A Preliminary Inquiry into the new SEC Act: Governance and Processes - Part I

The Colombo Stock Exchange

In the first article in this series, I discussed the broad structure put in place by the new SEC Act and some interesting features of its drafting. My particular interest is in the public law aspects of this new legislation; therefore, this article and the next will explore the theme of governance and processes which runs throughout the Act.  

As far as recent statutes go, the new SEC Act raises the bar in terms of incorporating developments on natural justice in public law. The principles and processes embodied in the Act encourage fair dealing between the commission and capital market stakeholders. This may not be entirely altruistic, as the framers would have known that investor confidence would only be secured with a legislative framework which ensures transparency, accountability, and rationality in decision making by key bodies: no investor would enter a market in which institutions and regulators were able to make arbitrary decisions. Regardless of the motivations, the government must be credited for passing a piece of legislation in which these principles are enshrined. 

 The ‘right to reasons’ 

 The duty of public authorities to give reasons for their decisions is now a well-established principle in administrative law, having been developed as an aspect of natural justice (see generally: Mario Gomez, ‘Emerging Trends in Public Law’, Vijitha Yapa (1998)). It forces such bodies to be accountable for the decisions they make and to demonstrate that they are acting within their powers; it allows those affected by the decision to determine whether or not an appeal is viable. Sri Lanka’s superior courts have on numerous occasions commented on this aspect of administrative law.  

In Unique Gemstones Ltd. v Karunadasa ([1995] 2 Sri L.R. 357), Justice H.W. Senanayake, referring to the role of the Commissioner of Labour, stated: I am of the view that the Commissioner should give reasons for his decision. The present trend which is a rubric running throughout [sic] the public law is that those who give administrative decisions where it involves the public whose rights are effected [sic] specially when proprietary rights are affected should give reasons for its decisions. The action of the Public Officers should be ‘transparent’ and they cannot make blank orders. The giving of reasons is one of the fundamentals of good administration. In my view it is implicit in the requirement of the fair hearing to give reasons for a decision. This principle was affirmed on appeal to the Supreme Court (Karunadasa v Unique Gemstones Ltd., [1997] 1 Sri L.R. 256). 

Tracing the development of this jurisprudence, Justice Samayawardhena stated, in the more recent case of Kumara v Gunathilaka (CA Writ 333/2011, Court of Appeal Minutes of 1 June 2020): To my mind, the notion that there is no principle of natural justice that a tribunal or administrative authority should give reasons for its decision is inherently incoherent. The essence of natural justice demands administrative authorities give reasons for decisions. 

In several places throughout the Act, the commission is explicitly required to give reasons for its decisions. This includes, 

(i) specifying the grounds on which it takes a decision to close an exchange during an emergency, and notifying the Minister of the reasons for exercising this power (ss. 30(3), 30(5)); 

(ii) giving reasons for disallowing the amendment of rules by a market institution (64(6)); 

(iii) setting out grounds for refusal to register, or refusal to renew the registration of a market intermediary (s. 99(1)); and 

(iv) setting out grounds for cancellation of the registration of a recognised market operator (s. 123(2)). 

These requirements prevent (or strongly discourage) arbitrary decision-making by the commission, and therefore serve to secure investor confidence.   

The right to be heard 

 The right to be heard prior to the making of a decision which would affect one’s rights and interests is another aspect of natural justice that has crystallised as a principle of administrative law. This is derived from the ‘audi alteram partem’ (‘listen to the other side’) rule. The right to be heard features even more prominently than the duty to give reasons. The opportunity to be heard is granted, among other situations:  

(i) to the Director-General of the Commission, prior to being removed (s. 19(5));  

(ii) to market institutions, prior to a decision on the cancellation of their licenses (ss. 28(7), 39(6), 57(7));  

(iii) to market intermediaries or persons seeking to be registered, prior to a decision not to grant or renew their licence or registration, and prior to cancellation or suspension of a licence (ss. 95(2), 99(2), 105(2));  

(iv) to a recognised market operator, prior to cancellation of a licence, and in the review of its performance (ss. 123(5), 124(3));  

(v) before action is taken by the Complaints Resolution Committee, before the imposition of an administrative penalty on an employer who retaliates against a whistle-blower, and before the imposition of an administrative sanction (ss. 168(6), 172(2), and 178(2)); and  

(vi) to a market intermediary, before action is taken to protect investors’ assets (s. 179(2)). 

The situations described above have very serious consequences for the relevant stakeholders. Therefore, assuring investors and stakeholders that adverse decisions will not be taken without giving them an opportunity to be heard (whether in person, or through their representatives or lawyers) inspires confidence in the system, while simultaneously encouraging the commission to be open and transparent in its dealings.  

