This topic is designed as a reference on the rules and regulations governing advisory services in the Malaysian capital market. Examination candidates should review the notes for the Module 19 (SIDC – Advisory services) and complete the self-assessment questions and answers in the topics.

Objectives
Learners are expected to have good knowledge, understanding and ability to apply in the following areas:
• The principles of contract law and relevant issues
• The laws which are relevant to the advisory services in the Malaysian capital market
• The system and procedures of licensing of persons who carry on the investment advisory business in Malaysia
• The features and prohibitions of investment advisory activities
• The regulations governing the issue and offer of equity securities, listing of corporations and quotations of securities on the Main Market of Bursa Malaysia Securities Berhad (Bursa Securities) (Main Market) and proposals which result in a significant change in the business direction or policy of corporations listed on the Main Market under the Securities Commission Malaysia’s Equity Guidelines
• The regulations setting out who can act as principal advisers for the submission of corporate proposals and the competency standards required
• The regulations governing the conduct of due diligence for corporate proposals by issuers, advisers and experts
• The activities and current trends connected to money laundering and terrorism financing and the Malaysian regulatory approach towards them
• The characteristics and regulations governing take-overs in Malaysia
• The regulations governing valuations of property assets in conjunction with corporate proposals for submission to the Securities Commission Malaysia or for inclusion in prospectuses and circulars
• The regulations governing the issuance and registration of prospectuses
• The regulations governing the issue, subscription, purchase, invitation to subscribe or purchase corporate bonds or sukuk to retail investors
• The regulations that must be observed for the purposes of exclusively making available unlisted capital market products to sophisticated investors in Malaysia or persons outside Malaysia
• The regulations governing the issuers of structured warrants
• The regulations governing listing of securities under the Bursa Securities Main Market Listing Requirements, Bursa Malaysia Securities Berhad ACE Market Listing Requirements and Bursa Malaysia Securities Berhad LEAP Market Listing Requirement.

Outcomes
These define clearly what you should be able to do on the successful completion of each topic. You should read them carefully before you begin. On completion, check whether you have achieved the objectives.

PROHIBITED CONDUCT AND INSIDER TRADING

Content
Prohibited Conduct
Insider Trading
Self-Assessment Questions & Answers

Prohibited Conduct
The CMSA addresses prohibited conduct when trading in securities. Under section 175(1), no person shall create a false or misleading appearance of active trading in any securities on a Malaysian stock market or a false or misleading appearance with respect to the market for or price of such securities. Secondly, a person shall not, by purchasing or selling securities do not involve a change in beneficial ownership of the same, or by fictitious transactions or devices, maintain, inflate, depressor cause fluctuations in the market price of any securities – section 175(2). Subsection (3) sets out the events that shall be deemed to have created a false market:
(a) If the person effects directly or indirectly a transaction of sale or purchase of securities which does not involve a change in beneficial ownership of securities.
(b) If a person makes an offer to sell securities at a specified price where he has made or proposes to make or knowns that a person associated with him has made or proposes to make an offer to purchase the same number of securities at a price that is substantially the same  as the first-mentioned price, or
(c) If a person makes an offer to purchase securities at a specified price where he has made or proposes to make or knows that a person associated with him has made or proposes to make an offer to sell the same number of securities at a price that is substantially the same as the first-mentioned price.
Section 176(1) of the CMSA prohibits a person from effecting transactions in securities of a corporation on a stock market in Malaysia so as to induce other persons to acquire or dispose of the securities of the corporation.
Likewise, a person is not permitted to make a statement or to disseminate information that is false or misleading in a material or likely to induce the sale or purchase of securities by other persons or which has an effect on the raising, lowering, maintaining or stabilising the market price of securities if he makes it without caring whether the statement or information is true or false or knows (or ought reasonably to have known) that the statement or information is false or misleading in a material particular (section 177).
Section 178 of the CMSA covers the unlawful activity of fraudulently inducing persons to deal in securities. Fraudulent inducement includes:
(a) Making a statement that one knows to be misleading, false or deceptive;
(b) Dishonest concealment of material facts
(c) Reckless making (dishonestly or otherwise) of a statement that is misleading, false or deceptive; and
(d) Recording or storing information by means of any mechanical, electronic or other devices that one knows to be false or misleading in a material particular, to induce or attempt to induce another person to deal in securities.
Section 179 prohibits the use of any device, in connection with the sale or purchase of any securities, to defraud or mislead.
Section 181 states that a person shall not circulate or disseminate, or authorise or be concerned in the circulation or dissemination of any statement or information to the effect that the price of any securities or a corporation will or is likely to rise or fall or be maintained by reason of any transaction entered into or other act or thing done in relation to securities of that body corporate, or of a corporation that is related to that corporation, in contravention of sections 175, 176, 177, 179 or 179 if;
(a) The person, or a person associated with the person, has entered into any such transaction or done any such act or thing; or
(b) The person has received, or expects to receive directly or indirectly, any consideration or benefit for circulating or dissemination or

being concerned in the circulation or dissemination, the statement or information.
In addition to criminal liability, contravention of section 175, 176, 177, 178, 179 or 181 may give rise to civil liability. Any person who enters into a transaction for the sale and purchase of securities with the p0arty who has contravened sections 175, 176, 177, 178, 179 or 181 may, by civil action recover the amount of loss suffered by instituting civil proceedings against that party (section 199).
Infringement of the above provisions would also amount to an offence punishable on conviction to imprisonment for a term not exceeding 10 years and a fine of not less than RM 1 million (section 182).

