Merit-Based Regulation And Disclosure-Based Regulation in Malaysia

Since 1996, Securities regulation in Malaysia has evolved in a gradual and orderly fashion from a Merit-Based Regulation (MBR) to a Disclosure-Based Regulation (DBR) regime.
So what is this MBR and DBR?
Disclosure-Based Regulation (DBR):

• is an acronym for “disclosure-based regulation”.
• it is a philosophy of securities regulation that emphasises the importance of the quality and timeliness of material information disclosed by companies issuing securities to the public.
• from the information provided, investors can then judge for themselves if it is a good investment opportunity.
• under DBR, the regulatory authority’s primary function would largely focus on ensuring compliance by issuers with applicable prudential and disclosure standards.

Whereas:
Merit-Based Regulation (MBR) :

• emphasises on the regulatory authority assessing the quality and merits of an issue of securities
• Securities Commission (SC) assumed a paternalistic and interventionist role in the issue of securities.
• SC shielded the investing public and reduced the possibility of investors being exploited by unscrupulous individuals or corporations. This significantly enhanced the level of investor confidence and provided a sound foundation for the development and growth of the Malaysian capital market.

An analogy of how it works in a DBR and MBR environment:
If someone wants to sell a car in a MBR regime, the regulator will check to make sure that the car is in good condition and is saleable. The regulator then gives approval for the car to be sold in the market. In a DBR regime, even if the car has only three wheels and the steering wheel is missing, as long as minimum standards are met and so long as its condition is fully disclosed to the public, the car may be sold in the market. The premise is on the fact that the buyer or investor is fully informed of the condition of the car. It is caveat emptor, which means, let the buyer beware.

Since 1996, there has been the following gradual shift to DBR:

• Phase 1 (1996-1999) was a flexible MBR with enhanced disclosure, due diligence and corporate governance while
• Phase 2 (2000) promoted accountability and self-regulation and
• The SC implemented Phase 3, the final phase of the DBR programme in 2003.

So what might be  the benefits accruing to the shift to DBR?

The benefits are as follows:-

1. A more efficient fund-raising process:-
   Because DBR relies on higher standards of disclosure and accountability by issuers and due diligence on the part of investors, it provides for greater transparency which in turn allows greater market discipline to be imposed on the pricing and valuation of securities. The ultimate result is a more efficient and effective fund-raising process that is market-driven.
2. Increased investor protection and awareness:-
   DBR also increases investor protection by inculcating higher standards of accountability among issuers and their advisers by shifting the onus for statements and disclosure onto them and improving their sense of corporate responsibility and due-diligence standards.
3. Greater flexibility and innovation:-
   DBR allows for greater flexibility and innovation to facilitate market development as regulations covering issues, offers and listing would be less prescriptive and would focus on information disclosure regarding a particular proposal rather than the structure of the proposal itself.
   

(Source: Malaysian Investor created by the Securities Industry Development Centre (SIDC), which is the training and education arm of the Securities Commission (SC))

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