Nitty-gritty of Securities Exchange Act | Daily News

Nitty-gritty of Securities Exchange Act

Continued from February 8

RESPONSIBILITIES OF AUDITORS – MARKET INSTITUTIONS

Another important provision which has been included, is found at section 69 of the proposed Bill, which imposes an obligation on an Auditor of a Market Institution to inform the respective Board of Directors, with a copy to the Commission, in instances where; (a) any matter which, in his opinion, adversely affects or may adversely affect the financial position of the market institution, to a material extent; (b) any matter which, in his opinion, constitutes or may constitute a breach of any provision of this Act, regulations, rules or directives made thereunder or an offence involving fraud or dishonesty affecting the financial stability of the market institution to a material extent; or (c) any irregularity that has or may have a material effect on the accounts of the market institution, including any irregularity that adversely affects or may adversely affect, the funds or property of investors in securities.

ISSUE OF SECURITIES

Part III of the Act pertains to (a) the regulation of the issue of securities; (b) the disclosure of financial information by listed public companies; (c) the requirements for Auditors to disclose financial irregularities; (d) to license market intermediaries and to register their representatives and (e) to protect clients.

TRADE IN SECURITIES

The Chapter on Trade in securities categorically stipulates that a corporate entity listed or unlisted shall not make a public offer of securities either directly or through a third party by way of a prospectus or similar document, unless approved by the Commission, and thereby extends the regulation of the SEC to all public offers of securities to raise funds.

Section 81 provides that where it appears to the Commission that a listed public company has contravened or failed to comply with any provision of the Act, regulations, rules or directives or has furnished the Commission with information that is false, inaccurate or misleading, the Commission may issue a directive to the listed public company (a) to cease and desist from any contravention of this Act, regulations, rules or directives made thereunder; (b) to do or refrain from doing any matter as specified under this Act, regulations, rules or directives made thereunder; or (c) to carry out any other matter that the Commission considers necessary in the exercise of its powers under this Act, regulations, rules or directives made thereunder. It is also a punishable offence for a listed company to submit false information to any market institution.

The Commission will also be empowered to issue ‘Stop Orders’ or ‘Interim Orders’ where there is imminent violation of the stipulated requirements.

There is also a requirement that Directors and Chief Executive Officers of listed Public Companies must comply with the fit and proper criteria specified by the Commission or by the Rules of the Exchange.

RESPONSIBILITIES OF AUDITORS – LISTED COMPANIES

There is also important new provision imposing duties upon Auditors of Listed Companies, similar to the provisions identified above in respect of Market Institutions, to report such instances firstly to the Audit Committee, and if no rectification is made within two weeks to the Board with further provision to escalate the same to the Commission / the relevant Exchange where there is non-compliance. The Commission is also empowered to require the Auditor to submit such additional information, enlarge the scope of the Audit etc.

MARKET INTERMEDIARIES

Market Intermediaries have been defined to include any person licensed under the Act as a credit rating agency, derivatives broker, financial planner, investment analyst, investment manager, managing company, margin provider, market maker, placement agent, stock broker, or any other person who undertakes similar activity and described by rules for the purpose of issuing such licence by the Commission, and Chapter 2 of Part III seeks to regulate Market Intermediaries.

As in the case of Market Institutions, the proposed Act details a comprehensive set of governance requirements to be satisfied before being licenced as a Market Intermediary and also contains similar continuing governance requirements.

These governance measures include stringent requirements for directors, the chief executive officer, managers or controller of a Market Intermediary, and include grounds for refusal of a license on the basis that any of the said officers have been convicted of an offence involving fraud or dishonesty; or the conviction of which involved a finding that he acted fraudulently or dishonestly; has been subjected to any administrative action taken by the Commission; has been convicted or has been compounded of an offence for which he has been charged under the Act or under the laws governing securities outside Sri Lanka; has contravened any provision made by or under any law enacted for protecting members of the public against financial loss due to dishonesty, incompetence or malpractice by persons concerned in the provision of financial services or the management of companies; has engaged in any business practices that may be deceitful or oppressive or otherwise improper or reflect discredit on its method of conducting business; has engaged in or has been associated with any other business practices or conducted itself or himself in such a way as to cast doubt on its or his competence and integrity; is an undischarged bankrupt whether within or outside Sri Lanka; the Commission has reason to believe that the applicant or any of its officers may not be able to act in the best interest of its clients having regard to their reputation, character, financial integrity and reliability; the Commission is not satisfied as to the financial standing of the applicant or the manner in which the applicant’s business is to be conducted; the Commission is not satisfied as to the record of past performance or expertise of the applicant etc.

The new statutory obligations of Auditors for Market Intermediaries are similar as in the case of Market Institutions, setout above.

