Contents
Licensing Objectives
Introduction
Licencing Framework
Summary
Self-Assessment
Introduction
The Capital Markets and Services Act 2007 (CMSA) requires certain persons engaged in the capital market to be licensed for the purpose of protecting potential investors and maintaining appropriate standards. The intermediaries that need to be licensed are those who carry on the regulated activities prescribed in the CMSA as well as their representatives.
In this topic we examine the types of regulated activities and the requirements of the licensing framework.
Licensing Framework
Regulated Activities
‘Ss.58(1) and 59(1) of the CMSA set out that where a person is carrying on an activity which falls under the definition of “regulated activity” in Malaysia, that person is required to obtain the appropriate licence in accordance with the processes and procedures set out in the CMSA.
Determining whether a particular activity falls within the definition of “regulated activity” under the CMSA is fundamental to the capital market licensing framework.
Schedule 2 of the CMSA describes and defines the following types of regulated activities:
(a) Dealing in securities
(b) Dealing in derivatives
(c) Fund management
(d) Advising on corporate finance
(e) Investment advice
(f) Financial planning
(g) Dealing in private retirement schemes
(h) Clearing for securities or derivatives
Single Licensing Framework
Prior to the CMSA, the Securities Industry Act 1983 and the Futures Industry Act 1993 regulated intermediaries in the securities and futures industry respectively. Although generally licensing requirements were similar, there were still some differences in certain fit and proper requirements for intermediaries.
This situation was addressed through s.58 of the CMSA. This section sets out the general requirement for a person carrying on any regulated activity to hold a Capital Markets Services Licence (CMSL). The CMSA also standardised the fit and proper requirements applicable to all licence holders under the Act, while specific requirements relating to individual types of licences are set out in the Licensing Handbook.
Two-tiered Licensing Framework
Under the CMSA, the licensing framework involves a two-tiered regulatory system whereby both the principal as well as the representative are required to be licensed. The principal would be required to apply for a Capital Markets Services Licence (CMSL) while its representatives would be required to apply for a Capital Markets Services Representative’s Licence (CMSRL).
The two-tiered framework is based on the principle that the CMSL holder is responsible for the activities of its representatives and would therefore need to ensure that they are in compliance with all the relevant rules and regulations and are held accountable for their actions. On the other hand, every application for a CMSRL must be supported by the principal who is a holder of a CMSL1.
The requirement for a CMSRL applies both to a person who is employed by a Participating Organisation, generally referred to as a “salaried or paid dealer’s representative” as well as an agent, generally referred to as a “remisier” or a “commissioned dealer’s representative”.
As a summary, it can be concluded that a CMSL is granted to corporations while representatives of a CMSL holder will be granted a CMSRL. The only exception to this is in the case of a financial planner where individuals may be granted a CMSL as principal.
Procedure for Licensing Application
In order to obtain a CMSL or a CMSRL, applicants must comply with the requirements of the CMSA or any guidelines made under the CMSA. Grounds for refusal by the SC for the grant of CMSL and CMSRL are set out respectively in s.64 (1) and s.65 (1) of the CMSA.
S.60 (1) of the CMSA sets out that an application for a licence must be made to the SC in the form and manner prescribed by the SC and a licence fee must be paid2.
All information and documents required by the SC must be provided. In addition, the SC can notify an applicant for a licence, in writing, to submit detailed information or copies of documents on issues related to the application3. If an applicant gives false or misleading information, the application is liable to be rejected4. In addition, if an applicant makes a false or misleading statement, or a material omission in connection with the licence application he/she is liable to a fine of up to RM1 million or imprisonment up to five years or both’.
Please read ss.64 and 65 of the CMSA for further requirements in respect of licensing applications. Ss.64 and 65 must be read together with the Licensing Handbook which prescribes the detailed criteria that must be fulfilled before an applicant can qualify as a CMSL and CMSRL respectively.
Fit and Proper Criteria
In capital markets throughout the world, intermediaries are mostly required to be authorised or licensed by a regulatory authority. This need arises to instil confidence in market participants, particularly investors, on the efficiency, honesty and financial soundness of the organisation and its representatives with whom transactions are made.
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1 S.60 (6), CMSA
2 Ss.60 (4) and 63, CMSA
3 S.60 (3), CMSA
4 Ss.64 (1)(c) and 65 (1)(c), CMSA
5 5.71, CMSA
Capital Markets and Services Act 2007 (CMSA)
The Capital Markets and Services Act 2007 (CMSA) has streamlined the requirements relating to the fit and proper criteria that applicants for CMSL and CMSRL have to fulfil. The fit and proper criteria for applicants of a CMSL are listed extensively in s.64 of the CMSA while the fit and proper criteria for applicants of a CMSRL are prescribed in s.65. These criteria may be divided into several categories that include conditions relating to probity, financial status, regulatory compliance, record of past performance, reputation, character, financial integrity and reliability as well as public interest considerations. These requirements reflect the need for intermediaries to have high standards of integrity as they handle clients’ money, provide advice and manage assets.
