Securities and Exchange Commission of Sri Lanka

Transcription

1 Securities and Exchange Commission of Sri Lanka Dhammika Perera Director Disclaimer The views expressed herein are those of the author and do not necessarily reflect the views of the Commission, its individual members or its staff. 1

2 Regulatory Framework The SEC Act & Amendments: The Securities and Exchange Commission of Sri Lanka Act No. 36 of 1987 Amendment Act No. 26 of 1991 Amendment Act No. 18 of 2003 and Amendment Act No. 47 of 2009 Rules and Regulations made under the SEC Act: SEC Rules Gazette No 1215/2 (2001) & 612/8 (1990 amended in 1993) Unit Trust Regulations (1991) & Code (2004) Takeovers & Mergers Code (1995 amended in 2003) Rules for Market Intermediaries SEC Directives 2

3 Regulatory Framework Rules & Regulations of the Colombo Stock Exchange Listing Rules (acquired force of law through SEC Rules) Member Regulations CDS Rules ATS Rules DEX Rules Approved by the SEC 3

4 Broad Objectives of Securities Regulations The Protection of Investors Ensuring that markets are Fair, Efficient and Transparent The Reduction of Systemic Risk 4

5 Broad Objectives of Securities Regulation Cont d Protection of Investors: From Misleading, Manipulative & Fraudulent practices For Example: Insider Trading, Front Running, Misuse of Client Assets Full & Timely Disclosure of Material information To assess Risks & Rewards of Investments Accounting & Auditing standards License Market Intermediaries To provide Investment Advise/Service Supervision/Surveillance: Inspection, Surveillance & Compliance programmes Set minimum standards for Market Intermediaries Law Enforcement: Strong Investigation Procedure/Enforcement of Law 5

6 Broad Objectives of Securities Regulation Cont d Ensure Fair, Efficient & Transparent Market Fair: No undue favours to some over others Fair treatment of orders. Reliable price formation process Efficient: Timely & Widespread dissemination of information Price shall reflect Information availability Transparent: Information made Public/Real Time Basis Pre-trade Bid & Offer data Post-trade Prices & Volumes of all individual transactions 6

7 Broad Objectives of Securities Regulation Cont d... Reduction of Systemic Risk Reduce risk of failure but not prevention of financial failure Concerned with the Impact management On going Capital & other Prudential requirements Efficient & Accurate Clearing & Settlement Process Arrangements for Default handling Isolate any falling institutions 7

8 Establishment SEC Act No. 36 of 1987 (Mother Act) Membership of the Commission Objects, Powers & Functions Powers of Inspection/Inquiry/Investigation Cess Fund Licensing/Registration of Market Participants & Intermediaries Advise the Government on development of the Securities Mkt. Investigative Powers (call for information) Offence - Insider Dealing Penalties/Compounding..etc. 8

9 SEC Amendment Act No. 26 of 1991 Power to Register & Grant license to Managing Companies of Unit Trusts Prior to this amendment only Stock Exchanges & Stock Brokers were licensed Unit Trust means: Any arrangement made for the purpose, or of having the effect, of providing for the participation by persons as beneficiaries under a trust, in profits or income and capital gains arising from the acquisition, holding, management or disposal of securities or any other property vested in the trustee or such trust 9

10 SEC Amendment Act No. 18 of 2003 Power to Register & Grant licenses to 5 more market Intermediaries Credit Rating Agencies Investment Managers Margin Providers Underwriters Clearing Houses Enhanced Punishment for Insider Dealing Minimum 2 years Imprisonment (upto 5 years) Or Minimum Rs. 1 million Penalty (No ceiling) Or Both Increased Investigative Powers to: Summon Persons Examine Orally & Record Statements Enter Premises, Inspect & Take Copies of Documents of Regulated Bodies 10

11 SEC Amendment Act No. 47 of 2009 Section 3 (1) (a) (ii); To revise the composition of the Commission to increase the level of Private Sector representation. six persons drawn from the Private Sector possessing professional expertise, wide experience and proven competency in the fields of law, finance, banking and business. These appointments shall be made to facilitate a Commission with a multi-disciplinary capacity Section 13 (cc); To empower the Commission to issue general or specific directives to Listed Public Companies from time to time 11

12 2009 Amendments (Cont d ) Section 55; To enhance the scope and interpretation of Securities to encompass other instruments such as derivatives, Futures and Options. Securities means debentures, stocks, shares, funds, bonds, derivatives inclusive of futures and options, whatever the nature of the underlying asset relied on or notes issued, or proposed to be issued, by any Government or of any body, whether corporate or unincorporated, including any rights, options or interests (whether described as units or otherwise) therein or in respect thereof or any other instruments commonly known as securities, but does not include bills of exchange or promissory notes or certificate of deposits issued by a bank. 12

