS are accurate and truthful.

Key infrastructure

Clearing facilities

Mr Deputy Speaker, Sir, I will now discuss the refinements to our regulatory framework
concerning clearing facilities and markets. Entities engaging in clearing or settlement services are
vital components in the infrastructure of the entire financial sector. Such clearing facilities currently
require approval from MAS before commencing operations. However,
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the term "clearing or settlement" is not explicitly defined in the current SFA. Clause 106 introduces
a definition for "clearing or settlement", which covers any of the activities comprising post-trade
matching and confirmation, clearance and settlement. This gives greater clarity to the industry, and
takes into account the broad-ranging nature of clearing and settlement activities. This is also
consistent with recent practices in other developed markets where an entity may specialise in a
specific aspect of clearing or settlement, but would still be subject to regulation.

However, MAS anticipates that such a comprehensive definition could potentially become too
inclusive over time and dilute our approach of regulating and supervising an activity in line with the
risks that it poses. To pre-empt such problems, the new Part III inserted by clause 4 also introduces a
new designation approach for clearing facilities. Clearing facilities will have to notify MAS 60
business days before commencing their operations. MAS will only designate and regulate
the clearing and settlement systems which are systemically important, so as to focus our regulatory
resources where the risks are more significant.

Markets (clause 4, new Part II)

The Bill likewise improves the provisions relating to markets. These changes will clarify MAS'
intention to classify markets as approved exchanges or recognised markets depending on their
systemic importance. The more systemically important markets will be categorised as approved
exchanges. Recognised markets will typically be smaller-scale trading platforms or organised
exchanges which are already regulated in reputable jurisdictions. Recognised market operators will
be subject to a more limited set of mandatory regulatory provisions, although MAS still retains the
flexibility to tailor conditions to each specified recognised market.

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Conclusion

Mr Deputy Speaker, Sir, the key building blocks for a market and disclosure-based regime for the
capital markets are in place, and are being enhanced with this Bill. However, the SFA will remain
very much work in progress. With constantly evolving capital markets, MAS will continue to
engage in discussions with industry practitioners, monitor developments in regulatory practices
internationally, and keep our legislation relevant to competitive captial markets.

Singapore is not alone in this process of continued refinement and reform of capital markets
legislation. In Hong Kong, the Securities and Futures Commission has been reviewing various
aspects of its regulatory framework, less than a year after its Securities and Futures Ordinance came
into effect in April 2003.

There has also been a flurry of reforms in the United States, including major reforms
regarding corporate governance and conflicts of interest on the part of analysts as found in the
Sarbanes-Oxley Act, and in the managed funds industry. There have also been recent moves in the
US to modernise the process of securities offers and update the regulation of markets to keep pace
with technological and industry developments.

Capital markets regulation in Singapore as around the world will have to continue to evolve in
response to new developments and concerns, while allowing for innovation, liquidity and growth of
the markets.

Sir, the market-driven and disclosure-based regulatory regime that we have adopted is the most
effective way of governing a modern and rapidly innovating capital market, with a growing range of
investment offerings and a wide spectrum of investors with differing levels of risk tolerance. Market
discipline is at the
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heart of this approach. The responsibility for making market discipline work is shared amongst all
participants in the system, not just the regulator. In particular, the onus is on issuers and their
professional advisers to provide meaningful, accurate and timely information to investors. The
regulator, on its part, stands ready to take effective enforcement action when laws are breached or
prescribed standards of market conduct are not upheld. But market discipline also means that
investors have to accept the risks of a business failing for legitimate reasons, or an investment not
performing up to expectations.

In conclusion, Sir, the market and disclosure-based regulatory approach that underpins the
Securities and Futures Act and the amendments that this Bill proposes will enhance confidence in
our markets and encourage continued innovation and growth. The Bill continues MAS' efforts to
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establish a framework of laws, rules and standards that encourage complete and clear disclosure of
information, markets that operate with integrity, intermediaries who deal fairly with their customers,
consumers who are empowered and educated of the risks involved in investments and the regulator
able to take effective enforcement when breaches occur.

Sir, I beg to move.

Question proposed.
Mr Inderjit Singh (Ang Mo Kio): Mr Deputy Speaker, Sir, I rise in support of the Bill.

First of all, let me declare my interest, as I am working in a Committee that is trying to implement
an alternative platform for listing of shares either through a private equity exchange or the over-the-
counter (OTC) market.

