SEC will come down hard on non-compliance - Chairman

The capital market is considered a vital conduit for long-term fund mobilisation and a key driver of economic growth. As the capital market regulator, our focus is to facilitate a fair, efficient, orderly and transparent market, in which issuers can raise funds with adequate safeguards to protect investors, Chairman, Securities and Exchange Commission of Sri Lanka (SEC), Thilak Karunaratne said in the Commission’s Annual Report.

He said the regulatory framework of the securities market has been designed to fulfill this mandate and ensure a reliable price discovery mechanism, reasonable market access to all investors, prompt action to contain market failures and timely and efficient dissemination of market disclosures. The Commission continues to ensure that it strikes a balance in regulation since over-regulation can stifle growth and discourage active stakeholder participation.

An important aspect in maintaining the integrity of the market, and making certain that investors are protected is the dissemination of quality and reliable of information on an ongoing basis. Disclosures increase the ability of investors to make informed investment decisions, improve shareholder sentiment and deter management from engaging in improper behaviour.

When material information is made available in a timely manner it can also reduce the herd instinct of many investors.

Since the lack of reliable and timely information hinders market development and investor confidence, the SEC will continue to impose stringent rules and undertake rigorous enforcement action against non-compliance.

“We continue to monitor, mitigate and manage risk to promote integrity in the market. Since systemic risk has the potential to not only affect the financial market but the entire economy as well, our scope of supervision encompasses the identification of risk in regulated entities, issuers, transactions and the market.

Through our Risk Based Supervisory Framework we focus on capital and other prudential needs for market intermediaries, protect client assets and compliance with internal controls on a regular basis,” Karunaratne said.

Excerpts from the report

Our supervisory role further extends to mitigating the settlement risk in the securities market. We will set up a Clearing House with the Colombo Stock Exchange (CSE) which will act as a Central Counterparty (CCP) for settlement of securities, shares, corporate debt and any other instruments coming under our purview.

A consultancy firm specialising in capital market related assignments globally, was entrusted with the task of implementing a full-fledged CCP. This will significantly minimise the risk of settlement failure and counter-party risk.

The SEC is firmly committed to taking rigorous action against those who commit regulatory breach, which include market manipulation, misconduct by regulated entities and corporate disclosure-related offences. However, the Sri Lanka Securities Law, which was enacted 28 years ago, has its drawbacks inter alia the enforcement framework built on criminal prosecution and compounding of offences.

Therefore, in the past the SEC mainly resorted to issuing warning letters, imposing suspensions on investment advisers and compounding. In tandem with the expansion of the capital market it is necessary to make changes to the SEC Act to broaden the range of enforcement powers.

The proposed amendments to the SEC Act will introduce a range of administrative and civil sanctions, including the seeking of restitution to any person aggrieved. The SEC increased its efforts to expedite the amendments since this will pave the way for credible regulation and market confidence.

In addition the amendments to the Act will align the SEC governance structure with International Organisation of Securities Commissions (IOSCO) standards, facilitate the introduction of new categories of market intermediaries and regulation of their business conduct and provide for the regulation of derivative products. Investor confidence can be described as the foundation on which the capital market is built and sound governance will attract local and foreign investors and stimulate economic growth. As the capital market regulator, the SEC strives to promote good corporate governance practices through a framework of rules and regulations which ensure accountability, fairness and transparency.

However, upholding good corporate governance needs the concerted efforts of all stakeholders of the capital market. We have achieved a lot in the area of facilitating this but there is still much to be done and we will continue to work in partnership with the capital market industry to enhance corporate governance standards.

The need for investor education and financial literacy has never been more important than today. Our investor education initiative is centered on providing basic skills and knowledge to enhance investor protection, promote investor confidence and foster investor participation in the capital market.Since investor education is an essential regulatory tool for empowering investors we deployed various channels and outreach programs such as seminars, trade fairs, radio and television talk shows to impart proper knowledge on investing in the capital market to different segments of society. We anticipate that empowered investors will take on more responsibility for their investment decisions. Investor education is a shared responsibility and therefore, we work in affiliation with other stakeholders to achieve this objective. Since the quality of investment advice given to clients dependents on the quality of investment advisers, the SEC provides capital market professionals with the knowledge and skills to perform their duties properly. The SEC anticipates that stock broking firms would adopt a robust training regime to ensure industry participants perform duties in the clients’ best interests.