NATIONAL UNIVERSITY OF SINGAPORE

FACULTY OF LAW

SECURITIES REGULATION
2022/2023

LEGAL POSITION OF STOCKBROKERS

1. THE RELATIONSHIPS BETWEEN MARKET PARTICIPANTS

A typical transaction on the stock exchange takes this form:

 A client approaches a broker (either a remisier, salaried employee or director of

the broking company) and instructs the broker to buy or sell securities.
 The broker executes the order on the exchange through the facilities of the
broking company to which he is affiliated.
 The transaction is concluded with another broking company which has received
corresponding instructions from one of its clients.

In this kind of transaction, there are 4 sets of relationships that have to be considered
which are illustrated as follows:

  

client broker broking company broking company broker

client

(seller) (buyer)

Relationship : Client-broker/broking company

Relationship : Broker-broking company
Relationship : Broking company-broking company
Relationship : Seller-buyer

Securities are bought on the SGX-ST through an auction system using “limit orders”.
What do you think these are, as compared to “market orders”. NASDAQ
operates a system of market makers. What is this? See Reg 5(2) SF (Market
Conduct) (Exemptions) Regulations

2. RELATIONSHIP : CLIENT-BROKER/BROKING COMPANY

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The exact nature of the relationship between the client and the broking company is
elusive and hard to define. It could be a relationship between two independent
contracting parties, being a seller and a buyer. On the other hand, the broking
company could be an agent who agrees to buy or sell securities on behalf of the
client. Ascertaining the rights and obligations between broker and client that arise
from such an agency relationship is difficult. Does the agency arise from a
contractual relationship or from a fiduciary relationship? Read the following
cases:

Thompson v Meade (1891) 7 TLR 698

Solloway v McLaughlin [1938] AC 247
RH Deacon & Co v. Varga [1973] 1 OR 233
Syarikat Soon Theam Sdn v. H’ng Chye Jin [1975] 1 MLJ 259
Daly v. Sydney Stock Exchange Ltd (1986) 4 ACLC 283
Lim & Tan Securities v. Sunbird [1992] 1 SLR 258
Ng Kian Chong v. Saw Seng Kee [1994] 3 MLJ 693
(cf Ho Kam Seong v Arab Malaysian Securities Sdn Bhd [2000] 6 MLJ 641
Kelly v. Cooper [1992] 3 WLR 936 (analogous case on estate agents)

Where one views the relationship between the client and the broking company as
primarily contractual, it is acknowledged that various terms of this contract are
unwritten. They are implied from custom of the trade or necessity. From the cases
cited above, deduce some of the major implied terms of the contract.

The broking company is generally considered to be a fiduciary of the client. This

means that the broking company cannot put itself in a position where its duty to the
client conflicts with its interest. Could you break down this general fiduciary duty
to avoid conflict into more specific fiduciary duties? Does the broking company
owe any other fiduciary duties to the client? What about the duty of good faith?

From para 92 of Scintronix Corp Ltd (formerly known as TTL Holdings Ltd) v Ho
Kang Peng and another - [2013] SGHC 34

The distinction between the duties of fidelity and fiduciary duties was recently
set out by the Court of Appeal in Smile Inc Dental Surgeons Pte Ltd v Lui
Andrew Stewart [2012] 4 SLR 308 (“Smile Inc”) at [52], approving the
following dicta of Elias J in the English High Court decision of Nottingham
University v Fishel [2000] IRLR 471 at [96]:
Accordingly, in analysing the employment cases in this field, care must
be taken not automatically to equate the duties of good faith and
loyalty, or trust and confidence, with fiduciary obligations. Very often
in such cases the court has simply been concerned with the question
whether the employee's conduct has been such as to justify summary
dismissal, and there has been no need to decide whether the duties
infringed, properly analysed, are contractual or fiduciary obligations.
As a consequence, the two are sometimes wrongly treated as identical
...

Are banks usually in a fiduciary relationship with their customers? If not do

they still owe a high duty of care when it comes to advising them on financial

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transactions? How does a non-reliance clause work? What about conclusive
evidence clauses?

