Securities Commission issues Revised Guidelines on Recognized Markets

12 March 2024

The Securities Commission Malaysia (“SC”) issued the revised Guidelines on Recognized Markets (“Revised Guidelines”) that came into effect upon its issuance on 6 February 2024.

The Revised Guidelines is the eleventh revision of the guidelines and supersedes the 10^th revision of the guidelines issued on 19 April 2023.

This article provides a summary of the main amendments introduced under the Revised Guidelines.

Chapter 1 : Introduction

Definitions

Paragraph 1.17 which sets out the main definitions for the Revised Guidelines has been amended as follows:

new definitions of “compliance officer”, “fit and proper”, “officer”, “third-party validator” and “senior management” have been introduced; and

paragraph (a) of the existing definition of “sophisticated investors” has been amended to refer to the SC’s Guidelines on Categories of Sophisticated Investors in place of Part 1 of Schedules 6 and 7 of the Capital Markets and Services Act 2007 (“CMSA”).

Chapter 2 : Registration and Application for Registration

A new paragraph 2.04A has been introduced to impose a mandatory requirement on an applicant to consult the SC before submitting an application and to provide the SC with sufficient information and documentation to ensure a meaningful discussion.

Chapter 3 : Criteria for Registration as Registered Market Operator

Fit and proper criteria

Sub-paragraphs (i) to (x) of paragraph 3.01(g) have been deleted in view of the introduction of the fit and proper criteria in Appendix 2.

Registration requirements

A new paragraph 3.01(p) has been introduced requiring an applicant to submit a validation by a third-party validator as to whether the operational policies and procedures of the registered market operator (“RMO”) are in compliance with the relevant SC’s guidelines. Entities that are eligible to act as a third-party validator are set out in Appendix 3 of the Revised Guidelines.

Condition for full operationalisation

Paragraph 3.04 has been amended in four respects:

the SC’s discretion to require submission of the documents set out in paragraphs (a) and (b) of paragraph 3.04 is replaced by a mandatory requirement for the RMO to submit the documents before a RMO is allowed to fully operationalise its recognized market;

in respect of sub-paragraph (a), the RMO’s board (instead of its internal auditor) is now required, together with the responsible person, to issue the written declaration in the format set out in Schedule 1 to confirm the matters set out in sub-sub-paragraphs (i) to (iv) of paragraph 3.04;

a new sub-sub-paragraph (iv) requires the declaration to confirm compliance with all terms and conditions required by the SC to be fulfilled by the RMO prior to operationalising the recognized market; and

a new sub-paragraph (b) requires a copy of the finalised rulebook which complies with the relevant SC guidelines to be submitted before full operationalisation of the recognized market.

Chapter 4 : Key persons

Directors

The requirement in paragraph 4.02 has been expanded in the following respects:

in addition to notifying the SC of the appointment and reappointment of a director, a RMO must also notify the SC of the redesignation or vacancy in the position of director; and

the notice must now be given to the SC immediately via email, followed by the submission of the relevant forms within 14 days of the relevant event.

The requirement in paragraph 4.04 requiring a RMO to notify the SC of a director’s disqualification has been extended to include a situation where a director becomes unfit to hold office.

Appointment of responsible person

The requirement in paragraph 4.05 for a RMO to appoint at least one responsible person has been enhanced to require at least one responsible person to be on a full time basis.

A new paragraph 5.04A requires a RMO to ensure that its responsible persons are fit and proper.

A new paragraph 4.07A requires a RMO to notify the SC immediately via email, followed by submission of the relevant forms within 14 days of any appointment or vacancy in the position of a responsible person.

Senior management

In consequence of the introduction of provisions relating to senior management in the Revised Guidelines, a RMO is now required to:

ensure that an individual appointed to a senior management position is fit and proper and has the necessary professional skills and qualification, experience, and competence to fulfil the responsibilities and duties of that position (new paragraph 4.09);

notify the SC immediately via email, followed by submission of the relevant forms within 14 days of any appointment or vacancy in the position of chief executive (new paragraph 4.10); and

take steps to ensure any vacancy in relation to the position of senior management is filled within three months from the date of vacancy (new paragraph 4.11).

