SEC waiting for AG to sharpen its teeth, but will it bite?

June 19, 2013 (LBO) - Changes to Sri Lanka's securities law which will set civil penalties to offences, and make the Colombo Stock Exchange a limited liability and set up a derivatives exchange, regulators have said.

Sri Lanka's Securities and Exchange Commission said the long awaited legal changes to allow demutualization, or converting the exchange from a broker held mutual entity to a limited company is awaiting clearance from the Attorney General.

"These amendments to the Act will establish a regulatory framework for a derivatives exchange, clearing house, licensing of a demutualised stock exchange and give powers to the SEC to institute civil sanctions and administrative actions against capital market offenders," Chairman Nalaka Godahewa said in the regulator's annual report.

Outgoing director general Hareendra Dissabandara said the new laws in addition to bringing in "civil and administrative sanctions" will also back the introduction of new products.

Godahewa said the stock market had started to recover from the second half of 2012 from a burst bubble. Sri Lanka's stocks rose 400 percent after the end of a 30-year war in 2009, he said.

"Most new investors who entered the market did not have a good understanding of market dynamics," he said.

"Speculative traders looking for short term gains thronged the market creating a high degree of volatility in the market.

"The herd mentality created a market bubble and the regulator stepped in at this juncture and introduced risk mitigation measures, which created debates within the industry."

He said several measures were relaxed in consultation with the industry.

The regulator was implementing a master plan to boost capital markets.

Meanwhile the government has given tax breaks to boost the debt market which was also helping as part of measures to expand markets.

Update II
http://www.lankabusinessonline.com/news/sri-lanka-securities-law-to-allow-de-mutualization,-civil-penalties-on-track/623700042

The Securities and Exchange Commission of Sri Lanka (SEC) is waiting for feedback from the Attorney General’s Department regarding its draft proposal to the SEC Act, which would hopefully give the capital market watchdog enough teeth to effectively deal with market offenders. But will it act?

The project, with World Bank assistance, started during the tenure of former SEC Chairman Tilak Karunaratne who, as did his predecessor Ms. Indrani Sugathadasa, resigned after being prevented from dealing with influential capital market offenders. He told the Parliamentary Committee on Public Enterprises (COPE) last year that a highly-connected mafia was ruling the country’s stock exchange, engaging in price manipulation and other serious offences which prompted COPE Chairman DEW Gunasekare to say, "We are convinced that there is a mafia running the country’s stock exchange and we believe the SEC should be strengthened further to tackle this problem. The SEC Act has to be amended to give the regulator more powers to deal with this mafia and we believe this has to be done without any delays".

"The SEC will be empowered to institute civil sanctions and administrative actions against capital market offenders in order to disgorge investors who have incurred losses due to their actions. Many provisions have been included to enhance the protection of the investors including whistle-blower protection and powers to protect investors’ assets," the SEC’s 2012 annual report released yesterday (19) said.

"Regulation is fundamental to ensure that the capital market is fair, orderly and transparent. To strengthen our regulatory framework to facilitate capital market development many significant provisions were included in the proposed amendments to the SEC Act. The draft Act which is awaiting the Attorney General’s Department feedback will introduce a range of Civil and Administrative sanctions to deal with capital market offenders on par with global developments to efficiently handle regulatory matters, support the introduction of new products and facilitate the regulation of a demutualised exchange as well as establish a Central Counter Party," SEC Director General Prof. Hareendra Dissabandara told stakeholders in the annual report.

"The new Act will also provide for the all-time licensing of demutualised stock exchanges, derivative exchanges, clearing houses and central depositories as market institutions are subject to certain safeguards. In addition corporate finance advisors, financial planners, analysts, derivative brokers and dealers will be brought under the purview of the SEC," the report said.

"Further, the jurisdiction of the SEC will be extended in respect of companies and market intermediaries making or advising on the offering of debentures to the public in order to provide an impetus to develop the corporate bond market in Sri Lanka."

The World Bank through its FIRST Initiative (Financial Sector Reform and Strengthening Arm of the World Bank) assisted the SEC to propose amendments to the SEC Act and would harmonise the law with the International Organisation of Securities Commissions (IOSCO) standards.

The first mission was in June, 2011 and the final mission was in December, 2012.

"If the proposals are approved and made law, will the SEC Act? We believe people like Ms. Sugathadasa and Karunaratne would have acted had these amendments come through during their tenures. As to what the present SEC administration does with it, only time will tell," an investment analyst said not wanting to be named.

"The two former SEC chiefs gave us a feel of the extent of market offences, but the offenders were highly connected and got away scot-free. There is a feeling in some quarters that the investigations started during Karunaratne’s term is now buried under the carpet," he said.
http://www.island.lk/index.php?page_cat=article-details&page=article-details&code_title=81676