What is Insider Trading?

Insider trading refers to the practice of purchasing or selling a publicly-traded company’s securities while in possession of material information that is not yet public information. Material information refers to any and all information that may result in a substantial impact on the decision of an investor regarding whether to buy or sell the security.

By non-public information, we mean that the information is not legally out in the public domain and that only a handful of people directly related to the information possessed. An example of an insider may be a corporate executive or someone in government who has access to an economic report before it is publicly released…Read more

Insider Trading

Insider trading is a serious allegation. If pursued as a criminal offense, the penalties of a conviction are severe. However, several lines of defense can be taken and there are even a few things that people can do to completely avoid an allegation.
Insider trading is the trading on the basis of non-public and price sensitive information. However, in order to appreciate this topic in further detail, it is important to know the meaning of ‘information’ and “trading” and what constitutes a material effect on the price of value of securities.
Under section 183 of the CMSA “information” for the purpose of Subdivision 2 of Division I of Part IV on Insider Trading could mean any of the following:
1. Materials of supposition and other matters that are insufficiently definite to warrant their being made known to the public;
2. Matters relating to the intentions, or likely intentions of a person;
3. Matters relating to the intentions, or likely intentions of a person.
– Information relating to the financial performance of a corporation;
– Information that a person proposes to enter into or has entered into a transaction or agreement in relation to securities; and
– Matters relating to the future.
Information is generally available if that information has been known in a manner that would bring it to the attention of reasonable persons who invest in securities of a kind whose price and value might be affected by the information and since it was so made known, a reasonable period for it to be disseminate among and assimilated by such persons has elapsed (section 184).
Secondly, section 185 of the CMSA states that information will have a material effect on price or value of securities when that information would, on becoming generally available, influence reasonable persons who invest in securities in deciding whether or not to acquire or dispose such securities or enter into an agreement to acquire or dispose securities.
Section 188 of the CMSA provides the general rule of prohibited conduct of a person in possession of inside information. An “Insider” is a person who (Section 188(1)):
(a) possesses information that is not available which on becoming generally available, a reasonable person would expect it to have a material effect on the price of the value of securities; and
(b) knows (or ought reasonably to know) that the information is not generally available.
Section 188(2) stipulates that an insider shall not (a) acquire or dispose of, or enter into agreement with a view to the acquisition or disposal of such securities which is related to the information set out in subsection 188(1); or (b) procure the same.
Section 188(3) states that in respect of publicly traded securities, the insider shall not communicate information referred to in subsection 188(1) to another person if the insider knows that the other person would, or would procure a third party to, acquire, dispose of or enter into an agreement with a view to the acquisition or disposal of any securities to which the information in subsection 188(1) relates. In other words, the insider shall not act as a “tipper”.
Failure to comply with subsection 188(2) or 188(3) is an offence and would warrant on conviction to imprisonment for a team not exceeding 10 years and to a fine of not less than RM 1 million. Also, section 200(1) allows any person that appears to the SC of having contravened sections 175, 176, 177, 178, 179 or 181.
Corporations must comply with section 190 in relation to prohibited conduct when in possession of inside information. A corporation is deemed to possess any information:
–  Which an officer is an insider by reason of being in possession of the information;
– Which an officer of the corporation possesses and which came into his possession in the course of his duties as an officer of a related corporation of the first-mentioned corporation where;
(i) the officer is an insider by reason of being in possession of the information;
(ii) the officer is involved in the decision, transaction or agreement of the first-mentioned corporation in acquiring or disposing of securities in relation to which the officer is an insider; or
(iii) it is reasonable to expect that the officer would communicate the information to another officer of the first-mentioned corporation acting in his capacity as such, unless it is proved that the information was not in fact so communicated.
Section 190 of the CMSA contains the exceptions to section 188(2) in respect of corporation. Section 190(3) embodies the “Chinese Walls” defence which considered to have contravened section 188(2) by entering into a transaction merely because the corporation possesses the information. The “Chinese Walls” defence requires that:
– the decision to enter into the transaction was made by a person other than an officer of the corporation in possession of the information; and
– the corporation already had arrangements that could reasonably be expected to ensure that the information was not communicated to a person involved in the transaction, or that no advice was given by the person in possession of the information, or that the person in possession of the information is not involved in the decision to enter into the transaction.