13 Regulated Entities Colombo Stock Exchange Stockbroking Companies Unit Trust Management Companies Credit Rating Agencies Investment Managers Margin Providers Underwriters Clearing Houses/Depositories 13

14 Section 51(1)(a) Any person who: Offence Contravenes any provision of the SEC Act or any rules or regulations made thereunder. Furnishes untrue, incorrect or misleading information. Willfully obstructs performance of duties of any member, officer, servant of the Commission or any other person with whom the Commission has entered into an agreement. 14

15 Specific Market Related Offences SEC Act Section Insider Dealing SEC Rules Rule Market Manipulation Rule Wash Sales Rule Front Running Rule Immediate non- disclosure of price sensitive information 15

16 Insider Dealing (Section 32) Trading in the shares of a Listed Company whilst in the possession of unpublished, price sensitive information in respect of the securities of the said Company, with a view to the making of a profit, or the avoidance of a loss. 16

17 Insider Dealing S.32 (1) & (2): capture the persons having direct access to information by virtue of being connected S.32 (3) to (7) & (10): extends the liability to persons who counsel or procure, communicate and obtain information S.32 (8) & (9): provides certain exemptions to charges of Insider Dealing 17

18 Insider Dealing Relevant Information Specific to a listed entity Confidential/Not Generally known Price Sensitive/Material 18

19 Insider Dealing Relevant Information (Cont d ) Specificity Specific to an Event / a Matter Particularity Information is not General in nature and related to a listed entity Publicity Information NOT in Public domain Price Sensitivity Bearing an Impact on a Security s Price Confidentiality Information expected to be kept in Privacy/Not to Disclose 19

20 Offences Market Manipulation/Creation of a False Market (SEC Rules 12 & 13) Creation of a false or misleading appearance or impression in respect of the trading, market or price. 20

21 Offences (Cont d ) SEC Rule 12 : Market Manipulation No person shall, Create Cause to be created Do anything that is calculated to create a) a false or b) misleading appearance or impression I. of active trading of II. with respect to the market for any III. the price of securities 21

22 Offences (Cont d ) Rule 13 : Creation of a false market No person shall by means of purchase or of any sale securities o o o that do not involve a change in the beneficial ownership of the securities (Wash Sales) or by fictitious transactions or by any other means create a false market in any securities 22

23 What is market manipulation? It is an intentional and willful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities or an intentional interference with the free forces of supply and demand. 23

24 Market Based Manipulation False/Misleading Transactions Some examples:- Marking the Close Creation of a flow in the Price Pattern Excessive Bid Ask Spreads Price Positioning Some examples:- Wash Trades Painting the Tape / Circular Trading Improper Matched Orders Placing orders with no intention of executing them 24

25 Information Based Manipulation (Pump and Dump or Hype and Dump) Insiders and promoters over promote a stock through a variety of fraudulent means to generate interest in that stock and cause the price to rise Some examples:- False press releases Paid promoters Internet chat rooms, E- mail spam campaigns, Message board postings Trash and cash Scalping 25

26 Negative consequences of market manipulation It affects the integrity of the market Market prices become less accurate (price should be set by the unhindered collective judgment of buyers and sellers) Undermines fair, honest and orderly markets Undermines market depth 26

27 Offences (Cont d ) Front Running (Rule 14) Trading directly or indirectly in securities of a Company ahead of a significant purchase or sale of securities of that Company, for his client, with the intent to profit by trading in such securities thereafter. 27

28 Offences (Cont d ) Non-Disclosure of Material Information Non-dissemination of material information by a Listed Company which could have a bearing on the price of its securities. SEC Rule 16 It shall be the duty of a listed company, with immediate effect, to disclose any Information; To avoid the establishment of a false market Which would likely to materially affect the Price 28

29 Listing Rules & the Liability on the Directors of a Listed Entity Rule 3; Every listed company on any stock exchange shall be required to comply with the listing requirements Rule 18; Every Company which obtains a listing shall enter into an agreement with the licensed stock exchange, agreeing to comply with all the listing requirements and policies and it shall not withdraw its listings without prior written approval of such stock exchange Rule 17; Directors of the listed companies to ensure compliance of the listing requirements on a continuing basis so long as the company remains on the official list 29

30 Section 51 (3) Liability - Shifting of the Burden Where the offence under this Act is committed by a body corporate, any person who is at the time of the commission of the offence, a Director Manager Secretary or Other similar officer of the body corporate shall be deemed to be guilty of that offence! 30

