“market intermediary” means an underwriter, a margin provider, a credit rating agency, an investment manager or a clearing house.
Credit Rating Agency
“Credit Rating Agency” means a person engaged in the business of assessing and evaluating the credit-worthiness of any issue of listed securities or securities to be listed with particular regard to the issuers’ ability to perform any obligations imposed on the issuer thereon.
Registration Of Market Intermediaries
- Any person who is carrying on or who intends to carry on business as a market intermediary shall register with the Commission for such purpose.
- An application for the purpose of registration under subsection (1) shall be made to the Commission in such form, together with such documents and such fee as may be prescribed by the Commission from time to time in that behalf.
Terms And Conditions To Be Complied With For The Registration Of A Market Intermediary
No person shall be registered as a market intermediary unless he complies with the terms and conditions set out in Part V of the Schedule hereto.
Grant Of Certificate
On receipt of an application for registration, the Commission having considered the particulars stated therein and where it appears necessary having given the applicant an opportunity of being heard, shall by written notice inform the applicant whether he is being registered as a market intermediary or not, and where he is registered as a market intermediary, issue him with a certificate of registration valid for a period of one year effective from the date of issue of such certificate. Every person issued with a certificate of registration is referred to in this Act as a “registered market intermediary”.
Renewal Of Registration
A registered market intermediary may three months prior to the expiry of the registration make an application to the Commission in the prescribed form, together with the prescribed fee for a renewal of the registration.
General Regulatory Standards Applicable To Registered Market Intermediaries
As at 29th September 2015
01. The Regulatory Standards set out herein shall apply to all Market Intermediaries registered under Section 19 A of the Securities and Exchange Commission of Sri Lanka Act No. 36 of 1987 (as amended) and shall be deemed as requirements or criteria to be complied with, in accordance with Part V to the Schedule of the Securities and Exchange Commission of Sri Lanka Act (the SEC Act). Every Market Intermediary as defined under Section 55 of the SEC Act shall be bound to comply with:
the standards set out herein and any amendments or additions thereto;
other terms and conditions contained in Part V to the Schedule of the SEC Act; and
all directives issued and that may be issued as applicable to Market Intermediaries from time to time by the Commission.
02. No person shall engage in any activity of a Market Intermediary or hold himself out as doing so unless he is a holder of a Certificate of Registration issued by the Securities and Exchange Commission of Sri Lanka as a Market Intermediary belonging to the category of that regulated activity. 03. The SEC may waive compliance with any of the standards set out herein after having satisfied itself that the attendant circumstances justify such waiver.
04. A Registered Market Intermediary shall pay such registration fee in respect of each regulated activity in such manner as may be specified or prescribed.
05. No holder of a Certificate of Registration as a Market Intermediary shall carry on any regulated activity in respect of the registration without the written consent of the Commission if the minimum financial requirements as may be specified by the Commission are not met.
06. All Registered Market Intermediaries shall comply with all general or special directives issued to them by the Commission and must observe both the letter and spirit of the directives issued.
07. No Registered Market Intermediaries shall contravene any written law enacted for the protection of the members of the public against financial loss by dishonesty, incompetence or malpractice.
08. All Registered Market Intermediaries shall always furnish true information to the Commission.
09. All Registered Market Intermediaries shall not act fraudulently or dishonestly in the performance of the regulated activity and shall not engage in any business practices appearing to the Commission to be deceitful or oppressive or otherwise improper ( whether unlawful or not) or which reflect in the opinion of the Commission discredit on its or his method of conducting business.
10. No Registered Market Intermediaries shall engage or be associated with any other business practices in such a manner as to cast doubt on its or his competence and soundness of judgment.
11. All Registered Market Intermediaries shall always strive to act in the best interests of clients.
12. All Registered Market Intermediaries shall always strive to act efficiently, honestly and fairly.
13. All Registered Market Intermediaries shall ensure that all directors and individuals employed to carry on the registered activity shall be fit and proper persons as may be determined by the Commission and shall possess the requisite qualifications as required by the Commission.
14. All Registered Market Intermediaries shall maintain a register containing the names of the individuals referred in 13 above in such form and manner as may be specified by the Commission.
