Securities Commission Mutualisation can be defined as the process of changing a firm's business structure so the owners of the company

are eligible to receive cash distributions from the company in direct proportion to the amount of revenue the company earns from each member. This form of business structure is also known as a cooperative in some jurisdictions. On the other hand, the term demutualisation describes the process by which mutual organizations or companies convert themselves to for-profit or profit-making public companies which distribute profits to their shareholders in the form of dividends. Demutualization usually involves the sale of a mutual, by its members, to a non-mutual company or to the stock market. As a result of demutualisation, members of a mutual usually receive a windfall payout. This payout usually takes the form of shares in the successor company, a cash payment, or a mixture of both. Generally, there are three methods on how a corporation may be demutualised. In a full demutualization, the mutual completely converts to a stock company and passes on its own (newly issued) stock, cash, and or policy credits to the members or policyholders. There is no attempt made to preserve mutuality in any form. A sponsored demutualization is similar whereby the mutual is fully demutualized and its policyholders or members are compensated. The difference is that the mutuality is essentially bought by a stock corporation. Instead of receiving stock in the formerly mutual company, stock in the new parent company is granted instead. Last but not least, a mutual holding company is a hybrid concept, part stock company and part mutual company. Technically, the members still own over 50% of the company as a whole. Because of this, they are generally not significantly compensated for what would otherwise be viewed as loss of property. The core participants are isolated into a special segment of the company, still viewed as "mutual" whereas the rest is a stock company. This part of the business might be publicly traded or held as a wholly owned subsidiary until such time that the organization should choose to go public. Bursa Malaysia previously known as Kuala Lumpur Stock Exchange dates back to 1930 when the Singapore Stockbrokers' Association was set up as a formal organization dealing in securities in Malaya. The first formal securities business organization in Malaysia was the Singapore Stockbrokers' Association, established in 1930. It was re-registered as the Malayan Stockbrokers' Association in 1937. The Malayan Stock Exchange was established in 1960 and the public trading of shares commenced. The board system had trading rooms in Singapore and Kuala Lumpur, linked by direct telephone lines. In 1964, the Stock Exchange

of Malaysia was established. With the secession of Singapore from Malaysia in 1965, the Stock Exchange of Malaysia became known as the Stock Exchange of Malaysia and Singapore. In 1973, currency interchangeability between Malaysia and Singapore ceased, and the Stock Exchange of Malaysia and Singapore was divided into the Kuala Lumpur Stock Exchange Berhad and the Stock Exchange of Singapore. The Kuala Lumpur Stock Exchange which was incorporated on December 14, 1976 as a company limited by guarantee took over the operations of the Kuala Lumpur Stock Exchange Berhad in the same year. A landmark event for the Malaysian capital markets took place on January 5 2004 when Kuala Lumpur Stock Exchange (the Exchange) demutualized, changing its status from a company limited by guarantee to a public company limited by shares. Not authorized by companies legislation, the conversion was made possible by the enactment of a special statute, the Demutualization (Kuala Lumpur Stock Exchange) Act 2003 (the Demutualization Act). Amendments were also made to relevant securities legislation, namely, the Securities Commission Act 1993 (the SCA), the Securities Industry Act 1983 (the SIA), the Futures Industry Act 1993 and the Securities Industry (Central Depositories) Act 1991. The aim of the amendments is partly to introduce and streamline provisions in light of the post demutualization environment, and partly to deal with other related matters. The wholly owned subsidiaries of Bursa Malaysia own and operate the various businesses namely, Bursa Malaysia Securities Bhd which provide, operate and maintain securities exchange, Bursa Malaysia Derivatives Bhd that provide, operate and maintain a futures and options exchange, Labuan International Financial Exchange Incorporation which provide, operate and maintain offshore financial exchange, Bursa Malaysia Bonds Sdn Bhd that provide, operate and maintain registered electronic facility for secondary bond market, Bursa Malaysia Securities Clearing Sdn Bhd which provide, operate and maintain a clearing house for the securities exchange, Bursa Malaysia Derivatives Clearing Bhd that provide, operate and maintain a clearing house for the futures and options exchange, Bursa Malaysia Depository Sdn Bhd that provide, operate and maintain a central depository, Bursa Malaysia Depository Nominees Sdn Bhd where it act as a nominee for the central depository and receive securities on deposit for safe-custody or management, Bursa Malaysia Information Sdn Bhd that provide and disseminate prices and other information relating to securities quoted on exchanges within the group and last but not least Bursa Malaysia Islamic Services Sdn Bhd which operate all Islamic Markets businesses and activities initiated under Bursa Malaysia.
