Market misconduct rules under revision
The Monetary Authority of Singapore (MAS) has proposed various amendments to the market misconduct provisions of the Securities and Futures Act (SFA).
In summary, it has proposed:
- clarifying that there is no requirement to establish a material price impact to establish a case of false or misleading statements under section 199 of the SFA;
- introducing a statutory definition of the phrase "persons who commonly invest", which is found in sections 215(b) and 216 of the SFA, and which are two of the key sections that make it an offence to engage in insider trading;
- amendments to section 232 of the SFA so that, where persons who have, through their market misconduct, gained a profit or avoided a loss, the court may impose a civil penalty of an amount that is the higher of either three times the profit gained or the loss avoided, or SGD 2 million. This is to ensure that the civil penalty imposed may be commensurate with the gravity of misconduct, even in cases where the profit gained or loss avoided happens to be low;
- introducing a provision in the SFA that will give priority to the MAS's civil penalty claims over debts by other unsecured creditors that accrue after contravention. The proposed new provision will be set out in a new section 237A in Division 6 of Part XII of the SFA;
- amending section 324 of the SFA to allow the courts to make orders in respect of investigations carried out by officers of the MAS, regardless of whether those investigations are being carried out in respect of offences under the SFA or pursuant to the Criminal Procedure Code. This is to facilitate joint investigations by the MAS and the Commercial Affairs Department of the Singapore Police Force.
The amendments are set out in a consultation paper issued on 24 August 2015 (Consultation Paper). The proposed amendments to sections 199 and 215 (considered below) have the effect of reversing two recent court decisions.
Revision of section 199 of the SFA on false or misleading statements
Section 199 of the SFA makes it an offence to make a statement that is "false and misleading in a material particular" and is likely, among other things, to have the effect of raising, lowering, maintaining or stabilising the market price of any securities. The MAS proposes to make it clear that it is not a requirement of the offence that the effect on the market price has to be a material one. The proposed amendment to section 199 will have an impact on the drafting of company announcements. In its Consultation Paper, the MAS explained that a statement may be false or misleading, even if it does not have a significant effect on the company's share price. What matters is whether an important or significant aspect of the statement is false or misleading. In thinking about the drafting of company announcements, therefore, listed companies should consider whether any statements (not de minimis) are false or misleading.
Clarification of "persons who commonly invest"
The insider trading provisions in the SFA prohibit trading in securities when in possession of materially price-sensitive information that is not generally available. Section 216 of the SFA provides that information is considered to be materially price sensitive if it "would, or would be likely to, influence persons who commonly invest in securities indeciding whether or not to subscribe for, buy or sell the … securities". In determining whether information is generally available, one of the tests applied in section 215(b) of the SFA is to consider whether "it has been made known in a manner that would, or would be likely to, bring it to the attention of persons who commonly invest in securities of a kind whose price or value might be affected by the information; and since it was so made known, a reasonable period for it to be disseminated among such persons has elapsed". While both these requirements refer to "persons who commonly invest in securities", the term itself is undefined. The MAS has therefore proposed defining the term.
- As for defining the phrase "persons who commonly invest", we agree with the MAS that the concept of such persons should (in an appropriate case) include the reasonably informed retail investor, and requiring that the common investor always be able to (for example) do fundamental and technical analysis may not represent a satisfactory universal test. However, it is not clear that simply defining the "persons who commonly invest" as "one or more members of the public who deal in securities… of the type in question on a regular basis" itself really addresses all of the issues. Rather, it seems to us that the relevant statutory provisions need to take into account the following:
- The characteristics of the common investor may vary depending on the type of securities involved (which is currently relevant for section 215(b) but not section 216).
- It is questionable whether a single definition of "persons who commonly invest" is appropriate in all cases.
- Even for a particular case, the investors who commonly invest in the securities of the kind in question may consist of more than one category of persons (eg retail and non-retail investors) who may respond differently to the same information.
- Furthermore, for information to be considered as generally available, we consider that the appropriate test should be whether the information has become accessible to all categories of investor who commonly invest in securities, whereas it may be sufficient under section 216 if at least one of the categories of investor who commonly invest in the type of securities in question is influenced to trade.