Wee Soon Kim Anthony v UBS AG [2003] SGCA 33

Susilawati v American Express Bank Ltd [2008] 1 SLR(R) 237
KIV ASIC v Citibank (insider trading sheet)
Go Dante Yap v Bank Austria [2010] SGHC 220 and [2011] SGCA 39
Orient Centre Investments Ltd v Societe Generale [2007] 3 SLR(R) 566
Springwell Navigation v JP Morgan Chase Bank [2010] EWCA Civ 1221
Jiang Ou v EFC Bank AG [2011] 4 SLR 246
Als Memasa v. UBS AG [2012] SGCA 43 at paras. 25-29, Chan C.J; see also
Deutsche Bank AG v. Chang TseWen [2012] SGHC 248 at para. 138, Pillai J,
but see now CA decision [2013] SGCA.
See Regulation Best Interest promulgated by the SEC July 2018:
https://www.sec.gov/news/speech/speech-peirce-072418

(A) MARRYING AND CROSSING

In some cases, the broking company does not execute a client’s order through the
exchange. It may have a corresponding order from another client of its own, which it
can then “marry”. This practice (called “direct business”) is recognised in rule 8.7
SGX-ST Rules. (NB: Transactions involving less than 50,000 units of securities or
$150,000 must be executed through the exchange but SGX previously proposed
raising this to 500,000 units and $500,000 respectively: see BT 21 Jan 2009) Read
*Jones v. Canavan [1972] 2 NSWLR 236.

A practice similar to a married deal is a “crossing,” where the transaction is done

directly with another broking company which has a corresponding order. This type
of direct business is also governed by rule 8.7 of the SGX-ST Rules.

Is the process of marrying and crossing orders consistent with a broking

company’s relationship with its clients or does it amount to the operation of a
securities market? See “approved market” definition in First Schedule SFA and
Rashid Hussain Securities v Chen Ten Song [2001] 6 MLJ 468.

(B) BROKER/BROKING COMPANY ACTING AS PRINCIPAL

Sometimes, the broking company will take the transaction on its own books. In other
words, it engages in "proprietary trading" or "house trading." See “Obama to set
limits on proprietary trading” Financial Times 21 January 2010. But the
implementation of all this has been slow and in some cases ignored completely.
Compare UK ringfencing of retail banks.

Read regs 44 (priority to customer’s orders) and 47B (dealing in securities as

principal) of the SF (Licensing and Conduct of Business) Regulations and rules 13.1,
13.3 and 13.4 of the SGX-ST Rules. Read the following cases:

Armstrong v. Jackson [1917] 2 KB 822

Fearon & Co v. Stivin & Green (1927) 6 FMSLR 104

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 Hewson v. Sydney Stock Exchange Ltd [1968] 2 NSWR 224
Lim & Tan Securities v. Sunbird [1992] 1 SLR 258

Is proprietary trading by broking companies legal? Is it desirable? See “Fast

traders changing the landscape of US equities” Business Times 28 December 2009.

Why were sections 122 and 125 SFA repealed when the SFAA 2009 came into
force, and the relevant provisions moved to the SF Regulations? Why is it so
hard for a full service large securities firm to give priority to a customer’s
order?

(C) ADVISING CLIENTS

Read sections 45 and 36 of the Financial Advisers Act and Regs 34, 35 Financial
Advisers Regulations (previously 120 and 121 of the SFA and Regs 49, 50 SF
(Licensing and Conduct of Business) Regulations 2002). How are these FAA rules
applicable to holders of a capital markets services licence when such persons are
exempted by virtue of section 20(1) FAA. Read also rule 15.5 of the SGX-ST Rules
and the following cases:

Simons v. Teo Guan Tye (1890) 2 SLJ 98

RH Deacon & Co v. Varga [1973] 1 OR 233
Daly v Sydney Stock Exchange (1986) 4 ACLC 283 (HCA – Austlii)
Choo Pit Hong v PP [1995] 2 SLR 255

Is it part of a broker’s function to advise clients? What is the modern reality?

