By Mak Yuen Teen
To borrow a phrase, it warms the cockles of my heart to see the proposal for a new enforcement framework by SGX Regco. It is no secret that I am not a fan of the current approach.
When SGX Regco was formed and the current enforcement framework was proposed, which involves the establishment of an “independent” Listing Disciplinary Committee (LDC) and Listing Appeals Committee (LApC), I had reservations about whether this would work, primarily due to excessive bureaucracy in the enforcement process and possible conflicts of interests involving members of these committees. I understood the need for natural justice and due process but felt that it may be an overkill. There is also another problem with the LDC. While the market holds SGX Regco responsible for the lack of enforcement action, it is the LDC which is rather shielded from the public view that may hold things up.
Those reservations have turned out to be a reality.
Over the past two years, I have raised those concerns again in several articles. In an article on June 4, 2018 on this website titled “SGX Watchlist of Directors and Key Officers is Good But More is Needed”, I said:
“Today, SGX Regco has enhanced regulatory powers that allow it to publicly reprimand and fine issuers, and to publicly reprimand directors (but not to fine them). SGX Regco also has a disciplinary committee and an appeals committee. When this system of independent committees was introduced, I felt that while due process and natural justice is important, there is a risk that the enforcement process becomes too “bureaucratic”. The disciplinary committee will not want its actions to be regularly or even sporadically overturned by the appeals committee, so there is likely to be an effort to ensure that the two committees are on the same page before any action is taken. This may then require many people to agree to an enforcement action. Add to that the fact that the committees are made up of market practitioners, there is also the risk of conflict, in the sense that they or their friends or acquaintances may be the ones facing possible enforcement actions (some members on the committees may themselves be serving on boards or advising them). Of course, there are conflict of interest procedures in place but such procedures usually deal with only the clearcut conflicts (and the rest is up to the individual member’s own standards and values). I was not confident that the enforcement process would be timely enough or would be used sufficiently to be a real deterrent.”
In another article here on December 11, 2019 here titled “2019: The Year Enforcement Stopped on SGX”, I said:
“Looking at the composition of the disciplinary committee, the previous concerns with a conflict between the commercial and regulatory roles of SGX, which the establishment of SGX Regco in September 2017 was supposed to address, may now have been replaced by conflicts within the disciplinary committee. How many of these committee members or their firms are providing services to issuers and directors who may be subject to enforcement actions? While I am sure there are conflict of interest procedures in place, how effective would these procedures be if the committee as a whole include many members who are actively providing services to issuers and directors, or who are directors or management of issuers? Some are directors or key management of issuers, including independent directors. Would they support enforcement action against their peers? Incidentally, enforcement actions against issuers and directors are already rare, but when it comes to enforcement actions against independent directors, they are practically “black swan” events.”
Two other jurisdictions I follow quite closely, Hong Kong and Malaysia, leave Singapore in the dust when it comes to enforcement by the stock exchange. Readers who are skeptical can take a look themselves here:
For HKEX: https://www.hkex.com.hk/Listing/Rules-and-Guidance/Disciplinary-and-Enforcement/Enforcement-Statistics?sc_lang=en
For Bursa: https://www.bursamalaysia.com/regulation/about_bursa_malaysia_regulatory/enforcement/enforcement_statistics
To summarise, for HKEX, which does not have the power to impose fines (this power rests with the SFC), there have been 12 sanctions in various forms imposed in just the first six months of this year, involving 21 executive directors, 4 non-executive directors, and 14 independent directors.
For Bursa, in 2019, there have been 23 public reprimands and fines, and 3 public reprimands, involving 25 directors. These directors paid total fines of about RM8.78 million. Bursa, unlike HKEX, has the power to impose fines on both companies and directors.
In both HK and Malaysia, the regulators have shifted their enforcement actions towards directors, rather than companies. This is a good idea because as we have seen in Singapore, when companies are reprimanded, some directors seem to say “who, me? I didn’t know, I thought it was the other guys”. Imposing fines on companies would just be penalising shareholders.
The SGX enforcement statistics for issuers and directors over the last three years would not be worth mentioning because there have been only three public enforcement actions against issuers and directors/key officers since SGX Regco was formed – they were for Jason Holdings in May 2018, Oriental Group in June 2018 and Dapai International in July 2018. As a keen observer of companies here, and having written extensively about clear disclosure lapses and other breaches, it is clearly not a case of our companies and directors being a bunch of angels.
It boils down to the regulatory gridlock in SGX, a gridlock due to the fact that enforcement actions against issuers and directors can only be taken by the LDC. Both HK and Malaysia also have a separate disciplinary committee called the Listing Committee for disciplinary actions, but somehow they don’t seem to have the same problems as we have seen in the LDC here.
Since SGX Regco is a separate subsidiary and ought to be an independent regulator, I feel that the need for a separate LDC is minimised. However, I think that the LDC has been ineffective in large part because of its composition.
SGX Regco’s media release refers to a “demanding case-load”. According a Business Times “breaking news” report, 18 cases have been put before the LDC, with only three cases heard (presumably, they are the three cases referred to above). That does not look like a large number of cases (if I have my way, companies and directors will have to take a number and wait their turn to be reprimanded).
The committee has 17 members with two co-chairs and one deputy chair. There are six lawyers on the committee, including one of the co-chairs and the deputy chair. The quorum is five members, with the requirement for a lawyer and one of the co-chairs or deputy chair being part of the quorum. It doesn’t seem to be that difficult to have five members out of 17 to form a quorum that meets the requirements.
The problem probably has much to do with the background of the LDC members, who are active market players, and therefore have a significant chance of having a conflict with an issuer or director facing regulatory actions. Unfortunately, I have observed that we do have a tendency to form committees with rather unbalanced composition, resulting in problems such as we are seeing here or creating the perception that the committee is formed to reach a predetermined outcome.
The proposed enforcement framework will keep the LDC which can still hear cases involving public sanctions. However, SGX Regco will also have the powers to deal with cases that call for public sanctions, except those where fines may be imposed where LDC must be involved. Since fines can only be imposed on issuers but not directors, I do not envisage that fines will be imposed often because, as I mentioned earlier, imposing fines on issuers penalises shareholders.
In summary, I fully support the proposed enforcement framework. However, we are only dealing with what I would call administrative sanctions by the stock exchange. For market conduct to improve and investors to be adequately protected, a range of sanctions that should include civil penalties, civil liability and criminal penalties must also be available to deal with more serious offences – they too must be effectively enforced. Therefore, statutory regulators in our ecosystem must also raise their game and not hide in the shadow of SGX Regco. It is time for them to show themselves. It will really touch my soul.
