“market intermediary” means an underwriter, a margin provider, a credit rating agency, an investment manager or a clearing house.
“Investment manager” means a person who for a fee or commission engages in the business of managing a portfolio of listed securities on behalf of an investor or advises any person on the merits of investing, purchasing or selling listed securities, but shall not include the licensed managing company of a unit trust.
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.
The Securities and Exchange Commission of Sri Lanka (SEC) in an effort to streamline the licensing and registration process, has reviewed all documents required for the said purpose and made arrangements to simplify the applications, standardize the format of the affidavit and provide details of documents required under each title document to facilitate the licensing and registration process.
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.
CODE OF CONDUCT FOR ALL MARKET INTERMEDIARIES
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.
DEALING WITH AUTHORIZED PERSONS WHO CARRY OUT SUPERVISION
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.
DUTY TO FURNISH THE COMMISSION WITH SUCH RETURNS AND INFORMATION AS THE COMMISSION REQUIRES
16. A Registered Market Intermediary shall furnish such returns and provide such information relating to its business as the Commission may require.
17. The Commission may specify that any information required herein shall be submitted within such period at such intervals in such manner or in such form as the Commission may specify and the Registered Market Intermediary shall comply with such requirement.
KEEPING OF BOOKS AND FURNISHING OF RETURNS
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.
DUTY OF REGISTERED MARKET INTERMEDIARY, ITS DIRECTORS AND OFFICERS TO FURNISH INFORMATION
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.
NOTIFICATION ON THE HAPPENING OF CERTAIN EVENTS
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.
SURRENDER OF CERTIFICATE OF REGISTRATION
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.
REVOCATION AND SUSPENSION OF A CERTIFICATE OF REGISTRATION OF A 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;
– Stated Capital;
– Reserves; and
– SEC approved subordinate debt
(2) 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.
STANDARDS FOR INVESTMENT MANAGERS
Fit and Proper criteria for directors and persons Dealing with Clients
01 (1) A Registered Investment Manager shall not appoint an individual as a director or a person dealing with clients for and on its behalf , 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 a regulatory or supervisory authority;
(i) established by law in Sri Lanka or abroad; or
(ii) constituted under law as a commission of inquiry, tribunal or other similar body; or
(iii) 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 Investment Manager, may grant approval for such person to be appointed notwithstanding the above said prohibition under exceptional circumstances. 01 (2) (a) A Registered Investment Manager shall not allow an individual to continue as a director or a person dealing with clients, for a period as determined by the Commission, if such person, subsequent to his appointment as a director or a person dealing with clients has been;
(i) 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
(ii) 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;
a. established by law in Sri Lanka or abroad; or
b. constituted under law as a commission of inquiry, tribunal or other similar body; or
c. by any professional body which in the opinion of the SEC is of an established and credible stature;
(iii) an offence committed by such person has been compounded 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 dealing with clients for and on behalf of a Registered Investment Manager may be;
i. for a period of months or for a period of years with a right to reapply at the end of the said period; or
ii. a permanent bar from the industry; or
iii. 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.
02. Every Director and /or employee of an Investment Manager who are involved in managing client funds shall posses the qualifications and/or experience as set out in (a) or (b) below;(a)(i)
– Associate of the Institute of Chartered Accountants of Sri Lanka;
– Associate of the Chartered Institute of Management Accountants- UK;
– A degree from an accredited Sri Lankan or foreign university;
– Charter holder of the CFA Institute;
– Associate of the Chartered Association of Certified Accountants;
– Associate of the Chartered Institute of Bankers, UK;
– Associate of the Institute of Bankers of Sri Lanka;
– Diploma in Capital Markets, conducted by the SEC; or
– An equivalent or higher professional and/or academic qualification
(ii) experience in the financial/securities market for a minimum period of two years.
(b) Experience in the financial/securities market for a minimum period of seven years. Provided that experience for the specified duration per se will not fulfill the required qualification and the Commission shall consider the nature, scope and intensity of experience in determining its adequacy. An individual who wishes to obtain a registration as a Market Intermediary shall posses the qualifications/experience specified in 2 (a) above.
Requirement for a Minimum Number of Persons Dealing with Clients
03. Every Investment Manager shall ensure that a minimum of two persons possessing qualifications and/or experience set out in 02 above are employed to manage client funds. The SEC may direct an increase in the number of such qualified personnel on account of the volume of business proposed to be undertaken or undertaken by such an Investment Manager.
SEC Sanction Required for other Business
04. An Investment Manager shall not engage in any other business other than that of an Investment Manager unless prior written approval of the Commission is obtained.
Financial Requirements and Infrastructure
05.An Investment Manager shall at all times maintain a minimum Net Capital stipulated by the SEC from time to time.
i. An Investment Manager shall at all times, maintain a minimum Liquid Capital stipulated by the SEC from time to time.
06. An Investment Manager shall ensure that key duties and functions of the front office and back office are clearly segregated to avoid any conflicts of interest.
07. An Investment Manager shall maintain proper systems, processes and human resources suitable and adequate to support the due functioning of its business as an Investment Manager at all times.
08. An Investment Manager shall at all time act in the best interest of the clients while establishing and implementing just and fair business practices. 09. All Investment Managers shall adhere to operational standards specified in Schedule 1 of the referred criteria.
10.(a) All Investment Managers shall maintain the following records of clients in its office:
(i) all powers of attorney granted to the Investment Manager by the clients;
(ii) all subsisting agreements entered into by the Investment Manager;
(iii) all agreements entered into by the Investment Manager that have been concluded spanning a period of six years from the date of conclusion pertaining to the identity of all clients, all transactions relating to clients including the bases for investment decisions;
(iv) records to support investment analysis, recommendations, actions, and other investment-related communications with clients and prospective clients for a minimum period of six years;
(v) a comprehensive written record of all complaints received from clients and action taken thereon by the Investment Manager representative of the duration of six years reckoned from the date of conclusion of action on such complaint.
