23 November 2017
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Stock market needs whistle-blowing procedure

Business Times
02 Nov 2017

WHISTLE-BLOWING is a controversial topic because of the negative connotations associated with snitching or taking covert action that could lead to punitive legal measures and the involvement of law enforcement.

There is also the fear of reprisals and possibly even physical harm to contend with, and it is likely for these reasons that the local stock market currently does not have a formal system whereby the identities of complainants can be kept confidential and where wrongdoing can be reported to either the Singapore Exchange (SGX) or Monetary Authority of Singapore (MAS).

Properly administered however, such a system can be beneficial and has been installed in other developed markets. In the US for example, the public is actively encouraged to engage the Securities and Exchange Commission (SEC). Its website states under the section "SEC Center for Complaints and Enforcement Tips" that the commission welcomes hearing from investors because the information provided may alert the SEC to "broker misconduct, unfair practices or the latest fraud".

It goes further to say that the Dodd-Frank Act of 2010 established a whistle-blower programme that enables the SEC to "pay an award, under regulations prescribed by the SEC and subject to certain limitations, to eligible whistle-blowers who voluntarily provide the SEC with original information about a violation of the federal securities laws that leads to the successful enforcement".

Since the programme began in 2011, SEC has paid more than US$85 million in awards to 32 whistle-blowers who provided evidence of illegal corporate acts. In 2014, the largest award was more than US$30 million; while in 2013, it was about US$14 million. On June 6, 2016, SEC awarded a whistle-blower US$17 million.

For the local market, no such financial incentives currently exist. Aggrieved investors can however lodge complaints with the authorities but the process is formal and may therefore be daunting to some. Moreover, it appears to be focused mainly on reporting errant trading representatives. No similar complaint process exists for other - arguably more important - abuses such as cornering, manipulation, front running and last but not least, insider trading.

Market manipulation occurs on the exchange and relies on prices being rigged using the trading system. Because daily trading is closely monitored by both the SGX and MAS, price rigging is arguably easier to detect and prove. Insider trading, on the other hand, occurs when privileged information is conveyed off the exchange, making policing much more difficult. Since 2014, SGX requires companies to maintain lists of privileged persons associated with all material transactions prior to announcement of those deals.

These privy lists are said to be useful if ever insider trading investigations are launched. However, details of who counts as privileged are scant; and perhaps more rigorous guidelines are needed. For example, not just company insiders but also external auditors, lawyers and public relations agencies should be included.

A formal whistle-blowing framework will entail dealing with many operational and ethical issues. Sifting through genuine tips and frivolous complaints will be time-consuming and costly. There are also legal and privacy issues to consider. However, if a new initiative serves the public interest, then it should be seriously considered. If nothing else, introducing whistle-blowing and formalising who should be on privy lists could well serve as deterrents to those contemplating stock market fraud.

Source: Business Times © Singapore Press Holdings Ltd. Permission required for reproduction.