Discretion 

 Despite these positive developments, there is a very wide discretion granted to the commission in its regulatory role. The breadth of these powers has led one senior lawyer to describe it as “giving a razor to a monkey”. Indeed, faced with an all-powerful commission, investors and stakeholders may feel lucky to get away with a close shave. However, as a statutory body governed by principles of administrative law, the commission’s exercise of its discretion will naturally be subject to judicial review. The courts have held on numerous occasions that there is no unfettered discretion in public law. In Sampanthan v The Attorney General (SCFR 351/2018, Supreme Court Minutes of 13 December 2018), which summarised the jurisprudence on this point, the Court held, “It must also be stressed that … this Court has, time and again, stressed that our law does not permit vesting unfettered discretion upon any public authority…” This may reassure investors to some extent, but a great deal may turn on the composition of the commission and on the personnel who animate it at any given time (to be discussed in greater detail in the next article). 

The matters over which the commission has discretion are too many to set out exhaustively in this piece. A crude linguistic measure is to trace the use of the term “may”, which generally (but not necessarily) imports an element of discretion. This author counts 85 instances in which the expression “the Commission may” occurs in such a way as to confer discretion. From the power to grant and cancel licenses to market institutions and intermediaries, and to vary the terms and conditions on which they may operate (ss. 26(3), 26(5), 28(2), 35(2), 39(2), 55(6), 55(7), 57(2), 95(1), 99(1), 100(1), 105(1)); to the power to amend the rules of market institutions “at any time” (s. 64(9)); to the power to take disciplinary action, including to move court for orders against these bodies (ss. 178, 167, 180) - the powers are as varied as they are vast. In several of these sections, the Act employs the language of the commission forming an “opinion”, or being “satisfied” of particular matters before exercising their powers. In order to inspire investor confidence, these vague notions will have to be distilled into rules and guidelines that make the Commission’s decision-making less abstract and more certain. 

More worrying than the Commission’s wide discretion, however, is the discretion given to the Minister in certain instances (ss. 28(10), 40(3), 57(10)). In a crucial category of decisions made by the commission - on the cancellation of a licence granted to a market institution (an exchange, clearing house, or central depository), an appeal lies to the Minister, and after a hearing, the Minister may override the decision of the Commission. The Act states in no uncertain terms that the commission “shall give effect to the decision of the Minister.” (eg - s. 28(11)). 

This provision is a fly in the ointment. First, the Minister may not be an expert in the subject, and may therefore lack the knowledge to properly appreciate the Commission’s reasons for its decision. Second, the Minister (unlike, say, a Court) does not have the training to evaluate matters judicially - and where such important rights and interests are at stake, the evidence and arguments presented by both sides should be treated judicially. Third and most crucially, allowing an option for the Commission’s decision to be subverted by the will of a potentially non-expert Minister will only tend to encourage bribery and corruption. As the relevant stakeholder has a great deal to lose by having its license cancelled, it may be tempted to resort to illegal conduct in order to avoid such an outcome, anti-bribery laws notwithstanding. An appeal process of this nature encourages corruption in these situations, and weakens the framework of accountability otherwise set up by the Act.   

Judicial review 

 This leads to the final matter, on judicial review. Section 186 of the Act states “Any person aggrieved by a decision of the Commission may invoke the Jurisdiction of the Court of Appeal conferred under Article 140 of the Constitution.” The provisions allowing an appeal to the Minister make no reference to section 186. For example, section 28(8) states “An exchange which is aggrieved by the decision of the Commission made under subsection (1) may, within fourteen days of receipt of such notice, appeal to the Minister.” On a plain reading, this provision does not oust the jurisdiction of the Court of Appeal in respect of a decision in that category (cancellation of a licence of a market institution), and therefore both the Court of Appeal (CA) and the Minister appear to have a parallel jurisdiction. If an exchange is aggrieved by the Commission’s decision to cancel the its license, for instance, they may appeal to the Minister (under section 28(8)) or move the Court of Appeal by way of writ to review said decision (under section 186), bypassing the appeal to the Minister.  

The Minister’s decision will also be open to scrutiny under normal principles of judicial review, including legality and reasonableness, and it thus appears that an aggrieved person may in reality avail themselves of two ‘appeals’ - first to the Minister, against the decision of cancellation by the commission, and if not satisfied thereby, to the Court of Appeal, seeking judicial review of the Minister’s decision not to reverse the commission’s decision. The commission, on the contrary, does not appear to have recourse to the Court of Appeal if the Minister overrides its decision to cancel a licence. In theory, as a body corporate (s. 4) having the power to retain its own lawyers to represent it in legal proceedings (s. 18), the commission itself could seek judicial review of the Minister’s decision to override its own. In practice, however, it is hard to imagine a commission challenging its own subject Minister in this way. This adds to the concern expressed above, about the danger of having an appeal to the Minister, instead of the Court of Appeal. Under the old Act, appeals against the commission’s decisions were to the Court of Appeal (s. 22 of Act No. 36 of 1987, as amended). 

 Conclusion 

 The new SEC Act incorporates two important aspects of natural justice in its provisions - the right to reasons, and the right to be heard. Both are well-established principles in modern administrative law, though they have not always received unequivocal support in our jurisprudence. It may well be that the jurisprudence flowing from the interpretation and application of this Act by courts in the future will serve as a catalyst to entrench these principles on a wider scale across all public institutions. 

The writer is an Attorney-at-Law, and can be reached for feedback at [email protected]