Nitty-gritty of Securities Exchange Act | Daily News

Nitty-gritty of Securities Exchange Act

Continued from February 6

The following is a brief analysis pertaining to several important provisions of this new Bill :-

THE PROPOSED NEW SECURITIES EXCHANGE ACT

THE CONSTITUTION OF THE COMMISSION, OBJECTS AND POWERS

The long title of the proposed new Securities Exchange Act provides that it is “An Act to establish the Securities and Exchange Commission of Sri Lanka; to Regulate Market Institutions, Public Offers of Securities, Market Intermediaries; to deal with Market Misconduct; and to meet the challenges encountered by Securities Markets in an effective and efficient manner..”, and seeks to seamlessly consolidate the several aspects which must come within a Law that would regulate a capital market.

The Objects of the proposed Act are (a) to establish the Securities and Exchange Commission of Sri Lanka for the creation and maintenance of a fair, efficient and transparent securities market; (b) to protect the interests of investors both local and foreign; (c) to ensure the maintenance of high professional standards in the provision of services under this Act; and (d) to mitigate systemic risks in the financial system.

The Objects have not been substantially revised, except for the inclusion of the object of the mitigation of systemic risk in the financial system, which is vital, and was implicit under the old Act as well. Protection of investors is still a paramount consideration over other competing interests such as competition and capital formation, which have been given parallel importance in jurisdictions such as the US.

The Commission largely comprises of the same, except for the replacement of the President of the Institute of Chartered Accountants of Sri Lanka, with a Fellow Member of the Institute of Chartered Accountants of Sri Lanka who is not engaged in Auditing as nominated by its Council. This was to eliminate any conflicts of interest that could arise from an Auditor, who provides professional services to listed market Regulatees becoming part of the Commission, and also in view of the fact that under this proposed Act, Auditors have certain obligations.

The term of office of every appointed or nominated Commission Member is for three years and is limited to a maximum period of two successive terms of office, which is an important provision from a governance standpoint.

CONFLICTS OF INTEREST

A further safeguard to ensure the independence of the Commission has been included whereby the Minister, when appointing Commissioners must have regard not only to that person’s integrity and standing, but also the likelihood of any conflict between the interests of the Commission and any interest which that person has or represents.

POWERS OF THE COMMISSION

The powers of the Commission include, (a) to advise the Government on the development of the securities market and to assist in the effective implementation of the policies; (b) to encourage and promote the development of securities markets in Sri Lanka; (c) to give general or specific directives to any person or persons including market institutions, market intermediaries, registered persons, clearing members, trading participants, depository participants, issuers, investors or recognized market operators; (d) to give general or specific directives to supplementary services providers of market institutions, market intermediaries or listed pubic companies from time to time; (e) to grant a licence to a body corporate to operate as a market institution and ensure its proper conduct; (f) to grant a licence to any person to operate as a market intermediary and ensure its proper conduct; (g) to register a person advising clients on sale or purchase of securities for and on behalf of a market intermediary as a registered person and to regulate their conduct in the discharge of their duties; (h) to issue general or specific directives to listed public companies or listed foreign entities from time to time; (i) to issue specific directives to any person to prevent the imminent infringement of this Act, regulations or rules and to restrain infringement; (j) to regulate the listing and trading of securities in an exchange; (k) to regulate the issuance of securities; (l) to prohibit or suspend the listing of any securities or to delist the listed securitiesor to take such steps as the Commission considers necessary for the protection of investors; (m) to regulate a takeover or merger of a listed public company or any matter connected therewith; (n) to inquire and conduct investigations into any activity of a market institution, market intermediary, a registered person, a listed public company or a listed foreign entity; and (o) to conduct investigations into any alleged violation or contravention of the provisions of this Act or any regulation, rule, or directive.

THE DIRECTOR GENERAL AND STAFF

The Director General under the new Act will come under the direct purview of the Commission, and shall be appointed and also removed by the Commission.

The Staff of the Commission shall also be appointed by the Commission, and their terms of service and remuneration shall be determined by the Commission. These are further provisions which strengthen the independence of the Commission.

MARKETS AND MARKET INSTITUTIONS

Part II of the Act under the heading “Markets and Market Institutions”, contains the provisions pertaining to Exchanges, Clearing Houses and Central Depositories.

EXCHANGES

Chapter 1 of Part II which deals with Exchanges (which is defined to mean a stock exchange or a derivatives exchange licensed under this Act) among other things, sets out the threshold requirements to become an Exchange which gives paramount importance to governance and investor protection, the duties of an Exchange including to ensure an orderly and fair market in securities that are traded through its facilities, to act in the public interest having particular regard to the need for the protection of investors, and other administrative and operational requirements.

In fact, there is specific provision which imposes a duty on a Director of an Exchange to act at all times in the public interest having particular regard to the need to protect investors.

There is also new provision, which enables the listing of securities of an Exchange, on such Exchange, which would become immediately relevant when the demutualization of the Colombo Stock Exchange takes effect.

CLEARING HOUSES

Chapter 2 deals with the regulation of Clearing Houses for the purposes of clearing and settlement and among other things, sets out the threshold requirements to be licensed as a Clearing Facility, provisions pertaining to regulation and supervision of the clearing house and its members, establishment and administration of a settlement guarantee fund etc.

Further provisions include prioritization of default proceedings of a Clearing House in the distribution of assets, and other ancillary powers to facilitate clearing operations.

With the promulgation of the Act, the legal provisions will be in place for the setting up of a Central Counterparty which would engage in the clearing and settlement of trades, thereby minimizing / spreading the risk of non-settlement.

CENTRAL DEPOSITORY

Under the proposed Act, there is also a separate Chapter for the regulation of Central Depositories. Under the present operative Act, the Central Depository Systems (Pvt.) Limited (CDS) has been registered under generic provisions.

GENERAL PROVISIONS PERTAINING TO MARKETS AND MARKET INSTITUTIONS

There are also general provisions applicable to Market Institutions, including requirement for Rules to be approved by the Commission, need for approval to hold more than 5% of the voting rights, and other governance measures including the power vested in the Commission to make preliminary orders, fit and proper rules / criteria for Directors etc. 


 

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