SEC to get tough on insider trading as new Bill widens scope

From left: Suhadini Wickremasinghe, Senior Assistant Manager, Legal and Enforcement at the SEC, Cargills Bank Managing Director and Ceylon Chamber of Commerce Chairman Rajendra Theagarajah, Partner, Nithya Partners, Naomal Goonewardena, University of Colombo, Faculty of Law Senior Lecturer Dr. Prathiba Mahanamahewa and Candor Equities Limited Group CEO/Director Ravi Abeysuriya
Pic by Pradeep Dilruckshana

• New SEC Bill makes any party trade based on unpublished, price sensitive info. liable for offence
• If convicted, to be fined Rs.10 million or 10 years imprisonment or both
• SEC says provisions also support statutory defences for ones with bona fide intention
• Also says new Bill with civil and administrative sanctions enables active enforcement

Those who eavesdrop to the chitchat among listed company directors and top officials at social gatherings and cocktails and trade at the Colombo bourse based on such information, could fall into trouble in future with the enactment of the new Securities and Exchange Commission (SEC) Bill.
The new Bill, which is at least a decade or more overdue, has provisions to catch anyone that trades on unpublished, price-sensitive information irrespective of whether he/she is a connected party to a listed firm.

This is a considerable widening of the scope of the existing SEC Act, which confines the insider trading to only ‘connected parties’ of a company, who are in possession and trade on unpublished, price sensitive information, said Dr. Prathiba Mahanamahewa, Senior Lecturer, Faculty of Law, University of Colombo.

Delivering the key note address at an event organized by Sri Lanka Institute of Directors (SLID) last week on the new SEC Bill, which is awaiting the Parliamentary approval, Dr. Mahanamahewa said the new Bill does not care how the unpublished price sensitive information was obtained but a convicted person shall be liable to pay a fine of not less than Rs.10 million or an imprisonment not exceeding 10 years or both.

Meanwhile, the trials in respect of insider trading are vested with the Provincial High Court and the Attorney General shall conduct the prosecution.
“This is a very progressive provision”, said Dr. Mahanamahewa—a rare positive remark from him, who otherwise had expressed many reservations on the provisions of the new Bill, which he thinks is an attempt to concentrate more powers at the hands of the Commission members. 

Meanwhile, the new Bill also provides with statutory defenses for those who act with bona fide intentions—which is absent in the current law—Suhadini Wickremasinghe, Senior Assistant Manager, Legal and Enforcement at the SEC said.  “So, there has been careful thinking to ensure that people who are with bona fide intention are not caught up here because we have given exemptions where you can prove your bona fides that you will not be prosecuted under this provision”, she explained.

Sri Lankan capital market has been accused of having lax rules on insider dealing and other market misconduct and hardly any action has been taken on securities offenders.

The post-conflict era market bull run, which began in 2009, was short-lived as the market crashed as many were engaged in pumping and dumping of shares at the hands of the hapless retail investors who invested their hard-earned savings to benefit from rising stock prices but little did they know that a few people were artificially inflating the prices.

Meanwhile, Partner, Nithya Partners, Naomal Goonewardena leveled sharp criticism against the SEC, saying that the market regulator is all talk but no action when it comes to enforcement.

“If there are wrongdoers then take action against them. But don’t do talking about taking action against people before taking action. Is that the way the SEC should behave? Can there be a leak from the SEC to the press?

Let’s not have leakages and become just like the police spokesman. When you become like the police spokesman, people will treat you as the police spokesman. Leakages are taking place without having the case being actually heard in the court. All the evidence is in the newspapers.
If action needs to be taken, take action. But don’t have evidence being leaked into newspapers in respect of those cases”, a vocal Goonewardena said.

In response, SEC’s Wickramasinghe said the SEC could not make any breakthroughs and take enforcement actions over the past due to the existing law allowing only criminal sanctions— an impediment, which has now been addressed through the new Bill, with provisions for civil sanctions and administrative sanctions.

“That will contribute largely towards a more active enforcement programme”, Wickremasinghe said.