SEC urges Compliance Officers to play a more effective role

Chairman, SEC, Faizal Salieh (centre) addresses the meeting. Others from left: Director Supervision SEC, Dilum Mahawatte, Director General Chinthaka Mendis, Deputy Director General Tushara Jayaratne and Vice President Broker Supervision, CSE, Kanishka Munasinghe

As part of their continuing efforts to strengthen market standards and investor confidence, officials of the Securities and Exchange Commission of Sri Lanka (SEC) and the Colombo Stock Exchange (CSE) recently met Compliance Officers of all categories of Market Intermediaries.

It served as a valuable opportunity to engage in a constructive dialogue on regulatory matters and industry best practices.

Emphasising the importance of the compliance function, SEC Chairman Faizal Salieh, said the SEC regards the Compliance Officer as a key management person empowered to act with independence, authority and responsibility. The appointment of a Compliance Officer is a prerequisite for granting or renewing licences to Market Intermediaries and to comply with SEC requirements. Compliance Officers must provide a sworn affidavit declaring their adherence to the fit and proper criteria established by the SEC.

He said, in the event the Compliance Officer resigns, it is imperative that the Market Intermediary must promptly inform the SEC, and select a successor with prior SEC approval. The Chairman said the SEC will investigate the reasons for a resignation, particularly focusing on any internal interferences or influences within the compliance function.

Referring to the regulatory obligations outlined in the SEC Rules applicable to Market Intermediaries, the SEC Chairman asserted that the SEC mandates that Compliance Officers must hold full-time positions due to the substantial responsibilities associated with their role.

Speaking on the reporting lines of the Compliance Officer, Salieh, emphasised that the compliance function should be independent of the business operations of the Market Intermediary and all compliance related matters should be reported by the Compliance Officer directly to the Board of Directors or a Board sub-committee dealing with risk, such as the Audit or Risk Committee.

The discussion also focused on the need for all Market Intermediaries to ensure compliance with the SEC Act and the applicable Rules. These Rules mandate the creation of an internal compliance manual for directors and employees, incorporating the specific content outlined in the relevant schedule to the Rules. It was stressed that before developing this manual, Market Intermediaries should have a Board-approved compliance policy to guide the Compliance Officer in implementing the compliance process. The Chairman urged Compliance Officers to ensure that there is a Board-approved compliance policy and discussed key areas within the minimum content of the compliance manual, including conflicts of interest, corporate governance, and risk management with a view to elevating market standards and making the market more attractive to investors.

SEC Chairman also stressed the need for Compliance Officers to provide prior written approval for all personal account trade transactions of other employees, in order that these transactions do not harm other clients› interests. Referring to the complaints received by the SEC, the need to have an effective complaint handling mechanism at the Market Intermediary level to proactively address client complaints was also emphasised.

Speaking on the critical role that Market Intermediaries play to protect the financial system and the wider community from criminal activities, Salieh stressed the importance of adhering to the regulatory framework set by the Financial Intelligence Unit of Sri Lanka (FIU) with regard to Anti-Money Laundering/Counter Financing of Terrorism (AML/CFT) regulations and Customer Due Diligence (CDD) requirements.

The SEC and CSE officials underscored the responsibility of Compliance Officers to provide crucial information for the Board›s decision-making process as well as the need to ensure the accuracy and veracity of all submissions made to the SEC. Compliance Officers were cautioned to exercise vigilance in regulatory reporting, as they could be held liable for any inaccuracies found in their submissions.

Director Supervision SEC, Dilum Mahawatte, presented the common shortcomings identified at site inspections with regard to monitoring client credit limits, timely rectification of non- compliances, quality of compliance reports, etc. 

Vice President Broker Supervision, CSE, Kanishka Munasinghe, commented on the need for Compliance Officers to be abreast of the new Trading Participant Rules and other new regulations, the duties of Registered Investment Advisors, and inaccuracies in compliance reporting. The officials noted the issues raised and suggestions made by the participants.

The SEC Chairman expressed his appreciation for the active participation of the Compliance Officers and said that the SEC looks forward to continuing these stakeholder engagements to foster a regulatory environment that ensures investor confidence and sustainability of the securities market.

The meeting concluded on a positive note, and a resolution was made to form a dedicated Compliance Officers Forum to strengthen the compliance role and build a Compliance Officers’ fraternity in the capital market.