Consultation Paper: Proposed Amendments to the SGX Securities Trading Rules

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20 January 2003

Membership Department
Risk Management & Regulation Division
Singapore Exchange Limited
2 Shenton Way
#19-00 SGX Centre 1
Singapore 068804

Dear Sirs:

Re: Consultation Paper: Proposed Amendments To The SGX Securities Trading Rules

The Asia Pacific Advocacy Committee (APAC) of the Association for Investment Management and Research (AIMR)¹ is pleased to comment on the Consultation Paper of the Singapore Exchange Limited, Proposed Amendments to the SGX Securities Trading Rules. The APAC is a standing committee of AIMR charged with reviewing and responding to major new regulatory, legislative, and other developments that may affect investors, the investment profession, and the efficiency and integrity of the Asia Pacific region financial markets.

General Comments

The APAC supports the general thrust and spirit of the Proposed Amendments to

…Ensure that the new rules reflect current market practices and meet the changing needs of both the marketplace and our Members.

A fundamental principle of AIMR's Code of Ethics and Standards of Professional Conduct is that the needs of investors and investment clients for fair dealing and full and fair disclosure of all material information must supersede other interests. We believe that a number of the Proposed Amendments will serve to advance this purpose.

We will address our comments primarily to Chapter 15: Research, Chapter16: Corporate Finance, and Chapter 17: Fund Management, of Annexure B.

We observe that the Rules take the form of brief "principles-based" statements of required conduct. It is likely that these Rules have been supported in the past by unwritten understandings regarding their application, requirements, and scope, including limitations. However, we believe that going forward some additional clarifications and elaboration could prove useful in their application, particularly in light of the rapid changes and convergence taking place internationally in financial markets and regulation.

Specific Comments

Chapter 15: Research
We recognize that the requirements specified here go beyond the MAS rules for analysts which require examinations and registration for participants, including adherence to a strong code of ethics. However, we observe that no minimum levels of expertise are required of research analysts, although such standards are mandated for Corporate Finance Department staff in Section 16.2. Because the reports prepared by Research Departments will be made available to retail investors, as well as to more sophisticated clients who are in a superior position to evaluate the quality of the research relative to retail customers, we believe that some consideration might be given to specifying such standards in these Rules as well. In contrast, the Corporate Finance Department will deal largely with sophisticated clients who are likely to be in a better position to evaluate the quality of the services they are receiving.

Section 15.2, Supervision, states, "The Trading Member is responsible to SGX-ST for the acts of its research analysts," but does not indicate how or if the indicated supervisory duties will be monitored by the Exchange for compliance. Although we agree that a Trading Member should "supervise its research analysts, and implement written supervisory procedures to ensure that its research analysts comply with this Rule," we believe that individual analysts should be held accountable, and subject to disclosures about their activities, as well.

Section 15.3, "Chinese Walls", states, "A Trading Member's research functions must be separate from its dealing, corporate finance and backroom operations." [Emphasis added] This section does not clarify what is meant by "separate." The Reasons for Change state that "internal procedures to avoid any conflict of interest which may arise in a Member's research and dealing activities" must be instituted. Is it intended that the separation be physical or geographic in nature? Should certain communications between employees in each area be restricted? Would analysts be permitted to participate in "road shows"? Should Members be allowed to base research analysts' compensation directly or indirectly on profits generated by the Corporate Finance or Dealing Departments. We believe that the rule should be modified to clarify these and similar issues. The proposed AIMR Research Objectivity Standards discourage such communication and compensation practices because of the inherent conflicts of interest that arise when they are allowed.

Other regulatory jurisdictions have found it difficult to regulate conflicts of interest by prescribing that Chinese Walls be established. In short, these tend to be ineffective and highly porous to the very information and practices they are designed to restrict. Consequently, regulatory practices have moved recently to proscribe specific activities, practices, and information flows, rather than to require only that Chinese Walls be developed.

We are pleased to observe that the AIMR recommended practices regarding Investment Recommendations are referenced in Section 15.4.

Section 15.7, Trade Restrictions, states "A Trading Member and a research analyst must not knowingly buy or sell a security if the Trading Member or research analyst has material non-public information in relation to the security." [Emphasis added] The term, "material", is not defined and this provision would seem to rest squarely upon the definition. This is an important provision and we believe that clarification could prove helpful.

Part (b) of this section states, "A Trading Member and a research analyst must not procure any person to buy or sell a security if the Trading Member or research analyst is prohibited under Rule 15.7.1(a) from doing so." [Emphasis added] We understand this prohibition to mean that a Member or analyst who is in possession of inside information, or who has other conflicts of interest, is not permitted to solicit a proxy to trade in the Member or analyst's stead, or to the benefit of the proxy. However, we believe that some clarification of the term "any person" would be helpful in understanding the intended scope of the provision.

