SC must step up enforcement

A CRUCIAL function of the Securities Commission (SC) is enforcement.

According to the SC’s 2024 annual report, active investigations increased from 55 in 2023 and 49 in 2022 to 62 in 2024.

More than a third were related to corporate misconduct, followed by insider trading (18%); manipulation (13%); unlicensed activities (11%); and securities fraud (11%).

SC’s enforcement actions are related to complaints the regulator has received from the public or the results of its investigations.

Compared to the previous year, there were 3,910 complaints in 2024, up 24.3%.

Astonishingly, 51.3% of the cases are about unlicensed activities or scams.

Unlicensed activities are arrangements in which an individual or entity conducts regulated business without being licensed or registered with the SC.

They are usually related to non-existent investment products.

A distant second was complaints related to licensed/registered persons, accounting for 13.5% of all complaints.

According to the SC, complaints and inquiries on scams and unlicensed activities have been consistently rising with a 337% increase from 2019 to 2024.

This has allowed the SC to understand better how these activities are conducted as well as take action.

Stepping up

SC enforcement starts with preliminary investigations, followed by actual investigations, including potential raids.

Action is taken through criminal, civil, regulatory settlements, restitution, administrative, or infringement notices in response to a proven case.

The latter is where the SC generates most of its revenue from enforcement-related activities as RM13.7mil was collected last year in penalties.

One of SC’s enforcement priorities, according to the report, is developing a three-year enforcement priority, which now includes corporate misconduct.

Under Section 317A of the Capital Market Services Act, 2007 (CMSA), corporate misconduct cases are those in which a director or officer of a listed company or any of its related companies shall not act or cause any act in the intention of causing wrongful loss to the listed company or any of its related companies, regardless of whether the act causes actual wrongful loss.

Offenders can be jailed two to 10 years and fined up to RM10mil.

A director under this section includes a person who is chief executive officer (CEO), chief operating officer, chief financial controller, or any other person primarily responsible for the operations or financial management of a company, by whatever name called.

In February last year, the SC used this section to act against three people who were CEO/directors and associated with conducting fund management activities without a Capital Markets Services Licence.

SC also acted against an ex-bank analyst last year with two charges under sections 59(1) and 362(3) of the CMSA relating to unlicensed capital market activities and the misuse of the “unit trust consultant” title.

What’s in a name?

While it may not be the norm, it is important for those who are licensed under the CMSA to carry out activities for the intended purpose under the company that they are representing.

This is especially important for an individual conducting regulated activities in the capital market which covers fund management activities, investment advisery, trading in derivatives, corporate finance advisery, financial planning and dealing with securities.

A person can only conduct corporate finance-related activities if licensed under CMSA and as defined under the Act.

A person cannot simply be re-designated to another “role” that is less ambiguous in terms of what services they provide to clients and how they represent a licensed corporation, but still remains responsible for the regulated activity.

For example, if a key office bearer is carrying out duties and functions without an investment advisory licence, he cannot simply be re-designated to another title (for example, client coverage or relationship manager) just so he/she can conduct such activities.

Investment banks themselves should enure there is no violation of the CMSA as it is considered just as serious as scams perpetrated by others.

In cases like this, what if the advice given by the office bearer results in significant losses to the client or the investment bank?

Who will be responsible?

Above board

Those corporations subject to CMSA must have clear guidelines on who can conduct regulated activities, as well as ensure that unlicensed individuals do not misrepresent the firm to potential clients.

In this way, the line is drawn between licensed and unlicensed representation of the company, as this may lead to future lawsuits, both from clients who are misled and from the SC itself.

If a key officer bearer remains unlicensed, the board must act.

In addition to safeguarding the company’s name and reputation, this is also in the best interest of the clients.

SC enforcement activities should be stepped up too, as there could be cases where individuals misrepresent themselves and remain unlicensed.

In order to ensure only licensed individuals conduct regulated activities, the SC should require every licensed individual under the CMSA to display their licence reference number on their business cards.

The quickest way to verify the authenticity of a CMSA-licensed individual is to check the SC’s website at https://www.sc.com.my/investment-checker and insert either the individual’s name or the name of the company they represent.