15. Where the Commission appoints a person for purposes of supervising the compliance by a Market Intermediary in terms of the provisions of the SEC Act, the terms and conditions set out in Part V to the Schedule of the SEC Act and the criteria stipulated under this Directive, the Registered Market Intermediary shall;
(1) furnish the authorized person with any information that the authorized person may require to determine whether the Market Intermediary has complied with the provisions of the SEC Act (as amended) or with the terms and conditions set out in Part V to the Schedule of the SEC Act and the standards stipulated herein or under any other Directives which are applicable to Market Intermediaries; and
(2) take such steps as are necessary to ensure compliance with the provisions of the SEC Act, the terms and conditions set out in Part V to the Schedule of the SEC Act and the standards stipulated hereunder all other directives as may be applicable to the Market Intermediaries.
18. A registered Market Intermediary shall;
(1) maintain or cause to be maintained, such accounting records and other books as will sufficiently explain the transactions and financial position of its business and enable true and fair profit and loss accounts and balance sheets in keeping with the Sri Lanka Accounting Standards to be prepared from time to time;
(2) maintain or cause to be maintained such accounting records and other books in such a manner as will enable them to be conveniently and properly audited; and
(3) retain such accounting records or other books as may be required to be maintained by the Commission for a period of not less than 6 years.
19. It shall be the duty of all Registered Market Intermediaries to furnish to an auditor or to an independent auditor appointed by the Commission;
(1) all the information within its or his knowledge or which it or he is capable of obtaining; or
(2) any information which the auditor or independent auditor requires to enable him to carry out his duties; and
(3) shall ensure that all the information which is furnished to the auditor or independent auditor as the case may be is not false or misleading in any material particular.
20. Where the Commission having considered that it is in the interests of the Registered Market Intermediary or those of its or his clients, appoints an independent auditor or such other person or a body of persons to examine, audit and report either generally or in relation to any particular matter, upon the books, accounts and records of and assets held by the Market Intermediary, it shall be the duty of such intermediary;
(1) to produce any books, accounts and records of and any assets held by the intermediary relating to his business; and
(2) shall answer all questions relevant to an examination and audit which are put to him by the independent auditor or such other person appointed by the Commission.
21. A Registered Market Intermediary with intent to defeat the purposes of 20 above or with intent to prevent delay or obstruct the carrying out of any examination shall not;
(1) destroy, conceal or alter any books or property relating to the business of the Market Intermediary; or
(2) send or attempt to send or conspire with any other person to send out of Sri Lanka any such books or any property of any description belonging to or in the disposition of or under the control of the Market Intermediary.
22. Without prejudice to the generality of the duties imposed under Section 25 of the SEC Act, a Registered Market Intermediary shall on the occurrence of any one or more of the following events shall give to the Commission written notice, forthwith setting out the particulars of the event;
(1) if the Registered Market Intermediary is in the course of being wound up or otherwise dissolved whether within or outside Sri Lanka or ceases to carry on the business to which the registration relates;
(2) where the Market Intermediary has failed to comply with the provisions of the SEC Act, Part V to the Schedule of the SEC Act and the standards stipulated herein or any other Directive issued by the Commission from time to time;
(3) where any information or document furnished to the Commission is false or misleading; or there is any change in any information or document furnished to the Commission;
(4) where any execution against the Market Intermediary in respect of a judgment debt has been returned unsatisfied in whole or in part;
(5) where a receiver, liquidator or an equivalent person has been appointed in respect of any property of the Market Intermediary;
(6) where the Market Intermediary whether within or outside Sri Lanka has entered into a compromise or scheme of arrangement with its creditors being a compromise or scheme of arrangement that is still in operation;
(7) where the directors, or the chief executive officer has been convicted of any offence involving fraud or dishonesty or a violation of securities law within or outside of Sri Lanka; or
(8) becomes an un discharged bankrupt.
23. Where a Registered Market Intermediary ceases to carry on the business in all or any of the regulated activities to which the Certificate of Registration relates, shall return the Certificate of Registration to the Commission within fourteen days of the date of the cessation.
24.(1) Subject to subsection (2), below, a Registered Market Intermediary may surrender the Certificate of Registration by sending it to the Commission together with a written notice of its surrender.