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Demutualization of the Exchange is a main recommendation of the countrys capital market master plan. It is intended to remove inherent disadvantages embodied in the mutual structure, and provides the catalyst for the Exchange to strategically reposition itself to better address the challenges ahead in a more dynamic global business environment. The Demutualization Act makes it clear that the conversion does not create a new legal entity and all rights and liabilities of the Exchange remain unaffected. Upon its conversion, the guarantees of members were extinguished and voting shares issued to securities houses, remisiers, the Ministry of Finance Incorporated and a statutory fund created by the amendments to the SIA, the Capital Market Development Fund (the CMDF). Demutualization also resulted in the separation of membership rights of the Exchange from trading rights on the Exchange. Accordingly, ownership of the Exchange is now through ownership of shares in the company, instead of previously through holding membership rights. There is also a fundamental change in group structure. The Exchange is now the holding company for the group, as a result of the Demutualization Act vesting the stock exchange businesses of the Exchange in a new wholly owned subsidiary. The vesting took place on the same day as conversion, and ministerial approval under the SIA to operate a stock exchange business is deemed by the Demutualization Act to have been transferred to the Bursa Malaysia. The Exchange is also an approved exchange holding company, a concept introduced by changes to the SIA. This is one important feature in the many new provisions introduced by amendments to the securities laws, which seek to balance the commercial objectives of the demutualized for-profit Exchange with public interest responsibilities. Among the principal statutory provisions that reflect these strong public interest elements are the exchange holding company (the EHC) must act in the public interest, and give this priority in the event of conflict with the interest of the company, creation of governmentappointed public interest directors in addition to the independent directors appointed under the Malaysian Code on Corporate Governance. The Exchange also splits the role of the chairman and the chief executive officer, making the office of the former a non-executive one. Its first chairman post-demutualization is the former chief justice of the federal court, Malaysias highest court. Next, the EHC has the authority to enforce the business and listing rules of its subsidiaries, establishment of an EHC risk management committee, restriction against reduction of shareholding of the EHC in subsidiaries to a level below 75% without ministerial approval, restriction against any person (including with any person acting in concert) from holding 5% or more of the voting shares in the EHC, permits the listing of the EHC on the BMSB, provided arrangements are in place to deal with conflicts, the Exchange
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has stated that its listing would take place at an appropriate time, depending on market conditions, empowers the statutory securities regulator, the Securities Commission (the SC) to issue directions to the EHC and its subsidiaries in events of conflict, duty of the EHC to submit annual regulatory report on compliance to the SC, duty of the EHC to notify the SC of an intention to acquire or dispose of asset of material value, establishment of the CMDF. Essentially, this is to ensure that funds raised from the demutualization and listing (that is, relating to the shares issued upon conversion to CMDF) would be set aside for activities beneficial to the broad capital market, but which may not necessarily be in the commercial interest of the demutualized exchange. Other significant changes to securities legislation include the Licensing; the status of exempt fund manager, previously granted to unit trust managers and trustees, has been removed. From 2006, those undertaking fund management activities must obtain a fund managers licence from the SC. The definition of investment advice has been expanded to also include financial planning activities that no longer necessarily need to concern securities. Those who are carrying on financial planning activities have until August 31 2004 to obtain an investment advisers licence, after which they risk committing an offence under the SIA. If convicted, those in default would be liable to pay a fine not exceeding M$1 million ($263,000) or to imprisonment for a term not exceeding 10 years, or both. Next, Securities offering; under the SCA, the issue of securities generally requires the prior approval of the SC, unless exempted. The amendments to the SCA make it clear that all types of bonus issue and employee share option schemes are also now similarly exempted. The amendments also clarify that SC approval is not required if the offering is made to an existing holder of the securities of an unlisted company. This still leaves open the need to obtain SC approval when a holder of all the shares in a public but unlisted company sells the entire stake to an outside institutional party. After that, enforcement; the offence of front running would also now cover fund managers, their representatives and dealers representatives. Previously it only concerned licensed dealers (that is, the securities firms).The civil penalty for insider dealing has been increased from RM500, 000 to RM1 million. Whistle-blowing provisions have been introduced to protect auditors and insiders of listed companies. The former are additionally under a duty to report breaches of securities laws or exchange rules to the SC. The High Court is now empowered to issue a wider range of orders, including those to remedy or make restitution in response to breaches of securities laws and listing rules. Fundamentally, any aggrieved person also now has standing to apply to the High Court for remedy or restitution.
