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FEATURES
A New Paradigm in Securities
Regulation
The Securities and Futures Act 2001

This article examines the SFA and highlights the primary changes introduced by it to the previous regime
it has replaced.
The Securities and Futures Act (Cap 289) (!SFA") was presented to Parliament for the first reading on 25
September 2001, and was passed by Parliament on 5 October 2001. On the same day that Parliament
passed the SFA, it also passed the Financial Advisers Act 2001 (Cap 110) (!FAA"). Together, these two
Acts put in place the legal infrastructure for a single and coherent regulatory regime for financial products
to come under the purview of the Monetary Authority of Singapore (!MAS").
The new regulatory regime can be broadly divided into two categories:
persons who engage in advising clients on financial products (who will be regulated under the FAA);
and
persons who deal in financial products for and on behalf of clients (who will be regulated under the
SFA).
This article examines the SFA and highlights the primary changes introduced by it to the previous regime
it has replaced. Very broadly, the SFA takes from the Securities Industry Act (A15/1986) (!SIA") and the
Futures Trading Act (Cap 116) (!FTA"), and consolidates into a single legislation one licensing regime for
all who provide financial advisory services. In addition, the SFA also takes from the Companies Act (Cap
50) (!CA") and reconciles the rules on raising capital.
The SFA has come into force in parts:
Part I (Preliminary), Part VIII (Securities Industry Council and Take-over Offers), Part IX
(Supervision and Investigation), Part X (Assistance to Foreign Regulatory Authorities) and Part XV
(Miscellaneous; except ss 314 and 342(1) and (3)) came into effect on 1 January 2002.
Parts XIII and XIV of the SFA, which deal with offers of shares, debentures and collective
investment schemes and the appeal processes, came into force on 1 July 2002, alongside with
changes to the Singapore Exchange Listing Manual (!Listing Manual").
The remaining parts of the SFA came into force on 1 October 2002. This included provisions on the
single capital markets licensing regime, the market conduct provisions (which also deal with insider
trading) and the remaining portions of Part XV.
In tandem with various portions of the SFA coming into force, regulations and practice notes have been
introduced.
The Key Changes
The major changes introduced by the SFA are as follows:
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A new single licensing regime for all persons dealing in financial products, instead of the current
regime which requires separate licences depending on the product dealt with and the nature of the
business concerned.
The creation of a new regulatory regime that consolidates the securities and derivatives markets
and exchanges and applies to overseas markets and exchanges whose activities affect persons in
Singapore. These will now come under MAS"s regulatory purview by way of a light touch recognition
and registration system.
While the current FTA does have provisions dealing with clearing houses, equivalent or similar
provisions are absent in the current SIA. The SFA deals with this lacuna by providing a general set
of provisions for clearing houses that will apply to both the futures and securities markets.
In addition to providing for clearing houses generally, the SFA also introduces new provisions that
abrogate to a certain degree the effect of insolvency rules on members of clearing houses. The
intent of this is to ensure that the insolvency of a member will not disrupt the clearing and settlement
of trades already executed.
Of the changes introduced to the corporate fund raising provisions, the most extensive and wide-
reaching ones must be those involving interests, the most common example being unit trust funds.
The SFA replaces the existing definition of the term !interest" with a new concept of !collective
investment schemes".
Civil penalties under the current regime are imposed only for offences of insider trading. The
amendments extend the remedy of civil penalties to other offences currently under the FTA and
SIA, as well as new offences created under the SFA.
The insider trading rules have been amended to concentrate on the core of the offence trading
while in possession of undisclosed price-sensitive information by the defendant.
The changes are discussed in greater detail below.
Single licensing regime
Unlike the previous regime, which required one licence for securities dealing and a separate licence for
futures dealing, the new regime set out in the SFA only requires one licence a capital markets services
licence. The holder of a capital markets services licence may engage in any of the following regulated
activities as set out in the Second Schedule of the SFA:
dealing in securities;
trading in futures contracts;
leveraged foreign exchange trading;
advising on corporate finance;
fund management;
securities financing; and
providing custodial services for securities.
Persons specified in the Third Schedule of the SFA, and persons who are exempted under s 99 of the
SFA will not be required to obtain a capital markets services licence.