The fit and proper criteria prescribe not only situations where the applicant has been convicted of an offence involving fraud, dishonesty or breach of securities laws but also situations which are not unlawful but where the applicant’s actions appear to the SC to be deceitful, oppressive or improper.
The CMSA empowers the SC in considering the fitness and propriety of a corporate applicant to refuse to grant a licence in the event the directors, chief executive, managers or controllers of the applicant are in breach of the criteria set out in s.65 (1) of the CMSA. Under the CMSA, the responsibility of ensuring that the directors, chief executives, managers or controllers are fit and proper rests on the CMSL holder.
S.75 (8) provides that the SC can direct the CMSL holder to remove its director or chief executive upon the Commission becoming aware that the director or chief executive is not fit and proper.
Licensing Handbook
The Licensing Handbook has divided the fit and proper criteria for purposes of holding a CMSL and CMSRL into organisational requirements, shareholding composition, financial adequacy and requirements relating to an applicant’s competency.
Organisational Requirements
An applicant for a CMSL to carry on the regulated activity of dealing in securities, dealing in derivatives, clearing for securities or derivatives, fund management, dealing in private retirement scheme, advising on corporate finance and investment advice, must be a corporation (see para. 4.02 (1), Licensing Handbook).
The other organisational requirements relate to the organisational competence of the applicant which includes ensuring clear lines of responsibility, IT systems, internal controls and policies and processes on risk management, managing conflict, monitoring unethical conduct and market abuse as well as ensuring compliance with applicable laws and regulations (see para. 4.02 (3), Licensing Handbook).
Read para. 4.02 on the other additional organisational requirements applicable to CMSL applicants.
Shareholding Composition
Except for the shareholding requirement for Investment Banks which is a minimum of 30% local shareholding, there are no other specific shareholding requirements for the other regulated activities. However, a company engaging in fund management in relation to portfolio management is required to meet additional requirements set out in para. 4.03 (2) of the Licensing Handbook. This additional requirement does not apply if it pertains to a digital investment management company.
In the case of a stockbroking company that is not an Investment Bank, the acquirer of more than 51% of such a company must have shareholders’ funds of not less than RM100 million and no individual other than a Malaysian citizen may hold up to 10% of the paid-up capital of a stockbroking company. Individuals in aggregate may not hold more than 49% of the total paid-up capital.
Financial requirements
Para. 4.04 of the Licensing Handbook prescribes the minimum financial requirements applicable for CMSL applicants based on the regulated activity carried out. This is in addition to the other financial requirements imposed under the Rules of Bursa Malaysia Securities Berhad, and the relevant SC Guidelines.
CM SRI Licensing Requirements
Para. 4.05 of the Licensing Handbook sets out the requirements to be complied with for applicants of a CMSRL. The general requirements include the applicant being at least 21 years old, meeting the fit and proper requirements under the CMSA, and providing all relevant information for the CMSL holder to conduct due diligence. In making the assessment, the CMSL holder will consider the applicant’s educational and professional background, or the applicant’s working experience and track record. Unless exempted, all applicants must pass the relevant licensing modules set out in Table 3 of the Licensing Handbook.
Licensing Requirements for key management of a CMSL Holder, Compliance Officer and Local Participant Para. 4.06 sets out the requirements to be complied with by key management of a CMSL holder, Compliance Officer and Local Participant.
Obligations of the Licensed Person
Under the CMSA, a licensed person has the following obligations:
• To notify the SC of an event for which the SC can revoke his/her licence (s.74)
• To notify the SC if there is a change in his/her particulars, e.g. no longer carrying on business or acting in the capacity or no longer acting as a representative (s.78)
• To keep a register of his/her interests in securities and notify the SC as to where the register will be kept (ss.83 and 84)
• To make his/her register of interests in securities available for inspection by the SC (s.86)
• Not to represent or imply that his/her abilities or qualifications have been approved by the SC (s.89)
• To disclose interests in securities in circulars where recommendations are made, etc. (s.91)
• To have a reasonable basis for making an investment recommendation (s.92)
• To give priority to client’s order over own or principal’s account (s.93)
• To not deal as principal without so informing his/her client (s.97).
Licence Conditions
The SC can grant a licence under s.62 of the CMSA subject to conditions or restrictions that it deems fit.
Variation
A CMSRL holder may apply to the SC to vary the name of his/her principal. The variation is subject to the SC’s approval (see s.69 of the CMSA).