(2) The surrender of a Certificate of Registration shall not take effect until the Commission is satisfied that adequate arrangements have been made to meet all the liabilities and obligations of the Registered Market Intermediary that are outstanding at the time when the notice of surrender was given by the Market Intermediary.
25. A Certificate of Registration of a Market Intermediary shall be deemed to be revoked;
(1) if the holder of the Certificate of Registration is wound up or otherwise dissolved whether within or outside Sri Lanka; or
(2) in the case of an individual holder of a Certificate of Registration, if the individual dies.
26. The words and terms defined in the Securities and Exchange Commission of Sri Lanka Act No. 36 of 1987 as amended by Act No. 26 of 1991, Act No. 18 of 2003 and Act No. 47 of 2009 shall unless the context so requires have the same meaning assigned to it in the said Act. “Commission” means Securities and Exchange Commission of Sri Lanka; “Connected Party” means the parent, subsidiary or an associate company of such party; “Liquid Capital” means cash or investments which can be readily converted to cash such as bank/call deposits, re-purchase agreements with maturity of less than three months, commercial papers which are endorsed or guaranteed by a licensed commercial bank or licensed specialized bank with a term to maturity of less than three months and government issued securities with a term to maturity of one year or less; “Net Capital” means,
The aggregate value of;
SEC approved subordinate debt
Total assets minus total liabilities adjusted by deducting any other item as specified by the SEC from time to time.
“SEC” means the Securities and Exchange Commission of Sri Lanka; “SEC Act” means the Securities and Exchange Commission of Sri Lanka Act No.36 of 1987 as amended from time to time; “Single Client” in the context of a corporate body means the borrowing company its parent and subsidiary company and in the context of a natural person means the borrower, his/her spouse and dependent children.
The Criteria set out in this Part shall be applicable to bodies corporate carrying on business as a Credit Rating Agencies.
01 (1) A Registered Credit Rating Agency shall not appoint an individual as a director or a person involved in the rating process, if such person has been;
(a) convicted by any Court of Law in Sri Lanka or abroad, subsequent to a finding of guilt for the commission of any offence which involves fraud, deceit or dishonesty; or
(b) found to have committed or been connected with the commission of any act which involves fraud, deceit or dishonesty by any regulatory or supervisory authority;
- established by law in Sri Lanka or abroad; or
- constituted under law as a commission of inquiry, tribunal or other similar body; or
- by any professional body which in the opinion of the SEC is of an established and credible stature; or
(c) where a commission of an offence by such person has been compounded in terms of Section 51A of the SEC Act during the past 3 years, preceding the date of the appointment; or
(d) found guilty of a capital market offence by a Court of Law in terms of the SEC Act, or the Securities Law of any other country;
unless the prior approval of the Commission is obtained for such appointment. The Commission on an application made under this provision by a Registered Credit Rating Agency may grant approval for such person to be appointed notwithstanding the above said prohibition under exceptional circumstances. 01
(2) (a) A Registered Credit Rating Agency shall not allow an individual to continue as a director or a person involved in the rating process on behalf of a Credit Rating Agency, for a period as determined by the Commission, if such person, subsequent to his appointment as a director or a person involved in the rating process has been;
- convicted by any Court of Law in Sri Lanka or abroad subsequent to a finding of guilt for the commission of any offence which involves fraud, deceit or dishonesty; or
- found to have committed or been connected with the commission of any act which involves fraud, deceit or dishonesty by any regulatory or supervisory authority;
- established by law in Sri Lanka or abroad; or
- constituted under law as a commission of inquiry, tribunal or other similar body; or
- by any professional body which in the opinion of the SEC is of an established and credible stature; or
iii. where a commission of an offence by such person has been compounded offence in terms of Section 51 A of the SEC Act; or
iv. found guilty of a capital market offence by a Court of Law in terms of the SEC Act, or the Securities Law of any other country;.
01 (2) (b) For the avoidance of doubt, the period in which a person described in 01 (2) (a) above shall be barred from functioning as a director or a person involved in the rating process for and on behalf of a Registered Credit Rating Agency may be;
- for a period of months or for a period of years with a right to reapply at the end of the said period; or
- a permanent bar from the industry; or
- for a period from acting in a supervisory capacity or from performing a particular duty;
depending on the gravity of the offence, the impact of such offence on the market or other factor which the Commission shall deem to be relevant considering the circumstances surrounding the commission of such offence.