Sir, OTC is one of the major initiatives that the Action Crucibles for Finance of
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ACE has been trying to implement for the last one year. We have heard so many times of local and
small and medium companies who have problems raising funds at their growth stage, after they have
completed their beginning stages of start-ups. The options available to them are limited to
either getting banking loans or raising private equity. In some cases, companies end up seeking
public listing or through an IPO. But because of their size and the stage of their development, they
end up raising very little cash. And also at the end, because of the cost of maintaining a listing, it
actually appears to them that they may have made a mistake because they are not actually able to
handle a listing for long, being a small company with very little cash flow or capabilities. But
because of the pressing needs of these companies, they are forced to take the route of a public
listing. With the amendments in the Bill, together with the combination of the private placements
and also the small offering exemptions, companies will now be able to seek an alternative route and
that is if it can implement a private equity exchange or OTC type of market.

There is only one issue with the Bill that I have which, I believe, will make it unattractive for an
OTC type of market to be put in place. This has got to do with new section 272A where there is a
limit of $5 million to the amount that can be raised or traded for a period of 12 months for such an
offering to be considered not a public offering. While this limit is fine for companies that are raising
the funds, and it may also be fine for the investors who may have invested in the companies during
such an offering, it is not workable for a market maker that is trying to make the OTC work simply
because in the model that we think that it can work for an OTC, the market maker will have to create
a very vibrant secondary market for such an OTC to be successful in any
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market. For that reason, a $5 million limit for the market maker will not work. So I hope that the
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Minister will consider making an exemption for market makers and exempt them from this $5
million limit for a period of 12 months in this Bill. If we can do this, I believe that the OTC market
will work. And I feel that it is about time that we had such a market in place so that we can further
improve the financing environment for our companies in Singapore. It will make Singapore a lot
more attractive for companies, not just local companies but also small companies from around the
world, to come down here, set up base and to raise funds, either through private placements, through
banking loans, through public listing and now, perhaps, through an OTC type of market.

So I urge the Minister to consider revising this $5 million limit if he wants to see a successful
OTC market developing.

Sir, I support the Bill.
Prof. Ivan Png Paak Liang (Nominated Member): Mr Deputy Speaker, Sir, I rise in support of
the Bill.

First, let me disclose that last year I was an expert witness in a case involving a club in which
shares of the club were offered to the public and this ended up in a court dispute. I think Members
will know which club it was. On a point of clarification, I would like to ask the Minister whether
this law or any other law will be amended so as to cover the offering of membership in clubs on a
large scale, as occurred in a number of cases in our recent history and which have resulted in very
unhappy experiences for members of the public who bought membership in those clubs.
Mr Tharman Shanmugaratnam: First, I would like to thank Mr Inderjit Singh for his points
which I think are valid. We are keen to see a private equity exchange
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being formed, if it is commercially viable. It is important that there be OTC trading, vibrant
over-the-counter markets, for this to succeed. And the market maker is an important player in
ensuring effective secondary trading. So MAS shares his concerns and we will provide exemption
for market makers under the small offers provision of the Act. We will do so by way of regulation.
Under the exemption, the resales that are effected by the market maker will not be aggregated with
the original amount that is issued by the offeror for the purpose of computing the $5 million limit.

On Prof. Ivan Png's question, the Securites and Futures Act does not govern that class of activity -
the offer of membership in clubs. So, it is not covered by the scope of this Act.
Prof. Ivan Png Paak Liang: Mr Deputy Speaker, Sir, I would like to ask the Minister, if it was
not covered by the Act, whether the Ministry would bring in legislation to regulate this, as these are
public offers made to large numbers of people, and it would be good if they were properly regulated
via prospectuses and other aspects with which we regulate IPOs.
Mr Tharman Shanmugaratnam: Sir, there is a range of investments that are offered to the
public. I remember last year in the House, we discussed ostrich eggs and some other exotic
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instruments. And then, of course, there are some more regular plain vanilla instruments that are
offered but they are not in the category of financial market investments and are not covered by the
Securities and Futures Act, which is a very exacting form of laws, rules and standards ensuring
continuous disclosure to investors, standards of market conduct on the part of intermediaries, and so
on and so forth. So, it is really intended for financial
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markets, and in particular to protect retail investors in financial markets, and we have got to ensure
that intermediaries, issuers and all participants in the market preserve transparency and high
standards for their benefit.
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. - [Mr Tharman
Shanmugaratnam].

Bill considered in Committee.
[Mr Deputy Speaker in the Chair]
The Chairman: The deletion of "No. 2" and the change of citation year from "2004" to "2005",
as indicated in the Order Paper Supplement, will be made.
Clauses 1 to 111 inclusive ordered to stand part of the Bill.
Bill reported without amendment; read a Third time and passed.
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