Compliance officer

New requirements are introduced to require a RMO to:

appoint a dedicated compliance officer on a full-time basis, to carry out compliance function on all matters provided in the Revised Guidelines and in the RMO’s internal policies and procedures. The compliance officer is not allowed to take on other roles within the RMO (new paragraph 4.12)¹;

ensure that the compliance officer must, at a minimum: (a) have a degree or professional qualification from an institution recognised by the Government of Malaysia with at least three years of relevant experience in the financial industry, or (b) a relevant diploma from an institution recognised by the Government of Malaysia with at least five years of relevant experience in the financial industry (new paragraph 4.14);

ensure that: (a) the compliance officer is fit and proper; (b) the roles and responsibilities of the compliance officer are clearly defined and documented; (c) the compliance officer has the necessary authority, resources, and access to all relevant information to carry on his roles and responsibilities; and (d) the compliance officer must not be placed in a position where there is possible conflict of interest with his responsibilities (new paragraph 4.15);

notify the SC immediately via email, followed by submission of the relevant forms within 14 days of any appointment or vacancy in the position of compliance officer (new paragraph 4.16); and

take steps to ensure any vacancy in relation to the position of compliance officer is filled within three months from the date of vacancy (new paragraph 4.17).

Chapter 5 : Terms and conditions, directions and ongoing obligations

Terms and conditions and directions

A new paragraph 5.01A clarifies that the right of the SC to impose terms and conditions in registering a RMO includes terms and conditions that are to be complied with prior to the RMO commencing its business or operationalising a recognized market, or on-going terms and conditions to be complied as long as the RMO is registered or such other period as determined by the SC.

In amplification of paragraph 5.01A, a new paragraph 5.01B provides that the terms and conditions may, among others, include requiring a RMO to: (a) fully operationalise its platform within nine months from the date of the SC’s approval; (b) have and maintain its shareholders’ fund at a minimum of RM2.5 million for such period as may be determined by the SC; and (b) host or facilitate the offering or trading of at least one issuer or capital market product, as the case may be, on its platform within 12 months from the date on which its platform is fully operationalised.

The right of the SC under paragraph 5.03 to direct a RMO to remove a director if he is not fit and proper or it is contrary to public interest for that person to continue to hold office has been extended to senior management and compliance officer.

A new paragraph 5.03A allows the SC to direct a RMO to conduct a periodic assessment of the RMO’s compliance with any or all of its regulatory obligations and submit to the SC a report on the extent to which it has complied with the regulatory obligations.

Chapter 6 : Obligations

RMO’s obligations

The obligations of a RMO in paragraph 6.01 of the Revised Guidelines have been expanded to include the obligation to:

establish, implement and maintain processes and contingency arrangements to protect client funds and assets in the event the RMO is unable to carry out its operations or ceases its business (new paragraph 6.01(n));

conduct an audit at least once every three years to assess the RMO’s compliance to the provisions of the Revised Guidelines and ensure that the audit findings and necessary corrective measures to be undertaken are tabled to its board (new paragraph 6.01(o));

establish controls and appropriate approval processes in relation to amendments or changes made to the RMO’s operating systems including web and mobile applications and ensure that all changes and amendments are properly documented and the necessary internal approvals are obtained before such changes are deployed (new paragraph 6.01(p));

deal with clients’ complaints and disputes in a fair, transparent, timely and efficient manner, including ensuring that the clients are kept abreast of the RMO’s review of the complaint regularly and maintain complete records of such complaints and the outcome of its review thereof (new paragraph 6.01(q));

communicate with the SC and other regulators in an open and professional manner (new paragraph 6.01(r));

provide the SC with documents and information when requested and within the time limits prescribed, or where no time limit is prescribed, within a reasonable time (new paragraph 6.01(s));

carry on its activities with proper safeguards in place to protect clients’ assets and information (new paragraph 6.01(t)); and

establish, maintain and consistently review the effectiveness and relevancy of the controls, policies and procedures to ensure compliance with the Revised Guidelines (new paragraph 6.01(u)).

Business particulars

A RMO must now notify the SC within 14 days on any change to the RMO’s business particulars. The SC has provided by way of Guidance that business particulars refer to changes of the RMO’s name, business address and registered address.

