Lesson in Regulation
...pass tough securities laws and gave enormous powers to the Securities and Exchange Commission (SEC) as a result of the scandalous conduct of corporate and brokerage chiefs and major market players in the runup to the October 1929 bubble burst — when millions of investors, big and small, lost their hard-earned savings — which triggered a deep decade-long economic depression. It has been said that up to 1933, American company shares were sold on the usual caveat emptor (buyer beware) basis while after that, shares were sold on a “seller beware” basis. The same is now true for all other stock markets as well. When companies (with their bankers and advisers) choose to sell shares to the public, they must always remember this rule. Selling shares to the public carries with it grave consequences to the seller who must observe not only the Companies Act but the capital market regulations as well. In our case, this includes the Securities Industry Act, the Securities Commission Act and the KLSE Rules. Our capital market authorities do not enjoy the wide-ranging powers that the SEC has. For example, the SEC regulates the accounting reports submitted by listed companies. The SEC has the benefit of robust investment, insider trading and fraud laws. Its “fining” and prosecutorial powers are enormous. On the other hand, our regulators have to work with the much more restrictive criminal standard of proof which emphasises technicalities and imposes a high evidential burden. A major obstacle is the need for the written consent of the public prosecutor before the SC can prosecute. This tends to discourage the development of a separate “white collar” legal regime which requires a more flexible approach to the determination of guilt and to the types of punishment to impose. In proving white collar crimes, a prosecutor has to rely much on paper trails as well as circumstantial evidence. Given the factors described above — the nascent market, the lack of robust fraud laws, the limitation on prosecution — together with the limited knowledge and exposure of our investors, the investing public should welcome regulatory actions. In Malaysia, the policeman’s job is never popular, and more so, the policing of the stock market. One should not go too far in watching the KLSE indices. What does it matter if a major prosecution results in a fall in the index? What does it matter if a foreign portfolio manager is thereby inconvenienced? Every prosecution is an inconvenience and carries a cost. But there is the greater public interest in the apprehension of criminals and in ensuring that all laws are duly observed and enforced. Just look at the US Department of Justice decision to indict Arthur Andersen for obstruction of justice. Of course, the prosecution is an inconvenience and imposes a cost on Andersen partners, employees, clients and their dependants. It was even reported that the US dollar suffered a slight fall as a result of the prosecution. Inconvenience and cost to some parties should never be a bar to prosecutions or other regulatory action. All laws, in particular corporate a...