By Viraj Dayaratne PC
Chairman Securities and
Exchange Commission of Sri Lanka

Continued from yesterday

Prosecutorial Discretion of the Commission

Criminal proceedings

Consequent to the completion of investigations by the Commission, if the Commission is of the view that sufficient evidence exists to establish the commission of an offence under Part V, steps will be taken to institute criminal proceedings. Since criminal proceedings are to be instituted in the High Court and charges are filed in the form of an ‘indictment’ which can be presented only by the Attorney General as stated in the Code of Criminal Procedure Act (with the exception indicated in the Bribery Act), the Commission will refer the matter to the Attorney General for the filing of indictment and the prosecution will be conducted by the Attorney General. Even when charges were to be filed in the Magistrate’s Court in respect of all offences under the previous Act, the preparation of the charges and the conduct of the prosecution was by the Attorney General.

The offences other than what is contained in Part V are triable in the Magistrate’s Court.

Civil Proceedings

A new feature that has been introduced by the Act is the discretion conferred on the Commission to institute civil proceedings in the High Court exercising civil jurisdiction which is commonly referred to as the Commercial High Court in order to recover damages and to seek the imposition of a civil penalty. The Act has specifically conferred this jurisdiction on the Commercial High Court. Such proceedings can be instituted against a person who has committed a contravention under Part V. The decision of the Commission to institute such proceedings will depend on the ‘nature and manner of the contravention, the impact it has on the market and the extent of the loss caused to any investor’. The amount recoverable by the Commission will be three times the gross amount of the pecuniary gain made or loss avoided and the penalty the court can impose will not be less than ten million and not more than one hundred million rupees depending on the severity or gravity of the contravention. How damages so recovered will be distributed has also been stated.

The Commission has also been vested with the discretion to enter in to an agreement with any person with or without the admission of liability to pay an amount equivalent to three times the gross amount of the pecuniary gain made or loss avoided in respect of contraventions under Part V. Offences other than those enumerated under Part V can be compunded for a sum not exceeding one half of the maximum fine that can be imposed for such offence.

Administrative Sanctions

Another important feature that has been introduced is the ability of the Commission to impose ‘Administrative Sanctions’ on wrongdoers. Previously, the Commission was not expressly empowered to impose penalties or other administrative sanctions although all contraventions were considered as offences.

However, depending on ‘the nature and manner of the contravention, non compliance or breach and its impact’ this new provision leaves the Commission with the discretion (except in respect of offences under Part V) of imposing a variety of administrative sanctions such as a reprimand, penalty, restitution, imposing a moratorium on or prohibiting trading etc.

Steps to protect assets of investors and right to seek certain orders from court

Some of the other new features are the ability of the Commission to take certain steps to protect assets of investors, issue directives during the course of conducting investigations or inquiry known as ‘freezing orders’ (which are valid only for a period of seven days and thereafter to be confirmed by the Commercial High Court), power to apply to the Commercial High Court in situations of violations or imminent violations seeking certain orders such as a declaration that a securities transaction is void, directing a person to dispose of any securities etc.

Development of the Capital market

There are several provisions in the Act that will contribute towards the development of the market. The use of state of the art infrastructure such as the much needed Central Counterparty (CCP) has been recognized which will greatly minimize central counterparty risk and also enable the introduction of new products. The new law spells out the requisites for investing in derivatives (such as futures and options irrespective of the nature of the underlying asset), stock borrowing and lending, regulated short selling etc. This will enhance the liquidity levels in the market and take away the one sided potential that is presently available and help create a vibrant market. Long term investors will benefit from these opportunities.

The trading of unlisted securities is facilitated through a platform operated by a recognized market operator thus providing an additional trading platform. The ability for ‘market makers’ to operate as a market intermediary will ensure continued and efficient exchange of securities between buyers and sellers. This will provide depth to the market and also encourage the setting up of funds such as exchange traded funds.

Furthermore, the new law has redefined ‘securities’ to include an array of securities in keeping with new developments across the world. Similarly, there is also provision for ‘Collective Investment Schemes’ which go beyond Unit Trusts. As to what would come under this umbrella has been defined. These will provide new investment opportunities.

In line with expanding the product range that is currently available in the market, a category of persons have been recognized as ‘accredited investors’. Not only will this result in the protection of non-sophisticated investors, but will facilitate the issue of high risk instruments to the market which could be utilized by those who are in a position to take higher risks.

Provisions for the protection of whistleblowers have been included with the expectation that it will facilitate the curbing of market malpractices. Whilst it is important to ensure that this protection is not abused by making frivolous claims, the benefits such a system can bring forth should not be discounted.

Checks and Balances on powers and discretion of the Commission

The Commission has been vested with wider powers and discretion under the Act in order to ensure that it can perform its functions as a regulator in a more meaningful and effective manner. However it must be borne in mind that the Commission does not enjoy immunity and like any other public authority that has been vested with power and discretion, has to exercise such power and discretion according to law and will have to in all instances follow the rules of natural justice. It is relevant to note that the power and discretion vested in the Commission is circumscribed by several checks and balances that will ensure that the Commission will be held accountable and will not under any circumstance exceed its authority.

They take the form of provisions which mandates the commission to hear a party before it takes a decision against such party, affords a party a right of appeal, requires the Commission to give reasons for certain decisions as well as those that require the Commission to obtain orders from court and where the court is expected to afford a hearing to the affected party before making an order.

Further, the common law remedy of being able to challenge a decision of the Commission by way of a writ application in the Court of Appeal has been re-iterated in the Act thus statutorily fortifying the rights of an aggrieved party.

Conclusion

It is expected that the progressive provisions of the Act will make sure that all market participants have the confidence and the necessary environment to engage in their activities which is the ultimate goal of a capital market. The Commission as the regulator of the market at all times will be aware of the perils of over regulation and therefore be committed to striking the right balance. At the same time it must be emphasized that if all market participants practice self-regulation and act within the confines of the law, there will be no necessity for most of the provisions contained in the law to be made use of.

Concluded