Mission statement To promote and maintain fair, efficient, secure and transparent securities and futures markets and to facilitate the orderly development of an innovative and competitive capital market. Contents | i | CONTENTS Chairman’s Message iii Part One: Protect Investors and Maintain Market Confidence Introduction 1-1 Quality Corporate Proposals 1-1 Corporate Surveillance 1-2 Strategic Approach to Enforcement 1-3 Investor Protection and Education 1-7 Part Two: Promote Fair, Efficient and Orderly Market Introduction 2-1 Supervision of Intermediaries 2-1 Single Licensing Regime 2-4 Efficiencies in Licensing 2-5 Supervision of Markets 2-6 Supervision of Bursa Malaysia 2-7 Supervision of Bond Market 2-8 Part Three: Strengthen Market Competitiveness Introduction 3-1 Growth Through Deregulation 3-2 Efficiency in Fund-raising 3-3 Conducive Trading Environment 3-6 Islamic Capital Market 3-7 Corporate Governance 3-10 Corporate Social Responsibility 3-11 Securities Industry Development Corporation 3-11 International Co-operation 3-12 AR07-Content ok 1 18/03/2008, 11:25 | ii | Securities Commission Annual Report 2007 Part Four: Increase Our Capabilities and Effectiveness Introduction 4-1 Enhancing Transparency and Efficiency 4-1 Leveraging on Information Technology 4-2 Human Capital Development 4-3 Seeking Market Feedback 4-5 Recognition and Awards 4-5 Part Five: Capital Market Issues and Outlook The World Economy 5-1 The Malaysian Economy 5-2 Global Capital Markets 5-3 Malaysian Capital Markets 5-5 Part Six: Statements and Statistics Members of the Securities Commission 6-1 Senior Management 6-5 Organisation Structure 2007 6-7 Statement of Governance 6-8 Audit Committee Report 6-13 Financial Statements 6-15 Corporate Proposals 6-37 Investment Management 6-45 Islamic Capital Market 6-49 Venture Capital 6-52 Market Intermediaries 6-56 Enforcement 6-64 Publications Issued in 2007 6-75 Calendar of Events 6-77 Acronyms and Abbreviations 6-84 AR07-Content ok 2 18/03/2008, 11:25 Chairman’s message Chairman’s Message | iii | CHAIRMAN’S MESSAGE The year 2007 proved to be challenging for the world’s international competitiveness was further underscored by financial markets. Concerns over credit quality in the US PricewaterhouseCooper’s review, which identified Malaysia subprime mortgage market quickly turned into a wholesale as having recorded the third largest value of announced reappraisal of risk across financial markets. The resultant M&A deals in the Asia-Pacific ex-Japan (RM120 billion) upheaval in credit and money markets, as investors fled to after China and India, both economies many times the size safe assets, soon gave way to contagion across other asset of ours. classes and bouts of equity market volatility that had not been seen for nearly a decade. But in spite of these In 2007, we worked harder to reinforce these strengths, concerns, the Malaysian capital market scaled new heights. guided throughout by the clear vision set out by the Capital The stock market surpassed many of its regional peers in Market Masterplan: we continued to review and enhance the terms of price performance, and experienced a significant framework of regulation under which we and the market rise in liquidity on the back of fair and orderly trading. The operate; we improved our capabilities and capacity for futures market also recorded strong gains while deepening effective supervision, surveillance and enforcement; and we considerably. The bond market, now Asia’s fourth largest, continued to introduce initiatives to improve the efficiency saw record issuance and approvals of both ringgit and and competitiveness of Malaysia’s capital markets. foreign-currency paper. These developments drove further growth in the unit trust industry, and a steady stream of innovation which included structured products and Stronger Regulation exchange-traded funds. Meanwhile, the Malaysian Islamic capital market continues to strengthen in terms of size and Over the past year, we introduced important changes to the diversity of products. regulatory framework targeted at key constituencies of the capital market. A major achievement was the Capital Market The market’s resilience and continuing growth reflect the and Services Act 2007. The Act streamlines securities strong foundations which have been built over the years. regulation, introduces a single licensing regime, facilitates This has been important in instilling market confidence, the establishment of self-regulatory organisations, and and I welcome the clear affirmation of the market’s strengths strengthens investor protection. We also revised and updated by various international organisations during the year. In its the Malaysian Code of Corporate Governance to strengthen Doing Business 2007 report, the