03. The applicant shall have at least two persons in its employment with the qualifications and experience set out in the criteria set out herein to act as rating analysts. The SEC may direct an increase in the number of such qualified personnel if the volume of the business proposed to be undertaken or undertaken by such Credit Rating Agency increases.
04.(a) The applicant shall always maintain adequate financial human and other resources sufficient to carry out the business as a Credit Rating Agency.
(b) A Credit Rating Agency shall appoint a Compliance Officer with qualification and experience the criteria set out herein who shall be responsible for ensuring compliance procedures and practices of the Credit Rating Agency.
05. A Credit Rating Agency shall keep the SEC informed of the percentage holding in it by its parent/owning company(s), subsidiary companies, associate companies and partnerships and of shareholders holding more than 20% or more of its equity.
06.(a) The Commission shall not consider an application made for the registration of a Credit Rating Agency unless the applicant is promoted by persons belonging to any of the following categories;
- A bank regulated by the Central Bank of Sri Lanka; or
- A foreign bank operating in Sri Lanka with the approval of the Central Bank of Sri Lanka; or
- A foreign Credit Rating Agency recognized in the country of its incorporation, having at least five years experience in rating securities.
(b) The promoters of the applicant shall collectively hold at least 30% of the total paid up capital of the applicant for a minimum period of five years.
07. A person registered as a Credit Rating Agency shall ensure continued compliance with the following requirements:
(1) Financial /Disclosure Requirements
Capital Requirements –
- A Credit Rating Agency will at all times maintain the Net Capital stipulated by the SEC from time to time.
- A Credit Rating Agency will at all times, maintain Liquid Capital as stipulated by the SEC from time to time.
(2) Professional Indemnity Policy
A Credit Rating Agency shall at all times maintain a Professional Indemnity Policy with an approved insurer. The policy should cover legal liability for claims against the Credit Rating Agency arising out of its business as a Credit Rating Agency. Without prejudice to the generality the policy shall include the following:
- The Professional Indemnity Policy shall be for a minimum amount of Rupees 15 Million or 20% of the annual revenue of the Credit Rating Agency rounded to the closest Rs.5 Million.
- The excess under the policy shall be for no more than 10% of the policy cover with a maximum excess of Rupees 2.5 Million.
- SEC shall be notified of events reportable under the policy to the insurance company.
- A copy of policy or cover note until issued is to be lodged with the SEC.
(3) A Credit Rating Agency shall at all times have appropriate staff and systems to monitor compliance and conflicts of interest.
(4) All ratings completed are to be published on the Credit Rating Agency’s web site unless the rating is a result of a request for a private rating. For the avoidance of doubt, any rating given to an instrument intended to be issued to the public or to qualify an instrument shall be published on the website.
(5) All open ratings or changes thereto must be lodged monthly with the SEC. A copy of all listed securities’ rating is to be copied to the SEC when completed.
(6) A Credit Rating Agency shall inform the SEC immediately if Liquid Capital falls below 120% of the required Liquid Capital or if Liquid Capital has fallen by over 50% since it was last reported to the SEC.
08. A Credit Rating Agency shall execute a written contract prior to carrying out any business for and on behalf of a client in its capacity as a Credit Rating Agency, containing the terms and conditions agreed to between the parties including the procedure to be followed in carrying out a rating, the fees to be charged by the Credit Rating Agency and shall ensure that such procedure is complied with uniformly in respect of all rating activities carried out by such company. Such contract shall not be modified in any way other than in writing.
09. (a) The applicant shall have formulated in writing its rating criteria and any amendments made there to from time to time. The rating criteria and methodology must be forwarded to the Commission together with the application for registration. Upon completion of the registration process this criteria must be made readily available to the public free of charge and shall be published on the company web-site.
- Every Credit Rating Agency shall specify the rating process and any modifications to the process
including the introduction of any new rating instruments.
- Every Credit Rating Agency shall have a professional Rating Committee comprising minimum of three persons who are qualified in terms of the criteria set out herein to assign a rating.
- At the time of applying for registration, the applicant shall give the names of all members of the Rating Committee and their current designations and qualifications.