The Securities and Futures (Financial and Margin Requirements for Holders of Capital Markets Services
Licences) Regulations 2002 set out the financial requirements for the grant or renewal of a capital markets
services licence to any corporation under Part IV of the SFA. This introduces a risk-based capital regime
for holders to deal in securities or trade in futures contracts as a member of a securities exchange, futures
exchange or clearing house, streamlined capital requirements for other classes of holders, as well as
margin requirements for holders providing securities financing.
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Exempted persons
The definition of an exempted person remains largely the same under the SFA, as under the SIA.
Exempted persons under s 99 of the SFA include banks, merchant banks, finance companies, any person
licensed under the FAA in respect of any regulated activity that is solely incidental to his carrying on of the
business for which he is licensed under that Act, and any securities exchange, futures exchange or
recognised trading system provider in respect of any regulated activity that is solely incidental to its
operation of a stock market or futures market, as the case may be.
In addition, by virtue of s 99(1)(h) of the SFA, the MAS may exempt any other person or class of persons
in respect of any regulated activity.
Such exempted persons will not be required to obtain a capital markets services licence because they are
already supervised by the MAS under their respective principal legislation.
The MAS has stated that the supervision of the exempted institutions would parallel the supervision of
licensed corporations to ensure a level playing field and that exempted persons would be required to
comply with the same standards as a holder of a capital markets services licence.
Persons specified in the Third Schedule
The other category of persons who do not require a capital markets services licence are those persons
specified in the Third Schedule. The persons specified in the Third Schedule include the following:
any company registered under the Trust Companies Act (Cap 336) whose carrying on of the
business in a regulated activity is solely incidental to its carrying on of that business for which it is
registered under the Trust Companies Act (Cap 336);
any advocate and solicitor whose carrying on of the business in that regulated activity is solely
incidental to the practice of law; and
any public accountant or accounting corporation whose carrying on of the business in that regulated
activity is solely incidental to the practice of accounting.
New examination requirements
With the coming into force of the new regime, a new examination structure has been introduced for all
persons intending to hold a representative licence, unless such persons are specifically exempted. The
new examination series will apply equally to the representatives of banks, merchant banks and other
exempt financial institutions who conduct regulated activities under the SFA and FAA. These
representatives will be required to pass the modules pertaining to the regulated activities they intend to
conduct. This will ensure a common standard and enhance the competency level of all market participants
across the various financial sectors. As with current practice, exemption from the examination
requirements will be accorded to persons who possess the relevant qualifications and market experience,
or who deal with only certain sophisticated segments of the market.
Conduct of business
The new licensing regime outlined in the preceding section is intended to better accommodate changes in
the business models of market intermediaries, and make it more convenient for market intermediaries to
conduct business. It will also reduce both capital and compliance cost for the intermediaries.
The Securities and Futures (Licensing and Conduct of Business) Regulations set out the provisions
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governing the operations of licensed intermediaries, and also deal with other licensing and administrative
matters. These include the prescribed forms to be used for an application for a capital markets licence
and the requisite fees to be paid depending on whether it is a first application, a renewal or a
representative licence. The Regulations also prescribe the relevant rules relating to record keeping
requirements, issue of contract notes, business conduct rules, trust account requirements, and the
notifications to be lodged by the licensed intermediaries and their representatives. In addition, the
Regulations also spell out guidance for its members on the handling and use of money and assets of their
respective customers.
Licensing of stock markets
A new approach has been introduced to allow MAS to have more direct regulatory reach over these
markets and to calibrate specific regulatory requirements to address the risks posed by different forms of
markets. This, the MAS seeks to do through the introduction of the Securities and Futures (Markets)
Regulations. These Regulations stipulate calibrated governance and reporting requirements for securities
and futures markets for the following markets:
exchanges;
exchange holding companies; and
recognised trading system providers.
The Regulations also prescribe the requisite forms to be used when applying for approval to operate as
an exchange, or an exchange holding company or as a recognised trading system provider. Likewise, it
prescribes the requisite form for an application for exemption from approval or recognition as an exchange
or as a recognised trading system provider. Another key aspect of the Regulations is the provisions on the
migration procedures for existing markets to this regime.