There have been instances in the past where those who possibly should not have been issued licences to operate as Market Intermediaries, have been issued such licenses by satisfying the basic eligibility requirements, and it is expected, that moving forward, the regime of licencing would be strengthened by these new provisions.

PROTECTION OF CLIENT ASSETS

The proposed Act in Chapter 3 of Part III also includes copious provision on protection of client assets and prevention of commingling of assets by Market Intermediaries.

Important provisions are also included to bring liability upon Market Intermediaries and Registered Persons to compensate losses of clients on the basis of unreasonable recommendations, and is included as a deterrent to unreasonable / fraudulent / reckless recommendations. In this respect, it is specifically provided as a guideline that a market intermediary or registered person does not have a reasonable basis for making a recommendation to a person unless – (a) he has, for the purposes of ascertaining that the recommendation is appropriate, had regard to the information possessed by him concerning the investment objectives, financial situation and particular needs of the person is accurate and complete; and (b) he has exercised due diligence into the subject matter of the recommendation as is reasonable in all the circumstances and made the recommendations accordingly.

Consequently, it is expected that these new provisions will act as a deterrent to Market Intermediaries and Registered Persons from being truant in advising their Clients.

TRADE IN UNLISTED SECURITIES

The proposed new Act also makes provision under Part IV for formalized trading in unlisted securities, through registered Market Operators, the objectives being (a) to provide a platform through a recognized market operator for sale and purchase of unlisted securities in Sri Lanka to local and overseas investors in a transparent manner; and (b) to facilitate the disclosure of information relating to unlisted securities to local and overseas investors through a recognized market operator in a transparent manner.

MARKET MISCONDUCT

Part V of the proposed Act deals with Market Misconduct, with the stated Objects identified as (a) to prevent false trading, market rigging and market manipulation, and (b) to prevent insider trading with a view to establishing a fair, orderly and transparent securities market.

The scope of application of the relevant provisions is wide, and covers, in respect of securities, acts or omissions occurring within Sri Lanka in relation to securities of any corporate entity which is formed or is carrying on business or is listed within or outside Sri Lanka, and acts or omissions occurring outside Sri Lanka in relation to securities of any corporate entity which is formed or is carrying on business within Sri Lanka; and in respect of derivatives, acts occurring within Sri Lanka in relation to derivatives, whether traded within or outside Sri Lanka; and acts occurring outside Sri Lanka in relation to derivatives traded within Sri Lanka.

PROHIBITED CONDUCT

Sections 124 to 128 of the proposed Act set out the prohibited conduct, the contravention of any one of them would amount to an offence and upon conviction punishable with a fine of not less than Rs. 10 Million or to imprisonment of either description not exceeding ten years or to both such fine and imprisonment.

The prohibited conduct includes, (a) false trading and market rigging transactions (pumping and dumping), (b) market manipulation (transactions which artificially raise, lower or peg, fix, maintain or stabilize the price or volume of securities, for the purpose of inducing other persons to trade), (c) making statements / disseminating information that is false or misleading, (d) fraudulently inducing persons to deal in securities through making false, misleading or deceptive statements or forecasts, concealment of material facts etc, and (e) the use of manipulative or deceptive devices to defraud.

INSIDER DEALING

The new Act proposes an even more comprehensive legal regime for Insider Trading, which is found in Chapter 2 of Part V under Market Misconduct.

The relevant information and the prohibited conduct have been defined.

Section 135 of the proposed new Act provides that an insider shall not whether as principal or agent in respect of any securities to which defined information relates (a) acquire or dispose of or enter into an agreement for or with a view to the acquisition or disposal of such securities; or (b) procure, directly or indirectly, an acquisition or disposal of or the entering into an agreement for or with a view to the acquisition or disposal of such securities. The provision further provides that where trading in the securities to which the defined information relates is permitted on a securities market of an exchange, the insider shall not directly or indirectly communicate the information referred to or cause such information to be communicated to another person, if the insider knows or could reasonably be expected to know that the other person would or would tend to (a) acquire, dispose of or enter into an agreement with a view to the acquisition or disposal of any securities to which the defined relates; or (b) procure a third person to acquire, dispose of or enter into an agreement with a view to the acquisition or disposal of any securities to which the defined information relates.

The offence of insider dealing is triable before the relevant High Court and brings with it a punishment in the form of a fine of not less than Rs. 10 Million or to imprisonment of either description for a term not exceeding ten years or to both such fine and imprisonment.

There is also provision for parity of Information as a defence, for example in the case of listed securities where information came into the possession of the person communicating the information solely as a result of it being made known in a manner likely to make it generally available or if the other party knew or could reasonably be expected to have known the information before the information was communicated.

There is further specific provision enabling / not curtailing the rights of persons who suffer loss as a result of the prohibited conduct, from instituting civil proceedings to recover losses or damages caused. 


 

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