Section 194 provides for the bidder’s defence and states that there is no contravention against section 188(2) by a corporation by the mere fact that the corporation is aware that it proposes to enter into or has previously entered into transactions in relation to securities other than those of the corporation. This would allow a person to build up his interest in a company without being regarded as being in breach of the provision insider trading.
Section 196 regulates unsolicited transactions by brokers. A CMSL (or dealer’s representative) does not contravene section 188(2) by entering into a transaction on the stock market in respect of securities quoted for trading, as an agent for another person, if:
(a) the transaction was entered into under specific instruction by the other person and the instruction was not solicited by the dealers (or its representatives);
(b) the dealer (or its representative) has not given any advice to the other person concerning the transaction; and
(c) the other person is not associated with the dealer (or its representative).
Section 196 would refer therefore require that relevant information or advice is not to be communicated to the holder of a CMSL who carries on the business of dealing in securities or its representative who executes the client’s instructions. Thus, holder of a CMSL who carries on the business of dealing in securities, whether they are bodies corporate or natural persons, must ensure that the particular price sensitive information is not made available to anyone within the business who may advise clients, or execute the instructions of clients, in relation to securities the price of which might be affected by the information.

Reference:

CMSA 2007: Part V (174-196)

CMSA 2007 (Act 671): Capital Markets Services Act 2007

Question 1:
Match the prohibited conduct relating to negligent misstatement and the CORRECT provision as set out in the Capital Market and Services Act 2007.

1. FALSE TRADING AND MARKET RIGGING TRANSACTION (SECTION 175):
Answer: Purchasing or selling securities that do not involve a change in the beneficial ownership of the securities.

2. STOCK MARKET MANIPULATIONS (SECTION 176):
Answer: Effecting transactions in securities of a corporation that have the effect of raising, or pegging the price of securities of the corporation on a stock market in Malaysia so as to induce other persons to acquire or dispose of the securities of the corporation.

3. FALSE OR MISLEADING STATEMENTS, ETC. (SECTION 177):
Answer: Disseminating information that is likely induce the sale or purchase of securities by other persons if the licensed person makes it without caring whether the statement or information is true or false or knows (or ought reasonably to have known) that the statement or information is false or misleading in a material particular.

4. FRAUDULENTLY INDUCING PERSONS TO DEALS IN SECURITIES (SECTION 178):
Answer: Dishonest concealment of material facts to induce or attempt to induce another person to deal in securities.

Question 2:
Which of the following considered as “information” under the provision in the CMSA governing the prohibited conduct of Insider Trading?
1. Matters of supposition and other matters that are insufficiently definite to warrant their being made known to the public.
2. Matters relating to the information, or likely intentions of a person.
3. Matters relating to negotiations or proposals with respect to commercial dealings or dealing in securities.
4. Information relating to the financial performance of a corporation;
5. Information that a person proposes to enter into or has entered into a transaction or agreement in relation to securities.
6. Matters relating to the future

Question 3:
Identify whether the following statements on the general liability of stockbrokers are TRUE or FALSE:
1. Insider Trading is the trading on the basis of non-public, price sensitive information. TRUE / FALSE
2. A corporation is deemed to possess Insider information which an officer of the corporation possesses in the course of his duties or knowns (or ought reasonably to have known) because he is an officer of the corporation. TRUE / FALSE
3. A CMSL (or dealer representative) contravenes the section on Insider Trading 188(2) by entering into a transaction on the stock market in respect of securities quoted for trading, as an agent for another person, if the transaction was entered into under a specific instruction by the other person and the instruction was not solicited by the dealer (or its representative).TRUE / FALSE
4. Information is generally available if that information has been made known in a manner that would bring it to the attention of reasonable persons who invest in securities of a kind whose price and value be affected by the information. TRUE / FALSE

Exercises:
1. Which of the following is insider trading? 
A. You sell your company’s stock because you know it is about to announce poor earnings
B. Your company starts supplying parts for a customer’s secret major product, so you buy the client’s stock
C. You dump a company’s shares after your broker confidentially tells you the CEO at that company just sold stock, but the sale has not yet been publicly reported
D. All of the above

2. While feeling good at a family party, you tell your brother-in-law that your company is about to announce a big deal with Microsoft. What are you guilty of? 
A. Talking shop
B. Consumer fraud
C. Tipping / insider trading
D. All of the above

3. What is a blackout period? 
A. A period when your company’s stock price is lower than the exercise price of your options
B  A period of stock-trading activity that you cannot remember during an SEC interview
C. A period during which your company prohibits you from buying or selling its stock
D. A period during which a company prohibits its insiders from exercising their stock options or receiving restricted stock

4. What would probably not be considered insider trading during a blackout period if you knew inside information? 
A. Exercising and holding stock options
B. Exercising and selling stock options
C. Trading company stock in a 401(k)
D. None of the above

Read more…
Module Outlines – Contractual Issues –Negligent Misstatement – Licensing of Persons Who Carry On The Business Of Investment Advice, Advising On Corporate Finance And Their Representatives –Prohibited Conduct And Insider Trading –Conclusion.

Equity Guidelines

CHAPTER 5 : EQUITY OFFERINGS AND LISTINGS
CHAPTER 6 : SPECIAL PURPOSE ACQUISITION COMPANY