Look back to the “know your client” rules in the first seminar sheet. See now reg 18B
of the Financial Advisers Regulation for due diligence in respect of new financial
products, which places responsibility for such on senior management: discussed by
Low KY in Singapore Law Gazette September 2011. On 1 January 2016, the
Financial Advisers Act was amended to implement the recommendations of the
Financial Advisory Industry Review (FAIR) Panel. This regulates the payment to and
receipt of remuneration by FAs and also ways of assessing the non-sales related
performance of FA reps and supervisors. The FAR was also amended to restrict the
types of non-FA activities that licensed FAs may carry out.

See briefly "The Fiduciary Obligations of Financial Advisors Under the Law of
Agency" ROBERT H. SITKOFF, Harvard Law School
rsitkoff@law.harvard.edu
Email:

This paper considers how agency fiduciary law might be applied to a financial advisor
with discretionary trading authority over a client's account. It (i) surveys the agency
problem to which the fiduciary obligation is directed; (ii) examines the legal context
by considering how the fiduciary obligation undertakes to mitigate this problem; and
(iii) examines several potential applications of agency fiduciary law to financial
advisors, including principal trades and the role of informed consent by the client,
organizing the discussion under the great fiduciary rubrics of loyalty and care. This
paper was sponsored by Federated Investors, Inc.

Is the “suitability rule” enough? What does this try to regulate?

(D) DEFAULTING CLIENTS

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 Solloway v. McLaughlin [1938] AC 247
Syarikat Soon Theam Sdn v. H’ng Chye Jin [1975] 1 MLJ 259
Mercantile Credits v. Jarden Morgan Australia (1989) 1 ACSR 51 (Supreme
Court); (1990) 1 ACSR 805 (Full Court)
Ong & Co v. Foo Sae Heng [1990] 2 MLJ 85
Lum Chang Securities v. Liam Beng Hian [1993] 3 SLR 187
YK Fung Securities Sdn Bhd v. James Capel [1997] 2 MLJ 621

What are the broking company’s remedies against defaulting clients?

(E) MANAGING FUNDS

Although this is a different regulated activity, ie providing fund management as

opposed to dealing in capital markets product, a large stockbroking firm might
provide such a service on a discretionary or non-discretionary basis. For a good
discussion of the different roles played by fund managers and dealers in the context of
the Takeover Code, see

https://www.mas.gov.sg/-/media/MAS/resource/sic/Practice-Statements/Practice-
Statement-on-Exempt-Fund-Managers-and-Exempt-Principal-Traders.pdf?
la=en&hash=5539807E947382CF5A93F2D2A32CF8B13A6D6A4A

If you understand all of this, you are ready to be a regulatory and an M&A lawyer!!

3. RELATIONSHIP : BROKER-BROKING COMPANY

This relationship depends on what type of broker one is considering. There are three
sorts of brokers: executive directors, salaried employees and remisiers.

EXECUTIVE DIRECTORS

A director may or may not be an employee of the company. He will be subject to the
normal fiduciary duties of a director to his company. He is also an agent of the
company in relation to the client.

SALARIED EMPLOYEES

A salaried employee is an agent of the broking company vis-a-vis the client of the
broking company. For an interesting case providing insight into the operations of a
stockbroking company, see Kim (Eng) Securities v Lee Kia Khen [1999] SGHC 47.

REMISIERS

This type of broker causes problems. Remisiers are peculiar to Singapore and
Malaysia. Read the following cases:

Theresa Chong v. Kin Khoon & Co [1976] 2 MLJ 253

Associated Asian Securities v. Lee Kam Wah [1993] 1 SLR 585

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 Mohamed Selan v. PB Securities Sdn Bhd [1992] 1 MLJ 762
Chien Chung Ming v. Kay Hian & Co [1992] 1 SLR 242
Ng Kian Chong v. Saw Seng Kee [1994] 3 MLJ 693
*Tat Lee Securities v Tsang Tsang Kwong (Seminar sheet 1).
Tiang Ming Sing v Datuk Ambrose Joseph Lee [2000] SGHC 95.

