SEC to reform licensing framework for market intermediaries

By Dinali Goonewardene

The Securities and Exchange Commission (SEC) has released a consultation paper on reforming the licensing framework for market intermediaries.

Features of the proposed new system include consolidating all market participants under the common umbrella of market intermediaries and the restriction of license to only corporate entities.

This includes the expansion of the definition of market intermediaries to include additional entities who provide intermediary services in the capital market. This category will comprise of all market participants regulated by the SEC and will also include additional categories who have not been regulated.

This includes stock brokers, stock dealers, derivatives brokers and corporate finance advisors, investment analysts, investment managers, financial planners, managing company of unit trusts and other investment schemes that are or will be regulated by the SEC, underwriters, margin providers and any other person or entity as may be specified by the commission to be necessary for the proper regulation of the capital market.  Market intermediaries will be licensed as opposed to being issued with a certificate of registration. The new categories of market intermediaries will also include derivatives brokers, corporate finance advisors and financial planners.  The new categories of intermediaries will be defined as follows: derivatives broker-anybody corporate engaged in the business of buying or selling of derivative contracts on behalf of investors for a commission and corporate finance advisor – anybody corporate who for a fee or commission engages in the business of providing advice.

It is proposed that the Act incorporates provisions that will enable the Commission to conduct a detailed assessment on the applicant who seeks to be licensed. In this regard it is proposed that the Act will empower the commission to ask for further information other than those that have been disclosed in the forms submitted to the commission if the need should arise.

It has been proposed that the Act be amended to allow the Commission to impose conditions and restrictions on the license granted and that the Act will incorporate transparent criteria for granting and renewing a license. The Act will provide for the commission to refuse to grant or renew a license of a market intermediary on  the grounds the application was not made in accordance with the act, the applicant has failed to comply with any requirement of the Act, the applicant has furnished  false or misleading information or  if there is a material omission, the applicant is in the course of being wound up or otherwise dissolved or  that execution against the applicant in respect of a judgment debt has been returned unsatisfied in whole or in part.  It may also the refuse a license on the grounds a receiver or manager has been appointed within or outside Sri Lanka, or in respect of any property of the applicant.  It has been proposed that the Act will prohibit a market intermediary from carrying on its business if it does not meet the minimum financial requirements  specified by the Commission or as may be provided in the rules of a stock exchange or a derivatives exchange. The Act will include provisions that will enable the Commission to regulate the business conduct of market intermediaries in relation to clients’ assets.