Policy Dialogue on Corporate Governance Regulatory Enforcement : The Malaysian Experience

1. Policy Dialogue on Corporate Governance Regulatory Enforcement: The Malaysian Experience Presented By: Siow Kim Lun, Director Market Supervision Division Securities Commission MALAYSIA Caveat : The views expressed by the presenter reflect his personal views and need not necessarily represent the official views of the Securities Commission

2. Agenda 2. Division of responsibilities between the Securities Commission (SC), Stock Exchange and SROs 1.Accountability of Regulators 3. Developing effective sanctions and incentives

3. Accountability of Regulators • Introduction : • The Asian economic crisis of 1997 – 1998 and financial scandals like Enron and WorldCom have reinforced the importance of good corporate governance • Today, corporate governance is a key factor in investment decisions

4. Accountability of Regulators • To Whom is SC Accountable? • Parliament – SC, as a statutory body, discharges duties and carries out mandate endorsed by Parliament • Other Stakeholders – investors’ protection is SC’s paramount concern; SC ensures proper market conduct and that market operates efficiently; SC carries out effective enforcement of securities laws and rules

5. Accountability of Regulators • What are the Regulators seeking to promote ? • Disclosure & Financial transparency – timely, accurate and • reliable disclosure on companies’ financial positions • Proper Market Conduct andBusinessintegrity • Accountability and responsibilityto protect investors’ • interestthrough effective enforcement of securities • laws and rules • Investor confidence

6. Accountability of Regulators • Implementation of Key Corporate Governance • Initiatives in Malaysia • Listing Requirements – sets out corporate governance rules that must be complied with by public listed companies (PLCs) and their directors • Malaysian Code on Corporate Governance - introduced in year 2000, which sets the tone for the directors of PLCs to inculcate good corporate governance practices for their organisations • DBR – SC has moved from a merit-based regulation to a disclosure based system of regulation. DBR accords great flexibility for issuers to raise capital but it imposes high standards of due diligence and disclosure • Duties of auditors of listed corporation (section 99E SIA) –to report breaches of laws and Rules • Financial reporting framework - accounting standards issued by Malaysian Accounting Standard Boards come with legal backing with enforcement powers given to authorities such as Securities Commission, Central Bank of Malaysia and Companies Commission of Malaysia .

7. Accountability of Regulators • 6. • create awareness among minority shareholders of their rights • act on behalf of minority shareholders to deter abuses of majority shareholders who control the decision making process of a PLC • Shareholder activism – the Minority Shareholder Watchdog • Group was established in August 2000 with the aim to:

8. Division of Responsibilities between SC, Stock Exchange & SROs • Delineation of Functions to Achieve Greater Efficiency in the Enforcement of Securities Laws and Regulations in Malaysia • Role of SC (Regulator) - enforcement agency with powers to investigate and take administrative, civil or criminal actions. It also has an equally important role to develop the Malaysian capital market. • Role of the Stock Exchange – enforce compliance of the Listing Requirements and Business Rules. Has power to suspend, de-list, issue caution / reprimand & impose fines. • Role of SROs in Malaysia – more empowerment to the industry associations such as the Association of Stock broking Companies Malaysia (ASCM) and Federation of Malaysian Unit Trust Managers (FMUTM), whose role is to regulate conduct of their members (e.g. brokers, dealer representatives, and sales agents of unit trust funds).

9. Division of Responsibilities between SC, Stock Exchange & SROs Types of Enforcement Actions Taken by the SC : 1993-2003 Warning letters (15%) (22 cases involving 29 individuals & 9 companies) Criminal charge (49%) (71 cases involving 97 individuals & 7 companies) Compound (36%) (53 cases involving 40 individuals & 30 companies)

10. Division of Responsibilities between SC, Stock Exchange & SROs • E.g.: • Providing false or misleading information on proposals, dealings in securities or affairs of company • Fraud involving directors or management. • Mis-utilisation of funds raised • Breach of condition of SC’s approval • Trading offences involving directors or management. Types of Offences Prosecuted by the SC : 1993 - 2003 Corporate Governance (36%) (26 cases involving 38 individuals & 2 companies) Fraud (7%) (5 cases involving 13 individuals & 1 company) Short selling & licensing related Offences (44%) (31 cases involving 30 individuals & 2 companies) Futures industry Offences (13%) (9 cases involving 16 individuals & 2 companies)

11. Developing Effective Incentives and Sanctions • Incentives • Protection for whistle blowing– Section 99F of the SIA offers protection to those who report breaches of securities laws, rules or any matter affecting PLC’s financial position • Green lane scheme– faster approval for corporate proposals and less stringent conditions of approvals for companies with good record on corporate governance • Recognition – through annual rewards given to PLCs with exemplary governance practices and those which practice good disclosure standards • Sanctions • Enforcement actions– against those who breach securities laws and listing requirements • Merit /Demerit scheme –SC will conduct thorough investigations on PLCs with poor governance practices and thus resulting in slower approvals for corporate proposals

12. Summary of key corporate governance reforms in Malaysia 1998 1999 2000 2001 2002 2003 2004 Rules & Regulations Listing Requirements : strengthen rules on related party transactions (July) New Malaysian Code on Takeovers and Mergers (January) Listing requirements mandate quarterly reporting (August) Guidelines on Issue/Offer of Securities facilitate equity participation by independent directors (December) Amendments to securities and company law to harmonise the regulatory regime for prospectuses (July) Major revamp of KLSE Listing Requirements – new chapter 15 on corporate governance (January) SC introduces merit-demerit incentives in Guidelines on Issue/Offer of Securities (April) Amendments to securities laws to inter alia introduce provisions governing whistle blowing and enhance enforcement/ redress mechanisms for breaches of securities laws (January) Best Practices Malaysian Code on Corporate Governance (March) MAICSA best practice guidance of company secretaries (November) Taskforce on Internal Controls issues a guidance for directors on statement of internal controls (February) Institute of Internal Auditors issues guidelines on the internal audit function (July) Best practices for good corporate disclosures (expected this year) Institutional reforms Malaysian Institute of Corporate Governance formed (March) Minority Shareholder Watchdog Group formed (August) Director’s Mandatory Accreditation Programme commences (April) SC licenses Minority Shareholder Watchdog Group as an investment advisor and receives grant of RM250,000 (March-April) Director’s Continuing Education Programme commences (July)

13. Thank You