- All members of the Rating Committee shall each give an individual declaration (certified by an
Attorney-at-Law) that they will not engage in the rating process of securities issued by companies in which they have any interest as shareholders or otherwise. The Commission has to be informed of the appointment of any new members to the Rating Committee.
- The Credit Rating Agency shall ensure that members of the Rating Committee are independent of the entity subject to the rating and have no interest or connection that could be perceived as presenting a conflict of interest.
10.(a) A Credit Rating Agency shall engage solely in the business of operating a Credit Rating Agency;
(b) The directors and the employees of the Credit Rating Agency and the members of the Rating Committee shall not have transactions with companies whose securities are rated by them except for those entered into on an “arm’s length” basis.
Such “arm’s length” transactions would include transactions as a subscriber or consumer of a utility company and a holder of a current account with a commercial bank, or a holder of an insurance policy with an insurance company.
However, all such arm’s length transactions and the attendant terms and conditions of such transaction, inclusive of all such transactions entered into by the Credit Rating Agency itself as a body corporate, (i.e. instances where a Credit Rating Agency, a director or employee or member of the rating committee obtains a loan or borrowing facility from such company whose securities are being rated) shall be strictly disclosed to the Compliance Officer, who shall take note of same.
(c) A Credit Rating Agency’s disclosures of actual and potential conflicts of interest to the client should be complete, timely, clear, concise and specific.
(d) A Credit Rating Agency shall demonstrate the organization’s independence from the companies it rates if and when required to do so by the Commission;
(e) A Credit Rating Agency shall ensure that its rating analysts owning any shares in any corporate entity or business firm shall refrain from participating in the rating process of such corporate entity or business firm;
(f) A Credit Rating Agency shall ensure that they do not carry out any activities which could cause a conflict of interest in terms of its credit rating functions;
(g) No employee of the Credit Rating Agency with the “capacity to influence” a rating shall participate in or otherwise influence the determination of the Credit Rating Agency’s rating of any particular entity or obligation.
An employee shall be deemed to have the “capacity to influence” the same in circumstances which has potential to impair his independence which shall include the circumstances set out below, where he;
- owns securities of the rated entity or any entity related and/or connected thereto;
- has had employment or other significant business relationship with the rated entity within the six months immediately preceding such rating;
- has an immediate relation (i.e. spouse, partner, child, sibling) who currently works for the rated entity; and
- has any other relationship with the rated entity or any agent of the rated entity that could in the particular circumstances be perceived as presenting a conflict of interest.
(h) No Credit Rating Agency shall rate a security issued by an entity which is;
- a borrower of its promoter, or
- a subsidiary of its promoter, or
- an associate of its promoter, if
- there are common chairman, directors between Credit Rating Agencies and these entities.
- there are common employees.
- there are common chairman, directors, employees on the rating committee.
(i) No Credit Rating Agency shall rate a security issued by its associate or subsidiary rating agency or if its rating committee has a chairman, director or employee who is a chairman, director or employee of any such entity.
(j) A Registered Credit Rating Agency shall provide for an independent review panel to handle appeals by the clients who are dissatisfied with the rating. Such review panel shall consist of minimum three qualified persons in terms of 02 above and shall be independent from the issue and the original rating panel.
(k) In the event there is an appeal, it is required to publish the report of the review panel on the website of the Credit Rating Agency.
11. A Credit Rating Agency shall ensure that their directors and staff act with due diligence and a reasonable degree of care in carrying out their functions.
12. A Credit Rating Agency shall provide the information set out below;
(a)(i) a ‘Financial Report’ prepared on a quarterly basis. The report shall be submitted to the Commission by the twentieth day of the following month;
(ii) the Financial Report shall-
- conform to the Sri Lanka Accounting Standards In the case of a holding company financial information of the group and the said holding company shall be set out separately;
- be signed by a director and its Chief Executive Officer;
- be endorsed with a certification by the directors that ‘The information contained in the Report is accurate and is subject to audit;
(b) audited accounts prepared in accordance with the Sri Lanka Accounting Standards. The accounts shall be submitted to the Commission within a period of six months from the close of each financial year; and
(c) all audit and non-audit services carried out by the Auditors of the Credit Rating Agency for the agency itself together with the fees and expenses charged should be disclosed separately in the relevant Audited Accounts.