(b) An Investment Manager shall have suitable information recording and retrieval systems and maintain such information for inspection by the SEC.
(c) An Investment Manager shall ensure confidentiality 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.
11. An Investment Manager shall ensure:
(a) that the money of each client is maintained in separate bank accounts to enable clear identification of the same;
(b) that the monies and assets held on behalf of the clients are not pooled;
(c) that all monies and assets held for and on behalf of clients are segregated from monies and assets held by the Investment Manager;
(d) that the monies of the clients shall not be utilised except as specifically sanctioned in writing by such clients.
Material Information and Contract
12. All Investment Managers shall provide clients and potential clients with an “Investment Management Services Guide” which shall include accurate and complete information. Without prejudice to the generality of this clause, the Guide shall include inter alia the provisions stated in Schedule 2 of the referred criteria.
13. All Investment Managers shall execute a written contract prior to carrying out any business for and on behalf of a client containing all the terms and conditions agreed to by and between itself and the client and such contract shall not be modified in any way other than in writing. Without prejudice to the generality of this clause it shall inter alia include provisions stated in Schedule 3 of the referred criteria.
14. All Investment Managers shall request for a Power of Attorney from the clients prior to carrying out any business for and on behalf of a client.
15.(a) An Investment Manager shall ensure that it has systems that are capable of issuing clients with regular portfolio valuations and notification of all transactions made on behalf of the client.
(b) An Investment Manager shall provide its clients with current and accurate portfolio valuations on a monthly basis.
Financial Reporting and Disclosures
16. An Investment Manager shall provide SEC with information as set out as follows:
a. A ‘Financial Report’ prepared quarterly in conformity with the Sri Lanka Accounting Standards signed by a Director and the Chief Executive Officer pursuant to a Board resolution;
b. A copy of the statement of audited accounts prepared annually in accordance with the Sri Lanka Accounting Standards shall be submitted to the SEC within a period of six months from the close of each financial year;
c. An Investment Manager shall provide the SEC with information in conformity with formats stipulated by the SEC from time to time.
17. All Investment Managers shall immediately notify the SEC of the percentage holdings in it by its parent/owning company(s), subsidiary company(s), associate company(s) and partnership(s) and of shareholders holding more than 20% or more of its equity.
18.An Investment Manager shall ensure that the content in advertisements promoting its services is accurate, materially complete and does not have the capacity to mislead the public.
a. The advertisement shall not guarantee a yield and/or return on investment.
b. Any reference to performance shall only be demonstrated by reference to relevant and published benchmarks.
c. An Investment Manager shall submit the contents of all advertisements for the perusal of the SEC at least 5 days prior to its publication in the media.
d. An Investment manager shall comply with any guidelines that may be issued by the Commission from time to time in respect of advertisements.
Regulatory Compliance and Internal Controls
19.An Investment Manager shall have an internal compliance manual applicable to its directors and employees which sets out adequate compliance procedures and practices to ensure:
i. that the directors and employees of the Investment Manager do not contravene the provisions of the SEC Act, Part V to the Schedule of the SEC Act, the criteria set out herein and any other Rules or Directives issued by the Commission time to time; and
ii. the consistent and fair implementation of its operational procedures and administrative processes.
b. An Investment Manager and its Directors shall be responsible for due compliance with such internal compliance manual.
c. An Investment Manager shall make an Annual Compliance Report signed by a director and the Chief Executive Officer confirming compliance with Part V to the Schedule to the SEC Act, the criteria set out herein and any other Rules or Directives issued by the Commission time to time and forward same to the SEC within 45 days after the closure of each financial year.
Schedule 01 – Criteria on Operational Standards
All Investment Managers shall;
a. ensure that the account opening procedures facilitate Know Your Customer (KYC) guidelines issued by the Financial Intelligence Unit (FIU) of CBSL;
b. exercise diligence and independence in analyzing investments and making investment recommendations and managing investment portfolios and shall establish and maintain procedures that will enable the monitoring of compliance by its employees;
c. Ensure that all investment decisions, recommendations and actions shall be based and supported by appropriate research;
d. maintain an effective complaints handling process;
e. ensure that its relationships or activities create no conflict of interest between itself and its clients. In the event such conflict cannot be avoided there shall be full disclosure thereof to its clients and to the SEC;
f. outsourcing of business shall be based on proper written agreements;
g. shall not guarantee a specific return to a client or compensate clients for any loss made in the respective portfolios, unless attributable to negligence.
Schedule 02 – Investment Manager Services Guide
The Investment Management Services Guide shall inter alia include the following;
a. names of persons authorized by the Investment Manager and approved by the SEC to deal with clients in providing investment advice;
b. dispute resolution mechanisms available to a client;
c. notice of reporting frequency;
d. the Company Profile and the Board of Directors; and
e. such other information which could be reasonably construed as having a bearing on functions carried out by an Investment Manager.
Schedule 03 – Written contract between the Investment Manager and the Client
The written contract between the Investment Manager and the clients shall inter alia include the following;
a. the investment objective;
b. the investment strategy and associated risks;
c. the contract period;
d. the income distribution policy;
e. the maximum leverage level;
f. the exit mechanism(s);
g. the applicable taxes;
h. the parameters within which investments may be carried out and the basis on which performance may be reviewed. Any measure used shall be a relevant published benchmark;
i. the reporting frequency and content thereof; and
j. the fee structure including terms of payment.