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The SC may now impose a penalty not exceeding RM1 million, or even order the making of restitution, for breaches of its guidelines or of the Malaysian Code on Takeovers & Mergers 1998. Last but not least, Clearing and Settlement; a new host of sections was introduced in the SIA to deal with the misapplication of insolvency laws in relation to securities transactions that are cleared through the clearing house. These are designed to ensure that the clearing operations are not subject to legal challenge in the event of the insolvency of market participants. One of the objectives of the Capital Markets Master plan is the self-regulation of the capital markets and services industry. The platform to achieve this objective is contained in Part VIII which introduces new provisions for the establishment, recognition, withdrawal and protection of self-regulatory organisations and the duties and rules of such organisations. A Self-Regulatory Organization indicates a business entity that regulates specific businesses within an industry. The role of the SRO is to monitor businesses within the SRO for ethics violations and to ensure fair practices in the operations of these businesses. The SRO exists primarily for the benefit of the businesses within the SRO. Additionally, however, the SRO also can benefit society in general by ensuring the business members conduct business ethically and within the standards established by the SRO. A self-regulatory organization is not associated with any specific government entity, and is not subject to many types of regulations that have legal ramifications. However, SROs still have to participate in arbitration or legal actions resulting from disputes. Additionally, SROS have to maintain basic business and ethical standards appropriate to the specific industry. Examples of SROs include the New York Stock Exchange and the National Association of Securities Dealers. In fact, most stock exchanges around the world are self-regulatory organizations. While SROs enjoy authority over the members of their organizations, that authority has limits in scope. Beyond the world of securities and commodity futures, there are other types of selfregulatory organizations. The America Dental Association is another example of a SRO. The ADA applies a universal standard and enforcement of rules and ethics to all practicing dentists. Another example of a SRO is the National Association of Realtors. In addition to ethical practices, SROs also place an emphasis on the efficient operation of businesses under the SRO. The fundamental purpose of a SRO is the establishment and enforcement of rules of conduct deemed necessary for the maintenance of an industry. The financial crisis of 2008 highlighted the importance of these organizations and what happens when either the standards of the SRO or enforcement by the SRO falters. SROs function as a check on the
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perspective of the individual business and the group of businesses within the SRO. They do not, however, typically place an emphasis on the overall sustainability of businesses practices for society. A self-regulatory organization primarily benefits businesses because the SRO should understand the operations and legal issues associated with businesses within the SRO. By allowing businesses to operate without having to deal with government regulators, businesses can continue to operate and grow more efficiently and effectively. SROs also have benefits in many of the emerging markets. Many developing economies lack the structural regulation within government to ensure sustainable practices by participating bodies. An SRO, then, may provide some of the only regulation available in emerging markets. SROs are formally recognized in certain specific instances under the CMSA. One of these is with respect to the registered persons as set out in Section 76. This section introduces several methods by which a person can be regarded as a registered person, one of which is by registration with a recognized self-regulatory body under the Section 323. Based on the savings and transitional provisions set out in Section 392(1), it would appear that the Federation of Investment Managers Malaysia which is the body currently charged with the responsibility of regulating its members in the unit trust industry, would after a period of two years need to convert itself into an SRO. Alternative trading system (ATS) is a proprietary electronic trading facility for securities that are traded principally on securities exchanges or other organised markets. Some ATSs have price discovery functions while others serve as matching systems or crossing systems using prices already established in organised markets. At the core of ATS regulation is the debate as to when a facility should be regulated as an exchange and when it should not. For this reason various criteria are used to guide regulators in making this judgement call. Although the term ATS is not specifically used in the CMSA, the provisions relating to Registered Electronic Facilities now provide a framework to allow electronic platforms to provide services to the public. These provisions together with the SCs Guideline on Regulation of Markets provide guidance as to the level of regulation which is imposed on various electronic facilities. The CMSA does not define registered electronic facility but instead sets out the conditions which the Commission may impose in registering an electronic facility for purposes of Section 7 of the CMSA. Effectively it means that a stock market or futures market can operate in the form of a registered electronic facility is approval is granted by the SC. Among the conditions are the person who operates the facility is to make available such electronic facilities according to the terms and conditions which the Commission can impose,
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ensuring that as far as reasonably practicable there is an orderly and fair market in relation to the transactions carried out by means of or through the electronic facility, permit any person authorised by the Commission to enter the premises on which the facility is provided and inspect it and ensure adequate arrangements relating to capacity, security and emergencies are available. In comparison with the regulation of a stock exchange, the provisions relating to registered electronic facilities are far less onerous in nature. Whilst an exchange would require formal rules and be subjected to a variety of regulations relating to their operations and governance, this is not replicated in the case of registered electronic facility. Section 35 of the CMSA merely states the information which the Commission may require relating to its facilities, business, services, directors and substantial shareholders while Section 36 sets out that the Commission may withdraw the registration if it is satisfied that it is appropriate to do so in the interests of investors, the public interest or for the maintenance of an orderly and fair market. In conclusion, the importance of demutualization in Bursa Malaysia includes its framework of exchange that covers SRO and electronic facility. As a mechanism for facilitating more efficient market access, a demutualized exchange is clearly appropriate. Going by the experience of the ASX that was demutualized and listed in 1998, a properly executed demutualization programme is a very effective vehicle to attract the inflow of foreign institutional investments. By removing the vested interests of members who provide intermediation services, the demutualization of the KLSE will enable it to institute strategies to broaden market access that will result in disintermediation. It is submitted that the long term benefits of such strategies will be positive for the intermediaries who stand to gain from increased market liquidity that comes from better governance of the exchange and improved reputation. Strategic alliances and straight-through trading linkages will also boost market liquidity for the Malaysian capital market. This is a compelling argument for intermediaries who may prefer the short-term benefits of their present dominance but must recognize that in the long term, a demutualized entity offers them the best hope to join the global capital market community as equals.