In Part (d) of Rule 15.7, we note a conflict with Section 15.5. In the latter, a Member is required to "maintain records to support its research report or investment recommendation for 7 years." However, Part (d) requires, "The Trading Member must maintain a record of each transaction and the justification for permitting the transaction for 3 years." We believe that many conflicts of interest with research recommendations could be associated with trading activity. Consequently, we believe that the record-keeping time requirements for both should be consistent at 7 years.

We are particularly concerned in part (d) with the provision, "This prohibition does not apply if the Trading Member is satisfied that the transaction does not conflict with its duty to customers or its analyst's professional responsibility to the Trading Member." Indeed, this statement would seem to negate the intent and force of the other provisions. We believe that the rule should explicitly preclude those trades undertaken on an agency basis or where professional market-making activities result in a position that requires clearing in the market. However, where a firm acquires or divests a stake for its own account or from other agency activities, the Trading Member should be required to disclose the acquisition or divestiture and the circumstances immediately to its clients in an addendum to the current research report that carries a contrary recommendation.

Chapter 16: Corporate Finance
This Chapter, in general, provides greater definition, clarity, and specification than does Chapter 15.

In Section 16.1.1(c) which states, "The Corporate Finance Department of a Trading Member must engage only in the following types of transactions: advising on acquisition and disposal of shares and assets…", we believe that this definition, or perhaps the other parts, should be broadened to include such activities as restructuring and financial advisory services, activities that are among the most common for corporate finance departments. Indeed, it may be that these activities were contemplated by the various parts, but this was not clear to the APAC.

Rules 16.2.5 and 16.2.6 need to be clarified to prohibit reporting line structures that result in a conflict of interest between the corporate finance department and the trading department.

Section 16.5 stipulates, "The Trading Member's Board of Directors must set prudent commitment limits for the Trading Member's corporate finance activities to limit its financial exposure." We agree with this provision but believe that, because the implementation of the rule rests upon the definition of "prudent", the term should be clearly defined in this section.

In Section 16.6, Restricted List, we believe that further clarifications would be most helpful. Specifically,

When does an account go on the restricted list and when is it removed?
What is the distinction between the restricted lists for research and trading as compared to the Corporate Finance "gray list", those clients for which the firms hold material non-public information?

Definitions of each of the lists and clarifications of the similarities and differences would be useful to Members. We believe it particularly important that any exceptions to the application of the Rule be clearly stated.

In Section 16.7, Code of Conduct, we believe that a further provision would be useful. The APAC suggests that an additional statement to the effect that staff and other employees are prohibited from using inside information for personal gain would provide greater clarity to the Rule.

Chapter 17: Fund Management
Section 17.1 appears to be addressing what are commonly known as "discretionary" accounts. Consequently, we believe that the addition of this term to the title would be helpful in clarifying the scope of the Rule.

In Section 17.3.3(a), we believe that the term "fairly" is open to broad interpretation. Because this provision is of considerable importance to clients, we recommend that the term be more precisely defined.

In part (b), we believe that with modern trading systems and practices, it would be impractical to "record the intended allocation before the transaction is effected." Instead, we recommend that policies be established for such allocations, that they be reflected in the policy statements, and that allocations be documented, monitored, and reviewed, consistent with part (c).

In Section 17.5, Segregation of Business Activities, we would reference our remarks on compensation in Section 15.3.

Closing Remarks

The APAC appreciates the opportunity to comment upon this proposal. We commend the Singapore Exchange on this initiative and, in general, support the Proposed Amendments to the Securities Trading Rules. If the Exchange should have questions about the APAC's positions, or desire further information, please contact Rebecca McEnally, AIMR Vice President, Advocacy (434.951.5319 or rebecca.mcenally@cfainstitute.org) and we will be happy to respond.

Sincerely,

Aaron Low, Ph.D., CFA Chair Asia Pacific Advocacy Committee	Raymond Orr, CFA Vice-Chair Asia Pacific Advocacy Committee
Rebecca Todd McEnally, Ph.D., CFA Vice President, Advocacy AIMR

¹ With headquarters in Charlottesville, VA and regional offices in Hong Kong and London, the Association for Investment Management and Research® is a non-profit professional association of 61,000 financial analysts, portfolio managers, and other investment professionals in 113 countries of which 48,800 are holders of the Chartered Financial Analyst® (CFA®) designation. AIMR's membership also includes 117 affiliated societies and chapters in 40 countries. AIMR is internationally renowned for its rigorous CFA curriculum and examination program, which had more than 100,000 candidates from 143 nations enrolled for the June 2002 exam.