New SEC Act tough on insider trading, market manipulation

After many months and long hours of drafting, the Securities and Exchange Commission (SEC) of Sri Lanka Act was finally published as a Bill last week aimed at regulating market institutions, public offers of securities, market intermediaries, deal with market misconduct; and meet the challenges encountered by securities markets in an effective and efficient manner.

The proposed new Act, which requires the sanction of Parliament, will repeal the Securities and Exchange Commission of Sri Lanka Act, No. 36 of 1987 which was not only seen as outdated but inadequate to deal with major issues like insider trading or pump-and-dump deals.

According to Ravi Abeysuriya, President - Colombo Stock Brokers Association, the previous 30-year old Act was archaic, weak and limited in its scope for oversight over listed securities and few market intermediaries. The SEC could take action against wrongdoers only through criminal proceed- ings and had not changed with the times compared to the rest of the world, he said.

The general scope of the Act is to regulate all public offers of securities, expanding the reach of the SEC to a wider range of capital market activity, including non-listed companies, he said adding that it is much wider in scope to deal with market misconduct and clarifying offences so that there is no uncertainty.

“It makes sanctions more meaningful by making punishments more stringent and expanding the right of the Commission to invoke civil proceedings and remedies to recover actual damages. It meets challenges encountered and new developments in capital markets,” he added.

Citing some other key features, he said auditors who audit accounts of market institutions, intermediaries and listed public companies must be registered and are made accountable to disclose financial irregularities

He said the Act provides for the stern prevention of false trading, market rigging, market manipula- tion, insider trading in order to establish a fair, orderly and transparent capital market.

Penalties in the proposed new laws have been increased to between Rs. 10 to 25 million in fines and jail terms of five to 10 years.

For the first time, the Commission, not the Minister, is empowered to appoint its DirectorGeneral, who shall be its chief executive officer. Earlier this authority rested with the Minister who made the appointment in consultation with the Commission.

The Act provides for the director of a stock exchange being dutybound to act at all times in the “public interest having particular regard to the need to protect investors”.

Much of the provisions of the proposed new laws deals with market ‘ mischief ’ and ‘ misconduct’, particularly pump- and- dump trades which earlier saw two chairpersons of the SEC, Ms. Indrani Sugathadasa and Thilak Karunaratne (who returned as the SEC chairman after the advent of a new Government in January 2015) being forced to quit owing to political pressure mounted by influential traders and officials. The SEC, while re-opening these cases of market manipulation, is yet to charge anyone.

The proposed law also provides for directors or chief executive officer of a listed public company to comply with the fit and proper criteria specified by the Commission or in the rules of an exchange in appointing or maintaining directors or chief executive officer to the listed public company.

Auditors of listed public companies are expected to report any issue that “may adversely affect the financial position of the listed public company to a material extent” immediately to the audit committee “and if no remedial measure is taken within two weeks thereof refer the matter to the board of directors”.

“No auditor shall be liable to be sued in any court of law for any report submitted by the auditor in good faith and on the intended performance of any duty imposed on the auditor under this section,” it said.