What is the legal relationship between the remisier and the broking company on
one hand and the client on the other? Is the remisier an agent of the client, the
broking company or both? Compare Ong v Lai (Seminar sheet 1) on dealers. Is
agency sometimes used incorrectly? See Reynolds and Tan, “Agency Reasoning – A
Formula or a Tool?” [2018] SJLS 43.

4. RELATIONSHIP : BROKING COMPANY-BROKING COMPANY

This is the least controversial of the four relationships. By trade custom, the two
broking companies are considered to be dealing as principals. This is now expressly
stated in rule 4.6.2 of the SGX-ST Rules, which provides as follows:

“A Trading Member contracts as principal as regards the other Trading

Member when it trades on SGX-ST.”

Rule 8.5 of the SGX-ST Rules also provides that contracts are inviolable, unless there
is eg fraud, wherein SGX-ST is then permitted to cancel the relevant contract.

5. RELATIONSHIP : SELLER-BUYER

The key issue here is the nature of the broker’s authority from the client. Are brokers
true agents who have authority to establish privity of contract between the seller and
buyer? Or are they merely “agents” for the purpose of purchase and sale of securities
with no authority to actually bind their clients to the contract with third parties?

Read the following cases:

Wilson v. Clarke (1896) 21 VLR 694

Syarikat Soon Theam Sdn v. H’ng Chye Jin [1975] 1 MLJ 259
Bell Group v. Herald & Weekly Times [1985] VR 613
Mercantile Credits v. Jarden Morgan Australia Ltd, supra

Which cases are correct in the light of modern stock market practice? Is it
realistic to hold that there is privity of contract between buyer and seller? What
is the practical significance of holding that there is indeed privity of contract?

See also Bonds and Securities (Trading) Pty Ltd v Glomex Mines NL [1971] 1
NSWLR 879.

The importance of the payment, and clearing and settlements, systems cannot be
over-emphasised. Under our system, securities are credited into the CDP account of
the purchaser on the second business day after the trade date (T + 2). Settlement has
to accord with SGX-ST Rules Chapter 9. Note that if seller does not have sufficient

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securities to honour a sale transaction on due date, CDP shall buy-in against the
member acting for the seller in accordance with SGX-ST Rules rules 9.2 and 9.4,
without giving any notice - consequently, short-selling even though not illegal in
Singapore is in practice difficult without scrip borrowing.

 A new Part VIIA to the Securities and Futures Act was introduced by the SFAA 2017
that requires short sell orders to be disclosed to an approved exchange and short
positions beyond a certain threshold have to be reported to the MAS. 1 The details
will be found in regulations promulgated under the new section 137ZM.

See R Sivanathy, “Time SGX moves to T+1, scraps contra” Business Times 19 Jan
2010. More recent recommendation is for T+2, “MAS-SGX measures: more can be
done” Business Times 10 Feb 2014. Why should we not give retail investors more
time to settle their trades?

CDP rules are given the same force and effect as SGX-ST rules: section 81ST SFA.
Recall also that CDP depositors are deemed to be members of the Company by
section 81SJ. The Companies (Amendment) Act 2004 extended this regime to cover
unlisted and foreign shares, as well as units in collective investment schemes by
deeming depositors of such securities members in a company or holder of units
respectively. The provisions have been moved to the SFA. What if a Bermudan
company is listed on the SGX-ST, and Bermudan company law states that it
only recognises the person who is the legal owner on the books of the company
(ie CDP) as the member or shareholder?

See now the excellent decision of Aedit Abdullah J in Goldilocks Investment Co Ltd v
Noble Group Ltd [2018] 5 SLR 425, [2018] SGHC 108

What is a “forum mandatory statute”?

Is a sub-account holder of share just a putative account holder and so satisfies
the deemed member requirements in section 81SJ?

Hans Tjio March 2023

1
MAS Consultation Paper, P004-2014, Proposed Amendments to the Securities and Futures Act,
February 2015, at para 4.3. $2 million or 0.2% of the company’s total issued capital.