31 Liability Shifting of the Burden (Cont d ) unless he proves that such offence was committed without his knowledge connivance or or that he exercised all due diligence to prevent the commission of that offence 31

32 Liability on Stockbrokers.. Section 28 (2) No licensed Stock Exchange, Stockbroker, Stock dealer, Managing Company of a Unit Trust or registered Market Intermediary shall directly or indirectly employ any devise to defraud engage in any practice/business as a fraud or deceit upon any person make any false or misleading statement in relation to a material fact 32

33 Enforcement Action by the SEC Directions Section 13(c) Publication of Malfeasance - Section 13(j) Cancellation or Suspension of licence granted to a Stockbroker/Stock Dealer - Section 21(1) Suspension or Cancellation of Certificate of Registration granted to a Market Intermediary Section 21A (1) Taking over administration and Management of a licensed stock exchange Section 23A(1) 33

34 Enforcement Action by the SEC (Cont d ) Compounding of the Offence - Section 51A An offence could be compounded for a sum not exceeding 1/3 of the maximum fine imposable under the Act. That is 1/3 of Rs. 10,000,000/- approx. Rs. 3.3 Mn per offence. The monies collected through compounding should be credited to the Compensation Fund. Prosecution 34

35 Classification of Punishment on Conviction Penalty Expressly Provided Insider Dealing Inquiries & Investigations Threatening, intimidating, defaming member of the Commission, etc. Penalty Expressly Not Provided Contravenes any provision of the SEC Act or any rules or regulations made thereunder, such as; Market Manipulation Wash Sales Front Running, etc. 35

36 Section 33A Punishment on Conviction for Insider Dealing Any person who commits Insider Dealing shall be liable on conviction by a Magistrate to: A Fine not less than Rs. 1 Mn. Or An Imprisonment for a term not less than 2 years, and not exceeding 5 years. Or Both such imprisonment and fine. 36

37 Punishment on Conviction on Inquiries & Investigations Section 46A(4) Every person who fails to (1) appear or (2) refuses to answer any question or (3) knowingly gives any false answer to the commission shall be liable on conviction by a Magistrate to: A Fine not exceeding Rs. 1 Mn. Or An Imprisonment not exceeding 5 years. Or Both such imprisonment and fine. 37

38 Punishment on Conviction for Threatening, intimidating, defaming member of the Commission & etc. Section 50A Any person or body of persons who (a) threatens or intimidates or (b) makes any derogatory remarks publishes any statement with a view to bringing disrepute or defaming the reputation of any member of the Commission, the Director General or any other officer or servant of the Commission in the course of discharging his duties, shall be liable on conviction by a Magistrate to: A Fine not exceeding Rs. 50,000/= (Fifty thousand). Or An Imprisonment not exceeding 6 months. Or Both such imprisonment and fine. 38

39 Section 51 (2) Punishment on Conviction Any person who is found guilty of an offence under this Act for which no penalty is expressly provided for under this Act shall be liable on conviction by a magistrate to (a) a term of imprisonment not exceeding 5 years Or (b) a fine not less than Rs. 50,000 & not exceeding Rs. 10 million Or (c) both such imprisonment and fine 39

40 Commencement of an Investigation/Inquiry As a result of a written/verbal complaint. (These complaints can even be anonymous) By way of: An internal referral of the SEC Eg: Surveillance Division An external referral Eg: Colombo Stock Exchange Any other form of information i.e. newspaper articles, rumors, tip-offs etc. 40

41 Powers of Inquiry/Investigation Section 13(i) Power to inquire and conduct investigations into any activity of a: licensed stock exchange licensed stock broker licensed stock dealer licensed managing company or a trustee of a unit trust registered market intermediary any listed public company 41

42 Powers of Inquiry/Investigation Section 45(1) Power to call for any information in writing from any person. Exception: Other than information which is prohibited from being disclosed or produced under any law which provides for the imposition and recovery of any tax. 42

43 Powers of Inquiry/Investigation Section 46A(1) Power to summon and call upon any person to give evidence, or to produce any books or documents. Section 46A(3) Power to examine orally and record statements of the persons so summoned. Liability!!! Section 46A(4) Every person who fails to appear when summoned, who refuses to answer any question put to him, refuses to produce any document in his possession or control when required to do so, or knowingly gives any false answer to any question put to him shall be guilty of an offence under the Act. 43

44 Powers of Inquiry/Investigation Section 46A(2) Power to enter into any premises of the: Stock Exchange Licensed Stock Broker Stock Dealer Listed Public Company Licensed Managing Company of any Unit Trust Registered Market Intermediary and Inspect and take copies of any records required to be kept under the Act. 44

45 Thank You Questions? 45