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

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

Page : 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

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

Page : 5 Accountability of Regulators What are the Regulators seeking to promote ? Disclosure & Financial transparency – timely, accurate and Disclosure & Financial transparency – timely, accurate and reliable disclosure on companies financial positions reliable disclosure on companies financial positions Disclosure & Financial transparency – timely, accurate and Disclosure & Financial transparency – timely, accurate and reliable disclosure on companies financial positions reliable disclosure on companies financial positions Proper Market Conduct andBusiness integrity Proper Market Conduct and Business integrity Accountability and responsibility to protect investors Accountability and responsibility to protect investors interestthrough effective enforcement of securities interest through effective enforcement of securities laws and rules laws and rules Accountability and responsibility to protect investors Accountability and responsibility to protect investors interestthrough effective enforcement of securities interest through effective enforcement of securities laws and rules laws and rules Investor confidence

Page : 6 Accountability of Regulators Implementation of Key Corporate Governance Initiatives in Malaysia 1.Listing Requirements – sets out corporate governance rules that must be complied with by public listed companies (PLCs) and their directors 2.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 3.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 4.Duties of auditors of listed corporation (section 99E SIA) –to report breaches of laws and Rules 5.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.

Page : 7 Accountability of Regulators 6. create awareness among minority shareholders of their rights 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 act on behalf of minority shareholders to deter abuses of majority shareholders who control the decision making process of a PLC 6. create awareness among minority shareholders of their rights 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 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:

Page : 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 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 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).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).

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

Page : 10 Division of Responsibilities between SC, Stock Exchange & SROs Corporate Governance (36%) (26 cases involving 38 individuals & 2 companies) Fraud (7%) (5 cases involving 13 individuals & 1 company) Futures industry Offences (13%) (9 cases involving 16 individuals & 2 companies) 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 SCs approval – –Trading offences involving directors or management. Short selling & licensing related Offences (44%) (31 cases involving 30 individuals & 2 companies) Types of Offences Prosecuted by the SC :

Page : 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 PLCs 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

Page : 12 Summary of key corporate governance reforms in Malaysia 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) Amendments to securities laws to inter alia introduce provisions governing whistle blowing and enhance enforcement/ redress mechanisms for breaches of securities laws (January) Rules & Regulations Malaysian Code on Corporate Governance (March) MAICSA best practice guidance of company secretaries (November) Best Practices Minority Shareholder Watchdog Group formed (August) Directors Mandatory Accreditation Programme commences (April) Directors Continuing Education Programme commences (July) SC licenses Minority Shareholder Watchdog Group as an investment advisor and receives grant of RM250,000 (March-April) 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) SC introduces merit- demerit incentives in Guidelines on Issue/Offer of Securities (April) Malaysian Institute of Corporate Governance formed (March) Institutional reforms Best practices for good corporate disclosures (expected this year)

Thank You