Revisit need for a separate securities regulator

Published February 19, 2014

Combining commercial and regulatory roles calls for a more robust framework



First published in Business Times on February 19, 2014

securities regulator

Two hats not better: The retired CEO of a listed stock exchange which, like SGX, has dual roles of a regulator and operator, admitted that there is conflict between the two roles but went on to reveal that he couldn’t say it when he was still the CEO. – ST FILE PHOTO

IN 2008, The Business Times published my letter arguing for a review of the regulatory framework of our securities markets and that as part of this review, “we should closely examine the current approach to dealing with the conflicts between Singapore Exchange’s commercial and regulatory roles” (“Thoughts on SGX’s regulatory stance”, BT, Dec 23, 2008).


That letter was partly triggered by what I felt was a lack of transparency in the enforcement actions taken by SGX. At that time, SGX had a practice of using private reprimands and did not publish information about enforcement actions against listed companies. I felt it was too timid in discharging its regulatory role. It is fair to say that, since that time, SGX has become much more active in enforcement, although the effectiveness of its enforcement actions continues to be debated.


A couple of years ago, I met the retired CEO of a listed stock exchange which, like SGX, has dual roles of a regulator and operator. I asked him whether he thought there was a conflict between the two roles. He replied: “Of course there is, but I couldn’t say it when I was the CEO.”


It is, therefore, good that the recent press release on the joint consultation by the Monetary Authority of Singapore (MAS) and SGX into improving our securities markets has acknowledged that there are “perceived and actual conflicts of interests in relation to SGX’s role as a listing authority”.


The consultation paper has proposed several measures to enhance the listings and regulatory framework. These include the setting up of three committees – Listings Advisory Committee (LAC), Listings Disciplinary Committee (LDC) and Listings Appeals Committee (LApC) – and making a wider range of sanctions available to SGX.


The paper states that MAS and SGX have studied the regulatory models of international exchanges and concluded that most jurisdictions have adopted self-regulation by stock exchanges, with varying degrees of regulatory responsibilities vested in the stock exchanges. Therefore, the consultation paper takes the position that SGX will retain its dual roles, but it proposes that the regulatory role of SGX be enhanced through the committees and the enhanced sanctions.


It is true that most stock exchanges around the world have some degree of regulatory responsibilities for enforcing listing rules, although the UK has a separate listing authority doing this, which is now under the Financial Conduct Authority (FCA). For countries which have retained some degree of regulatory responsibilities within the exchange, the structures they have in place for addressing conflicts are arguably more robust than what has been proposed by the MAS and SGX. For example, the Hong Kong exchange has a Listing Committee consisting of 28 members, eight of whom are selected to represent investors’ interests. Unlike the advisory role of the proposed LAC, the Listing Committee in Hong Kong has a decision-making role in approving applications.


In Hong Kong and Malaysia, the board of the exchange has “public interest directors” who are appointed by the government. For Hong Kong, such “public interest directors” make up half the board. In Malaysia, they make up at least one-third of the board. According to the Securities Commission in Malaysia, the role of these public interest directors is “to represent broader stakeholder interests in the capital market and, in the discharge of their duties as such, they are mandated to ensure that public interests are not compromised” (


SGX has an impressive board of directors but it does not have the concept of “public interest directors” and only one of its directors, Jane Diplock, has prior regulatory experience, being the former chairman of the New Zealand Securities Commission. One may, therefore, question whether the SGX board is suitably composed to discharge its dual roles effectively. I had, in a previous commentary, already pointed out the perceived threat to its regulatory role when it has CEOs and directors of listed companies who are regulated by SGX serving as independent directors on its board. If SGX is to retain its dual roles, perhaps MAS should review the regulations for approved exchanges governing SGX, particularly with regard to the possible inclusion of “public interest” directors and restrictions on number of directors who are from listed companies.


In the case of listed entities where there is significant public interest and a need to consider wider stakeholder interests, it makes sense to ensure that the board has individuals who are able to bring those perspectives to bear in decision-making, so that there is not an excessive focus on just shareholders’ interest.


While I like the proposals to set up the three committees, I do have some concerns. The first is about the composition of the LAC. I hope that among the proposed 15 members, at least one-third to half will be representing investors’ and the public’s interest. If the committee is dominated by investment banking, corporate advisory, legal and accounting professionals, I fear that it will end up being a rubber stamp with no ink (given that it is only advisory anyway).


Prescribed referral criteria


Under the proposals, only listing applications which meet prescribed referral criteria will be submitted to the LAC for its review and advice. These include cases that present “novel or unprecedented issues”, which include those from new jurisdictions and sectors and proposed listings with unusual features or structures. It appears that we are preparing the ground for more listings of the likes of Alibaba, F1 and Manchester United, which had proposed partnership structure, stapled securities or dual-class shares when they were considering listing here or in Hong Kong. It seems we are getting ready to open the doors to issuers with dual-class share structures, given that the Companies Act will soon be amended to allow such structures for Singapore-incorporated public companies. Perhaps the LAC members in their deliberations will also have to consider if some of these listings, if they are permitted, should be classified as alternative investments and restricted to sophisticated and institutional investors. Otherwise, the enhanced regulatory framework may not offer sufficient protection to less-informed investors.


My third concern is the regulatory gridlock that may result from the establishment of the LDC and a LApC. While I welcome the proposed enhanced sanctions to be made available to the SGX through the LDC, I worry that if there is a lack of clear rules for appeal, the intent of these changes may be undermined. I can imagine the LDC being reluctant to impose sanctions if their decisions will constantly be challenged through the LApC, even though natural justice dictates that there must be checks and balances on the use of SGX’s powers.


In debating the regulatory framework over the past few years, commentators have been mostly concerned about the separation of the regulatory and commercial roles of SGX. Perhaps it is time for us to consider a bigger question – should the securities regulator role be taken out of MAS and put into a separate and dedicated securities regulator? Although the recent global financial crisis has highlighted the problems that can be created when supervisory and regulatory responsibilities are too fragmented and distributed among multiple regulatory bodies, it is extremely rare to find a single institution performing the roles of a securities regulator, a prudential regulator and a central bank. Almost all countries have a separate securities commission or equivalent.


While there are undoubtedly pros and cons in having a separate securities regulator, the fact that almost all jurisdictions have a different model from us should at least cause us to consider whether we should continue to have an omnibus regulator. The issue of whether there should be a separate securities regulator was last considered in depth by the Corporate Finance Committee in 1998. Given the growing complexity of securities markets and the fact that Singapore is an outlier in this regard, perhaps it is time for us to revisit this issue.


The writer is an associate professor in the NUS Business School where he teaches corporate governance and ethics



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