World Bank ranked Malaysia the role of independent directors in general, and of audit fourth in the world for the quality of our investor protection; committees in particular. the Asia Pacific Group ranks us fifth worldwide for compliance with Financial Action Task Force standards on The Code now requires all PLCs to carry out their own money-laundering and counter-terrorist financing; and internal audits. The reporting line for internal auditors clearly Malaysia scored top marks for disclosure and transparency holds the board accountable for ensuring that the internal of accounting standards in the Report on the Observance of audit process is effective. Audit committees have been Standards and Codes by the World Bank. The market’s strengthened: members must be non-executive and the AR07-Chairman ok 3 18/03/2008, 11:22 | iv | Securities Commission Annual Report 2007 majority must be independent; they must all be financially reprimands and suspension from registering new dealer’s literate and one must be a qualified accountant – forming a representatives. To ensure we have relevant resources to nexus of continuous engagement between the company monitor our increasingly sophisticated markets, we invested chairman, CEO, CFO, head of internal audit and external in state of the art surveillance systems and further enhanced auditors. We also set in motion the establishment of an the skills of our teams. accounting oversight board, targeted at the accounting profession, to emphasise the significance of the role of Tackling market abuse and corporate misconduct remains auditors and audit quality in attesting and providing one of our highest priorities, and we continue to invest more credibility to the financial statements prepared and verified in our capability to enforce the rules we set, to manage risks by companies. and to handle public complaints. In 2007, we adopted a new approach to enforcement that makes greater use of civil and administrative remedies to achieve a swift and fair Tackling Market Abuse and Corporate Misconduct resolution to cases. We actively applied the new approach: in 2007, we adopted pre-emptive measures to freeze assets We widened the scope of our financial and corporate and disgorge ill-gotten gains and make restitution. The surveillance, as well as the breadth of actions that we take following four cases alone involved a sum of over RM73 against misconduct. These range from directing companies million covered by this new approach: to restate and reissue their accounts and suspending auditors, to prosecuting company officials. We also expanded our • In the case of Swisscash, we obtained a mareva principles-based approach into the area of supervision. This injunction to prevent disposal of assets and secured an gives intermediaries the flexibility to innovate and compete order to compel the return of RM35 million from 14 without being hampered by unnecessary regulatory costs. bank accounts in Hong Kong and Singapore. In At the same time, they have come under stronger oversight Malaysia, 22 were also frozen. We facilitated a meeting and made more accountable for their conduct. of regulators from eight different countries in Hong Kong to trace fund transfers from bank accounts in We have taken a preventive approach to inculcate a strong one country to another; compliance culture within the industry. For this, we actively engaged with directors, senior management and industry • In the case of Ayer Molek Rubber Company, we associations to ensure an effective application of regulatory obtained an injunction against RM20 million in requirements and responsibilities. We enhanced our proceeds from the company’s sale of land; inspection programmes using risk-based assessments on thematic and high risk areas to prevent possible market • Investors in Powerhouse Asset Management Company misconduct. During the year, we also stepped up our received restitution worth RM10.9 million in total, and supervisory assessments of market participants by conducting we filed a civil suit against the company and the fund a series of diligence reviews, surprise inspections, and manager for the shortfall of RM1.9 million; and routine risk-focused inspections of investment banks, stockbroking, and fund management companies. To reflect • We commenced a civil suit against the managing the growing importance of the investment management director of FTEC Resources for restitution of the industry in our capital market, we established a specialised RM2.5 million that he is charged with utilising for his department to supervise the investment management own benefit. industry with particular focus on the unit trust management and fund management companies. Securities cases involving other jurisdictions highlighted the market’s