Where an overseas exchange or foreign corporation seeks to establish or operate or assist in establishing
or operating, or hold itself out as operating, a stock or futures market in Singapore, it may, instead of
seeking to be licensed as a securities or futures exchange as the case may be, seek registration as a
!Recognised Trading System Provider". The MAS will recognise an applicant as a recognised trading
system provider provided that it is satisfied that certain prescribed conditions are met.
Clearing houses
The SIA did not expressly provide for the regulation of clearing and settlement institutions, while the FTA
did. This anomaly has been rationalised in the SFA as the provisions on clearing houses in the SFA will
apply generally to both the futures and securities markets. In this regard, the provisions in the SFA setting
out the regulatory regime on obtaining a licence to establish or operate a clearing house have been
generally brought in line with the provisions setting out the regulatory regime for applying for a capital
markets services licence.
More significantly for the futures and securities markets, is a slew of new provisions that expressly
abrogate the effect of insolvency and bankruptcy law as between that member and the clearing house
where a member of a clearing house becomes insolvent or bankrupt. The rationale behind this is to
ensure that the insolvency of one member of the clearing house would have a minimal effect on the
settlement of its trade with the clearing house. This is to minimise any domino effect of the insolvency on
the other members of the clearing house as well as the clearing house itself.
The Securities and Futures (Clearing Facilities) Regulations prescribe the requisite forms to be used when
applying for approval to operate as a clearing house, and stipulate that a non-refundable fee of S$2,000 is
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payable to the MAS on the lodgment of the application. More importantly, the Regulations set out the
governance, reporting and operational requirements for clearing houses. In addition, the Regulations also
spell out guidance for its members on the handling and use of money and assets of their respective
customers.
Migration of corporate fund raising provisions
The provisions relating to offers of securities, debentures and interests under the CA have been migrated
to the SFA. The move includes all the provisions relating to prospectuses, profile statements and liabilities
for any misstatements therein.
Significant changes to the prospectus regulatory regime
It should be noted, however, that while the migration of the provisions from the CA to the SFA is largely
relocatory in nature, clarificatory drafting changes to the provisions have been made. These changes
include the following:
the SFA makes it clear that an advertisement authorised under it is not a prospectus for the
purposes of the SFA;
preliminary prospectuses are now provided for under the SFA whereas previously, they were dealt
with by a specific exemption under the subsidiary legislation; and
an !offer to the public" under the SFA is defined to include providing a facility, made available to the
public, that enables a person to subscribe for or purchase shares in or debentures of a corporation.
Some of the key changes relating to the prospectus regulatory regime are discussed here.
Registration of prospectuses with MAS Prospectuses will no longer be registered with the Registry
of Companies and Businesses. MAS has taken over as the body overseeing the lodgment and registration
of prospectuses.
Where the MAS refuses registration, it is generally required to give the person or company who filed the
prospectus an opportunity to state its case. There are stated exceptions to this requirement where the
MAS refuses registration.
Matters that must be disclosed in prospectuses Matters that must be disclosed in a prospectus
must satisfy the general test on disclosure set out in s 243 of the SFA. Generally speaking, the said
section provides that prospectuses must disclose all the information that investors and their professional
advisers would reasonably require to make an informed assessment of an investment, as well as the
matters prescribed by the MAS. This test is essentially the same as the one previously contained in s 45
of the CA.
The Securities and Futures (Offers of Investments) (Shares and Debenture) Regulations 2002
(S240/2002) (!Shares and Debentures Regulations") set out the matters that have been prescribed by the
MAS by way of prospectus checklists and updates the current list of matters set out in the Fifth Schedule
of the CA. In this regard, the Regulations have set out a total of eight checklists in the Fifth to Twelfth
Schedules (a three-fold increase from three in the CA).
Registration of a base prospectus In respect of bond and debenture issues, the Shares and
Debentures Regulations also allow an issuer to make multiple offers under a debenture issuance
programme, provided that the issuer registers with the MAS a base prospectus that is applicable for the
entire programme. Subsequently, the issuer will only need to register a brief pricing statement containing
information specific to that particular offer without having to register the base prospectus. The intent is to
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encourage bond and debenture issues in Singapore by reducing costs for bond and debenture issuers
and allowing them to raise funds more quickly.