13. A Credit Rating Agency shall have an internal Compliance Manual applicable to its directors and employees which sets out adequate compliance procedures and practices to ensure that the directors and employees of the Credit Rating Agency do not contravene the provisions of the SEC Act, Part V to the Schedule to the SEC Act, criteria stipulated hereunder or any other Directive issued by the Commission from time to time;
(a) A Credit Rating Agency shall be required to instruct the Compliance Officer in writing to immediately inform the Commission in writing where any member of the staff or a director contravene the provisions of the SEC Act, Part V of the Schedule to the SEC Act, standards stipulated hereunder or any other Directive issued by the Commission from time to time; and
(b) The Compliance Officer of every Credit Rating Agency shall make an Annual Compliance Report setting out the extent of compliance with the SEC Act, Part V of the Schedule to the SEC Act, standards stipulated hereunder or any other Directive issued by the Commission from time to time and forward same to the SEC signed by a director and the Chief Executive Officer within 45 days after the closure of each financial year.
14.(a) A Credit Rating Agency shall establish and implement good business practices and follow just and fair principles in the conduct of business.
(b) A Credit Rating Agency shall comply with Codes and Best Practices applicable to the activities of a Credit Rating Agency as may be issued by the Commission or determined by the Commission to be applicable.
(c) A Credit Rating Agency shall make full and material written disclosure to the public of the ratings carried out by them and the key elements underlying the decision and also the bases for the same.
(d) A Credit Rating Agency shall ensure that their rating analysts use reasonable care and exercise independent judgment when conducting credit analysis and also use reasonable judgment regarding the inclusion or exclusion of relevant factors and distinguish between facts and opinions in credit analysis reports.
(e) A Credit Rating Agency shall have internal practice manuals sufficient to ensure the continuity of its operational activities.
(f) A Credit Rating Agency shall maintain an effective complaints handling process.
(g) A Credit Rating Agency shall ensure that the credit rating analysts and the members of the Rating Committee refrain from soliciting or obtaining any benefits from anyone with whom the Credit Rating Agency does business.
(h) A Credit Rating Agency shall disclose in all its communications to the public, when its ratings are not initiated at the request of the issuer and whether the issuer participated in the rating process.
(i) A Credit Rating Agency shall refrain from rating any issue of a company in which:
a) it has any interest whatsoever, whether financially or otherwise and/or;
b) its director(s) has any interest whatsoever, whether financially or otherwise.
(j) A Credit Rating Agency shall have its own Code of Conduct to be strictly adhered to by its Rating Committee, directors, analysts and employees.
(k) In the event the Credit Rating Agency resorts to outsourcing of work, then the Credit Rating Agency shall include that fact in the Credit Rating Agreement entered into with the client in order for the client to be informed of same. The Credit Rating Agency shall obtain from the person to whom the functions are outsourced an undertaking to comply with the SEC Act, Part V to the Schedule to the SEC Act, criteria stipulated hereunder or any other Directive issued by the Commission from time to time particularly which prohibits conflict of interest situations.
15.(a) A Credit Rating Agency shall maintain the following records in its office;
- all internal records to support its credit rating opinions for a period of six years;
- all particulars relating to clients up to date at the rating agency office which shall include the name and registered address and contact numbers of such companies, names and addresses of its directors as at the date of rating, its issued share capital and the nature of business; and
- a comprehensive written record of all complaints received from clients and action taken thereon by the Credit Rating Agency for a period of at least six years from the date of receipt of such complaint;
(b) A Credit Rating Agency shall have a suitable information recording and retrieval system and maintain such information for inspection by the Commission.
(c) A Credit Rating Agency shall ensure confidentiality at all times of all information relating to clients including such client’s identity and transactions carried out for such client unless and to the extent such disclosure is required by law; and
(d) The employees of the Credit Rating Agency shall be prohibited from engaging in transactions in securities when they possess confidential information concerning the issuer of such security.
16.(a) Credit Rating Agencies shall ensure that the content in advertisements promoting its services is accurate, materially complete and does not have the capacity to mislead the public.
(b) The Credit Rating Agency shall submit the contents of all advertisements for the perusal of the SEC at least 5 days prior to its publication in the media.
(c) Credit Rating Agencies shall comply with any guidelines that may be issued by the Commission from time to time in respect of advertisements.