Board’s obligations

The board’s obligations under paragraph 6.06(c) of the Revised Guidelines to identify and manage risks associated with the business and operations of the RMO and to have in place an effective business continuity plan has been expanded to include conducting business impact assessments.

Senior management’s obligations

A new paragraph 6.06A now sets out the specific obligations of the senior management, which include:

implementing and adhering to the controls, policies and procedures approved by the board;

managing risks associated with the business and operations of the RMO, including having in place an effective business continuity plan and conduct business impact assessments;

frequently and adequately apprising the board on the operations of the RMO and ensuring that the RMO complies with all the requirements under the Revised Guidelines and any direction issued or any term or condition imposed by the SC; and

complying with the reporting requirements and submitting accurate information to the SC in a timely manner.

Chapter 7 : Submission of rules

The following amendments have been introduced in relation to the submission of rules:

for the purposes of Chapter 7, a definition of “rules” has been introduced to mean the rules or directions, by whatever name called and wherever contained, governing the management, operations or procedures of the RMO, or the offering or trading of any capital market product on the RMO’s platform;

the existing obligation of a RMO under paragraph 7.02 to submit to the SC for its review, any proposed rules or any proposed amendments to existing rules has been clarified in two respects; first, to state that the proposed amendments and proposed new rules are to be submitted to the SC before they are effected, and second, that the RMO’s board resolution approving the proposed rules or amendments is to be submitted to the SC;

the submission procedure for proposed new rules or amendments is set out in new paragraphs 7.03 and 7.04, which requires a RMO to give the SC notice of any proposed rules or amendments in Form 12 (Notification for changes, amendments, variation and deletion to rulebook for RMO) no later than 14 days before effecting the proposed rules or amendments, and if the SC is of the view that any proposed rule or amendment does not fall within the scope of Form 12, the SC will direct the RMO to submit such proposed rule or amendment for its review.

Chapter 8 : Reporting Requirements

A new obligation is imposed under paragraph 8.02 on a RMO to comply with all reporting obligations and submit accurate reporting to the SC in a timely manner.

Chapter 9 : Cessation of Business Operations

With regard to cessation of business operations, a new paragraph 9.01A provides that, unless otherwise permitted by the SC, the cessation shall not take effect until the SC is satisfied that adequate arrangements have been made to meet all outstanding liabilities and obligations of the RMO.

Chapter 13 : Equity Crowdfunding Platform

Minimum financial requirement

Paragraph 13.03 has been amended to include a requirement for a RMO who operates an equity crowdfunding platform (“RMO-ECF”) to have a minimum paid-up share capital of RM5.0 million.

Enhanced responsibilities in relation to prospective issuers

In assessing the suitability of prospective issuers, a RMO-ECF is now required, in addition to its existing obligations in paragraph 13.04, to ensure that all relevant documents relating to the prospective issuer and fundraising exercise have been obtained and to review and consider all documents and information relating to the prospective issuer with the purpose of assessing whether the prospective issuer should be hosted on the ECF platform.

Chapter 14 : Peer-to-Peer Financing Platform

Obligations of a P2P operator

Paragraph 14.05(a) has been amended so that in addition to ensuring there is an efficient and transparent risk scoring system in place relating to the investment note or Islamic investment note, a RMO who operates a P2P platform (“RMO-P2P”) is also required to have an efficient and transparent risk assessment framework, policies and procedures to assess the investment note or Islamic investment note and the issuers.

In addition, new paragraphs 14.04(c) and 14.04(d) require the RMO-P2P to obtain all relevant documents relating to the prospective issuer and funding exercise, and to review and consider all documents and information relating to the prospective issuer for the purpose of assessing whether the prospective issuer should be hosted on its P2P platform.

The obligation under paragraph 14.05(g) for a RMO-P2P to have in place processes or policies to manage any default by issuers has been expanded to include late payment by an issuer.

Trust account relating to monies received for the issuer

Paragraph 14.10 which provides for the release of funds raised on the P2P platform has been amended in three respects. First, to allow the funds raised to be released to a relevant supplier; second, the provision has been clarified to state that the release of funds is only upon closure of the offer period; and third, there is no material change prior to the release of the payment (instead of during the offer period).

