SEC role needs to change radically to support economic growth

SEC Chairman Thilak Karunaratne

By Save the market Sri Lanka

The common interest of all Sri Lankans after 8 January is to support a growing economy that produces jobs, improves our standard of living and protects the value of our savings. This means that all of the SEC’s actions must be taken with an eye toward promoting the capital formation that is necessary to sustain economic growth and creating jobs rather than enforcing outdated regulation to destroy business formation or existing businesses. Therefore the expectation of the current SEC would surely be to regulate the market to ensure that Sri Lanka attracts more FDI and supports the Government to create wealth for all Sri Lankans big or small.

Confidence game

The world of investing that the SEC regulates is rewarding and complex and it can be very fruitful. But unlike the banking world, where deposits are guaranteed or have protection in some form, stocks, bonds and other securities can lose value. There are no guarantees and that’s why investing is not a spectator sport like we saw a few years ago. Tempted by promises of ‘rags to riches’ transformations and easy credit, most Sri Lankan retail investors gave little thought to the systemic risk that arose from widespread abuse of margin financing and unreliable information about the stocks in which they were investing. 

Just after the war large and small shareholders took advantage of post-war prosperity and set out to make their fortunes in the stock market. It is estimated that of most of the stocks offered during this period, more than half became worthless. The state funds were also big losers. By far the best way for investors to protect the money they put into the securities markets is to do research and ask the right questions before they invest. 

It was hoped with the reappointing of Thilak Karunaratne sacked by the former regime that many of those culprits who deceived the retail investors would be brought to book and the investment forums that fuelled the appetite of the investor population would be given new energy but those people have not been brought to book and the investment forums are virtually dead.

Policy changes required

The laws and rules that govern the securities industry in many countries derive from a simple and straightforward concept: all investors, whether large institutions or private individuals, should have access to certain basic facts about an investment prior to buying it, so long as they hold it. To achieve this, the SEC needs to support public companies to disclose meaningful financial and other information to the public. This provides a common pool of knowledge for all investors to use to judge for themselves whether to buy, sell, or hold a particular security. Only through the steady flow of timely, comprehensive and accurate information can people make sound investment decisions.

The result of this information flow is a far more active, efficient and transparent capital market that facilitates the capital formation so important to our nation’s economy. To ensure that this objective is always being met, the SEC should continually work with and support all major market participants, including especially the investors in our securities markets, to listen to their concerns and to learn from their experience rather than imposing outdated laws that have no currency in a world driven by technology and knowledge. The SEC needs to invest in building capacity to regulate effectively. The SEC needs to oversee and support the key participants in the securities market including securities exchanges, securities brokers and dealers, investment advisors, and funds need to have new skills. 

The SEC’s role should not only be concerned to promote the disclosure of market-related information, maintaining fair dealing and protecting against fraud. Crucial to the SEC’s effectiveness in each of these areas is its enforcement authority. Each year the SEC is expected to enforce civil actions against individuals and companies for violation of exchange laws to bring discipline into the market. Typical infractions include insider trading, accounting fraud and providing false or misleading information about securities and the companies that issue them. 

 Recent action by SEC

The recent proposal to rate brokers according to criteria decided by the SEC is horribly short-sighted. Markets should be allowed to operate freely; they will decide who to go to depending on the performance of the outfit. We should not borrow practices from other markets and implement without any regard for local conditions. This again is to target certain brokers by the SEC. Many brokers will lose their jobs. 

Another example is the sudden decision of the SEC in March this year to force a local rating agency formerly known as RAM to ensure quality in their rating given the lack of confidence of their ratings by the SEC to sell out to an international rating agency within a record time. This decision is short-sighted because the previous SEC had a policy of encouraging local expertise to get together and form a truly Sri Lankan Rating Agency until March 2015 and until then had allowed them to operate for over two years. 

The SEC is effectively ridiculing our own accounting and university qualifications. Most of the SEC Commissioners and the secretariat have the same qualifications of those involved in doing ratings in Sri Lanka. Does this mean they too are redundant? For example what are the Chairman’s credentials to be the Chairman? A businessman, local graduate and politician? What the market expects from the SEC like in other progressive markets is not only to be a policeman but also to act as a facilitator. The SEC needs to be led by top professionals, men not coloured by political affiliations and bias; that is the only way we can attract solid FDI into the country. 

 Expectation

Much was expected from the current SEC Commissioners to clean up the market, to support the private sector to grow, give confidence to foreign investors and ensure consistency in policy and ensure good governance within the exchange. It would do a world of good for the Prime Minister to bring in new expertise from overseas to the board and secretariat to strengthen capacity within the SEC and to see how commissions in Hong Kong and Singapore work alongside the Government and the industry to create wealth for their countries and also how they future proof investors, instead of trying to enforce outdated laws to kill business. 

For a start the Government and the Prime Minister should appoint a committee of experts to study and suggest ways to improve the effectiveness of the SEC; if not the way the SEC and the Chairman is going they will fence up the private sector and prevent them from expanding or growing. They will continue to eat them for lunch!