Holding period for prospectuses Section 240(8) of the SFA provides that the MAS may register a
prospectus lodged with it on any day between the 14th and 21st day from the date of lodgment of the
prospectus, unless it has extended the time of registration (which cannot be more than 28 days from the
date of lodgment of the prospectus). This essentially provides the MAS with a minimum two-week holding
period to review the prospectus.
The MAS has also explained that during this time, it will post a copy of the lodged prospectus on a
database to be made available at the MAS website the Offers and Prospectuses Electronic Repository
and Access (!OPERA"). The public may view and comment on offer documents lodged with the MAS, and
public comments will be kept confidential. This move is intended to raise the standard of prospectus
disclosure. The MAS has assured the public that there will be safeguards in place to discourage frivolous
comments.
Stop orders The MAS has the power to issue a stop order on a prospectus that has been lodged and
registered with it under s 242 of the SFA. The provision is intended to act as a safeguard if a prospectus is
found to be misleading or deficient after it has been registered. Such a stop order will direct the person
issuing the prospectus to halt any issues of shares or debentures, or units of shares or debentures.
Furthermore, where a stop order has been issued, any applications made prior to the issuance of the stop
order will be deemed to have been withdrawn. Where shares or debentures, or units of the same, have
already been issued prior to the issuance of the stop order, any such issuance will be void. In either case,
the issuer must refund the applicants any payments they had made.
Changes to the Listing Manual
On 10 May 2002, the Singapore Exchange Ltd (!SGX") announced that it had completed its review of the
listing rules, which started principally in April 2001, and issued a new Listing Manual (!Listing Manual").
The intent of the new Listing Manual is to streamline and simplify the requirements for new listing
applications, thereby facilitating the listing process in Singapore. It will, therefore, be seen that relevant
clauses have been moved around and regrouped into a single chapter where appropriate, and chapters
generally adopt a more logical sequence. In doing this, the preservation of a fair and orderly market
remains the essential requirement.
The Listing Manual came into effect on 1 July 2002, in tandem with the coming into force of Part XIII of the
SFA. All new listings submitted on or after 1 July 2002 must comply with the new rules. Any listing
application and other compliance requirements prior to this date must be in accordance with the prior
listing rules. However, the SGX has made it clear that, where necessary, it may publish transitional
arrangements in relation to any amended or new listing rule.
The principal changes in the latest bout of amendments relate to the following:
initial shareholding spread and public float requirement;
IPO distribution;
moratorium;
disclosure of subscription of IPO shares by parties associated to the offering;
covered warrants requirements;
disclosure in IPO prospectuses;
continuous disclosure;
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interested person transactions (!IPT");
circular and annual report; and
suspension and delisting.
New criminal offences
Concurrent with these changes, new offences with regards to listed companies have also been created,
consistent with a move towards a more disclosure-oriented climate.
Take-overs
Provisions in the CA relating to take-overs have been migrated to the SFA. The bulk of the CA take-over
provisions (those dealing with procedures, time table and documentation) have been migrated to a code
on take-overs and mergers. The SFA contains provisions empowering the MAS to promulgate, and the
Securities Industry Council to administer and enforce, the new code.
Collective investment schemes
Currently, the CA regulates the offer of !interests other than shares" by requiring, among other things, the
approval of a trust deed which must contain certain covenants stipulated in the CA. As noted in the MAS
consultation document, this is out of step with international practice. In order to bring our regulatory
regime in line with international practice, the SFA provides for the regulation of !collective investment
schemes".
The SFA divides collective investment schemes into two categories: schemes constituted in Singapore
and schemes constituted outside Singapore, with a different regulatory regime for each.
Singapore collective investment schemes
For a scheme constituted in Singapore, the MAS will authorise such a collective investment scheme if:
there is a manager for the scheme that meets the requirements of the SFA;
there is a trustee for the scheme that meets the requirements of the SFA;
there is a trust deed in respect of the scheme that complies with the requirements of any regulations
promulgated under the SFA; and
the scheme, the manager for the scheme and the trustee for the scheme comply with the SFA and a
code on collective investment schemes.