The conditions for release of funds to a relevant supplier are set out in the new paragraph 14.12A. In addition, a new paragraph 14.12B requires a RMO to maintain a list of all relevant suppliers under paragraph 14.12A and to provide such list to the SC upon request.

Risk assessment

In addition to being accountable for the risk scoring mechanism and methodology employed, a RMO-P2P is now made accountable for its assessment of the creditworthiness of an issuer under an amendment to paragraph 14.25.

Disclosure requirements for an issuer

The disclosure requirements for an issuer under paragraph 14.29 has been expanded to include information relating to its credit exposure (new paragraph 14.29(d)).

Chapter 15 : Digital Asset Exchange

Eligibility and financial requirements

Paragraph 15.03(b)(ii) has been clarified in that a digital asset exchange (“DAX”) operator which operates a Digital Broker model must, in addition to having a minimum share capital of RM5.0 million, also maintain an additional and separate minimum of RM5.0 million in shareholders’ funds.

Operations of the DAX operator

Paragraph 15.25 originally provided that any proposed rules of a DAX operator or any proposed amendments to its existing rules shall only take effect after approval by the SC. This is now amended to facilitate notification to the SC of the proposed rules or proposed amendment under Chapter 7.²

Client’s asset protection

The following requirements have been introduced to further safeguard client’s assets:

where the DAX operator undertakes custody of digital assets on behalf of its investors, to use its best endeavours to comply with the requirements set out in Chapters 27 and 28 of the SC’s Guidelines on Digital Assets (new paragraph 15.28(f)); and

in the case where the DAX operator offers separate trading models, to maintain separate digital asset wallets for its client’s asset under each of the respective models (new paragraph 15.28(g)).

Trading operations

A new paragraph 15.40A requires a DAX operator to disclose on its platform, information on the arrangements and processes implemented to manage systems error, failure or malfunction and to manage investors’ assets in the event of any suspension or outages of the platform, including transfer or withdrawal procedures.

Market transparency

Paragraph 15.44 has been amended to clarify that the SC’s prior approval must be obtained for any proposed processes, criteria and rules to facilitate the provision of any market making activities to provide liquidity to its market.

Chapter 19 : Submission

New paragraphs 19.04 and 19.05 have been inserted to clarify the submission process for an application for registration.

A new paragraph 19.06 has also been added to state that each application is to be accompanied by the fees prescribed by the SC and an application is deemed incomplete if the appropriate fee is not submitted.

Appendices and Schedule

Three new appendices and a schedule have been added to the Revised Guidelines, namely:

Appendix 1 – List of Forms and Documents to be submitted to the SC by an applicant or a RMO
Appendix 2 – Fit and Proper Criteria
Appendix 3 – Categories of Persons Eligible to be a Third-Party Validator
Schedule 1 – Template for the declaration on system and operational readiness

Comments

The Revised Guidelines introduce numerous amendments to the RMO framework in Malaysia, with the most significant being the requirement for an applicant to provide a validation by a Third-Party Validator of compliance of its proposed operational policies and procedures with the relevant SC guidelines and the introduction of requirements relating to senior management and compliance officers. The third-party validation process will provide a form of quality assurance that is likely to expedite the processing of an application for registration as a RMO.

The amendments have raised the bar in terms of management resources and responsibilities for existing RMOs as well as new applicants. In particular, existing RMOs must familiarise themselves with the amendments under the Revised Guidelines and incorporate them into their business and operational framework and procedures to ensure they do not inadvertently run afoul of the new requirements.

Article by Lee Ai Hsian (Partner) of the Fintech Practice and Kok Chee Kheong (Partner) of the Corporate Practice of Skrine.

¹ The requirements in this paragraph do not apply to a RMO that is an e-services platform operator.

² Refer to discussion above on new paragraphs 7.03 and 7.04 of the Revised Guidelines.

This alert contains general information only. It does not constitute legal advice nor an expression of legal opinion and should not be relied upon as such. For further information, kindly contact skrine@skrine.com.

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Securities Commission issues Revised Guidelines on Recognized Markets