Reversed rules harmful to ‘free market’: Vigna

15 October 2012 02:54 am

The genuine investors and independent minority shareholders (IMS) were rudely surprised and shocked by the recent relaxation of rules on broker credit and restrictions on broker dealings by the Securities and Exchange Commission (SEC), a longstanding minority shareholder activist in the country said.

In a letter addressed to SEC Chairman Dr. Nalaka Godahewa, Acting Director General Hareendra Dissabandara and other SEC Commissioners, K.C Vignarajah noted that the decisions taken to relax rules on broker credit and dealings on October 8 and effected on October 9 is detrimental to attaining investor confidence.

“It appears from media reports that neither consultations nor discussions have been held with the other stakeholders and the investing public who are severely affected by your decisions to remove the existing safeguards,” Vignarajah said in his letter.

According to him, the rationale for earlier rules was to minimize, as far as possible insider dealing, market manipulation, front running, pump & dump practices, which impoverished the average genuine investors.

Vignarajah also pointed out in his letter that the reasons for this sudden reversal of the existing practice, rules and regulations of the SEC which greatly retarded market manipulations and malpractices have not been explained.

“Vague defenses of ‘Free Market’ have been aired by those who do not understand the basic premise of a free market,” he alleged. He also charged that the decision to amend the rules was taken by only consulting a section of stockbrokers.

Vignarajah also noted that conflicts of interests galore when a broker trades on his or on related parties’ accounts.

“The brokers should announce their and related parties’ shareholdings in PLC’s and should report their transactions in the CSE website simultaneously,” he said.

“It is also most important that the broker discloses to his client, (either buyer or seller) prior to the transactions that he was selling or buying his own shares; e-mail confirmations must be mandated,” he added.

Vignarajah in his letter also mentions about reports of an ‘in house discussion’ that was carried out to see whether the SEC should adopt a ‘disclosure-based or merit-based approach’.

In accordance with merit based-system, the regulatory authorities seek to protect the investor from abuse and ensure the securities are offered to them at a fair price by intervening substantively in the offering process. The public offering, and listing, cannot proceed until the securities have been “approved” by the authority.

Disclosure-based regulation takes a diametrically-opposed approach. Under disclosure-based regulation, the issuer is required by the regulatory framework to make full disclosure of its affairs to the investor, and it is then up to the investor to take responsibility for his own investment decision.

“Our contention is that these approaches are not mutually exclusive; they rather complement each other and could be merged to ensure investor protection,” Vignarahah said.

In his concluding remarks, Vignarajah quoting Martin Luther King Jr. requested the top officials at the SEC to switch on the lights to ensure transparency on behalf of the investing public.

According to a press statement issued by the SEC, during the 306th Commission Meeting held on October 8, it was decided to amend the net capital computation in order to relax the credit granted by stockbroking firms to their clients.

“In that the stockbrokers are now permitted to extend credit to their clients three times the adjusted net capital (i.e. net capital minus 50% of fixed assets) without having to deduct outstanding debtors from net capital,” the SEC said in its statement.

Further, the 20 percent upper limit on the crossings that was brought in by former SEC Chief Tilak Karunaratne, prompted by the controversial NSBTFC deal that was reversed later, and removed with effect from October 9.

And also, the SEC decided to lift the restrictions imposed on dealings by directors and owners of stock brokerages, which had also been prompted by the NSB-TFC deal.

Thus, the SEC lifted the restriction imposed on executive directors, employees, their spouses and their nominees of all licensed stockbrokers and stock dealers from selling listed shares purchased from the secondary market for a period of six months from the date of purchase.