Collective investment schemes outside Singapore
For a scheme constituted outside Singapore, the MAS will recognise such a collective investment scheme
if:
the laws and practices of the jurisdictions under which the scheme and its manager are constituted
give Singapore investors protection equivalent to that afforded under the SFA in the case of
comparable authorised schemes;
in the case of a scheme which is constituted as a corporation, the corporation is registered as a
foreign company with the Registry of Companies and Businesses;
there is a manager for the scheme which satisfies the requirements of the SFA;
there is a representative for the scheme who is an individual resident in Singapore;
the MAS has been furnished with information regarding the situation of the registered office of the
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foreign company or the manager, the name and contact particulars of the representative and such
other information as the MAS may require; and
the scheme, the manager for the scheme and the trustee for the scheme comply with the SFA and a
code on collective investment schemes.
Note that these requirements are substantially different from those proposed in the draft SFA.
Offers of foreign collective investment schemes to institutional and sophisticated investor
Where under the current regime, an offer of interests in an overseas investment fund cannot take
advantage of the exemptions under Part IV, Division 5A of the CA (that is, public offers made to
sophisticated or institutional investors), collective investment schemes under the SFA may be offered to
such investors.
Where investment in a collective investment scheme is to be offered to institutional investors, such offers
and collective investment schemes do not have to comply with the requirements in the SFA for collective
investment schemes (s 304 of the SFA).
Where investment in a collective investment scheme is to be offered to sophisticated investors, such
offers will be subject to less stringent requirements. To be approved by the MAS, such offers must satisfy
the following criteria:
the manager must be licensed (if the restricted scheme is constituted in Singapore, the manager
must be the holder of a capital markets services licence or otherwise exempted);
the manager must be !fit and proper"; and
if the collective investment scheme is a Singapore unit trust, an approved trustee must be
appointed.
Insider trading
The MAS had on 27 January 2001 released a consultation document on insider trading (the !Consultation
Document"). The Consultation Document proposed changes to Singapore"s insider trading laws (which
themselves had seen amendments only the previous year with the passing of the Securities Industry
(Amendment) Act (A2/2000) which introduced more onerous criminal penalties and civil liability for insider
trading). The proposed changes bring us in line with international laws and practices, including those of
the United Kingdom, Australia, the United States and Malaysia.
The SFA adopted the proposals in the Consultation Document and thereby redefined the laws on insider
trading.
The insider trading provisions are not discussed further given space limitations here.
Extension of civil penalties
The regime of civil penalties had previously applied only to insider trading offences. Broadly, the regime of
civil penalties, introduced only early last year for insider trading offences, allows the MAS to bring an
action against a person who has engaged in insider trading. If the action is successful, the offender will be
required to pay a civil penalty to the MAS (essentially a fine). Liability is determined on a balance of
probabilities and not on the higher criminal standard of proof beyond reasonable doubt.
The regime of civil penalties has been extended to all offences under Part XII of the SFA, which will
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include offences under the FTA and SIA (such as false trading and market rigging, bucketing and market
manipulation). It also includes the new offence on providing disclosure to the SGX.
Extension of jurisdiction
The SFA expressly provides that extra-territorial jurisdiction applies:
where a person does an act partly in and partly outside Singapore and the act, if done wholly in
Singapore, would constitute an offence against any provision of the SFA; and
where a person does an act outside Singapore which has a substantial and reasonably foreseeable
effect in Singapore, and the act would, if carried out in Singapore, constitute an offence under any
provision of Part II (Markets), Part III (Clearing Facilities), Part IV (Capital Markets Services Licence
and Representative Licence), Part VII (Securities Industry Council and Take-over Offers), Part XII
(Market Conduct), Part XIII (Offers of Investments) or Part XV (Miscellaneous) of the SFA.
Conclusion
The SFA provides the much needed rationalisation and integration of the present regulatory regime of the
futures and securities markets. The advent of a single licensing regime has been long in the offering and
market players will be glad to see its arrival.
Kala Anandarajah & Lim Wee Teck
Rajah & Tann
E-mail: kala.anandarajah@sg.rajahandtann.com & wee.teck.lim@sg.rajahandtann.com