Revocation and Suspension
Read ss.72 and 73 of the CMSA and note the circumstances in which the SC can revoke a licence. Note the following:
• Before revocation or suspension, the licence holder is given the opportunity to be heard
• However, in the event of a winding-up for a corporation, or for an individual in the event the individual is an undischarged bankrupt or has been convicted of an offence set out in s.65
(1)(g)(i) or (iii), the SC may revoke or suspend the licence without giving the licensed person an opportunity to be heard
• The SC may suspend the licence instead of revoking the licence if it considers it desirable to do so.
Effect of Revocation or Suspension
5.73 (1) of the CMSA provides that a revocation or suspension of a licence shall not operate so as to:
• Avoid or affect any agreement, transaction or arrangement relating to the regulated activities entered into by such person, whether the agreement, transaction or arrangement was entered into before or after the revocation, suspension or expiry of the licence or the imposition of restriction on the licence, as the case may be
• Affect any right, obligation or liability arising under any such agreement, transaction or arrangement.
5.73 (2) further prescribes that where any licence is revoked or suspended, the SC may, subject to such conditions as it may specify in the notice, permit the CMSL holder to:
• In the case of a revocation, carry on business operations for the purpose of closing down the business connected with the revocation
• In the case of a suspension, carry on only essential business operations for the protection of interests of clients of the licensed person during the period of suspension
• In the case of an expiry, carry on such business activity as the Commission may approve for the protection of the interest of clients of the person who held the CMSL before such expiry.
CMSRL for Dealing in Securities (Dealer’s Representatives)
In addition to the requirements discussed above, the Rules of Bursa Malaysia Securities Berhad set out requirements for dealer’s epresentatives.
• The categories of dealer’s representatives are Commissioned Dealer’s Representatives, Salaried Dealer’s Representatives and Proprietary Day Traders (Rule 3.44)
• A representative can only act for one Participating Organisation (Rule 3.47 (1)(b)), be employed or engaged on a full-time basis (Rule 3.47 (1)(c)) and only operate from a place approved by the SC (Rule 3.47 (1)(d))
• A dealer’s representative must be duly registered by Bursa Malaysia Securities Berhad in the manner provided by the Rules of Bursa Malaysia Securities Berhad
• To be duly registered with Bursa Malaysia Securities Berhad, a dealer’s representative must hold a valid CMSRL for dealing in securities (Rule 3.4.6 (1)). A Proprietary Trader cannot hold a CMSRL for dealing in derivatives (Rule 3.46 (2)).
Under Rule 3.47 (1)(g), a dealer’s representative must not engage in or hold any interest in other business unless:
• It is non-executive in nature
• There is no conflict with his/her duties to the Participating Organisation
• It is not in breach of the CMSRL, and
• Prior approval has been obtained from the Participating Organisation (Rule 3.47 (1)(g)).
A dealer’s representative cannot share remuneration or commission, except with his/her
Participating Organisation or any of the Participating Organisation’s Marketing Representatives, Trading Representatives or other dealer’s representatives (Rule 11.02 (3A)).
A dealer’s representative is liable for any loss arising from his/her own failure to properly verify the client’s identity and the authenticity of the application:
(a) A Participating Organisation must have an adequate system of supervision in relation to representatives
(b) The commission of a remisier (Commissioned Dealer’s Representative) shall be fully negotiable between the Participating Organisation and him/her
Summary
We began this topic by discussing the single licensing framework, as well as the regulated activities defined under the Capital Markets and services Act 207 (CMSA).
We went on to consider the licensing application requirements of Capital Markets Services Licence (CMSL) and Capital market Services Representative’s Licence (CMSRL) applicants, the licensing conditions as well as the obligations of licence holders, specifically CMSRL for dealing in securities.
Self-Assessment
1. Julia intends to make an application to the Securities commission Malaysia (SC) to be come the holder of a Capital Markets Services Representative’s License (CMSRL) for dealing in securities.
Then, the following are the requirements that Julia must fulfill:
I. Be fit, proper and be at least 21 years old.
II. Pass the relevant licensing modules.
III. Must have two years’ experience in the capital market.
IV. Must possess a degree that is relevant to the regulated activity of dealing in securities.
A. I only
B. I and II only
C. I, II and III only
D. All of the above
2. Which of the following statements are CORRECT in relation to the obligations of Capital Market Services Representative’s License (CMSRL) holder dealing securities?
I. Not deal as principal without informing his/her client
II. To have a reasonable basis for making an investment recommendations
III. To notify the SC of an event for which the SC can revoke his/her license
IV. Disclose interest in securities in circulars where recommendations are made.
A. I and II only
B. II and IV only
C. I, II and III only
D. All of the above
3. What is the penalty for acting as a representative for dealing in securities without a valid Capital Market Services Representative’s Licence (CMSRL)?
A. RM 2 million or imprisonment for up to two years or both
B. RM 3 million or imprisonment for up to three years or both
C. RM 4 million or imprisonment for up to four years or both.
D. RM 5 million or imprisonment for up to five years or both