SEC Chief in Building Mode to Quicken Pace on Probes

The capital markets watchdog has reopened cases gone cold on market manipulations rampant during the 2010-12 period, but the SEC Investigations Division may not be quite up to it

Thilak Karunaratne resigned as Chairman of the Securities and Exchange Commission in 2012 because he was not allowed to rein in rampant pump-and-dump schemes and market manipulations during a two year period soon after the thirty-year conflict with separatists ended in 2009. When the government changed in January 2015, he was reappointed Chairman of the capital markets watchdog. He opened up the investigations that were swept under the carpet by his predecessor.

Beefed up by political changes for good governance, he wants to bring to justice those involved in market irregularities during the 2010-12 period, but he is not interested in an all-out witchhunt, rather he wants to restore confidence and build credibility in the capital markets.

The investigations are taking time because the SEC’s Investigations Department needs to be beefed up. However, the Financial Crimes Investigations Division of the Police is conducting a separate probe, often collaborating with the SEC. Karunaratne concedes that the commission needs to build capacity.

Excerpts of the interview which also touches on Lanka Ratings Agency:

When you first resigned from the SEC chair in 2012, you said 17 investigations were pending on alleged pump-and-dump, insider trading and market manipulation. How are these progressing?
We had to revisit these files and collect sufficient material to convince the commission the need for recommencing investigations. This took some time and now the investigations are in progress with the approval of the commission. However, there is a lack of capacity in our Investigations Division and we are in the process of strengthening it.

How long will this take?
We are looking at capacity building in all the divisions quite seriously. I expect to have the commission working at full capacity within the next couple of months.

How tight is surveillance now?
It has been revamped and is functioning quite efficiently under the new director.

What’s happening with Lanka Ratings Agency (LRA)?
As far as we are concerned their license to operate as a rating agency has lapsed. We gave them sufficient time to come up with a written agreement with an internationally accepted rating agency to provide expertise on ratings methodology and all other related data. Sri Lanka is a small country and is only a frontier market. It is not possible for a local company to develop and keep pace with changes in rating methodology. This is why we wanted them to come with a proper agreement with an international rating agency.

Frankly, we are not interested in what the previous commission did. We cannot continue to allow anyone to contravene SEC rules and regulations.

But LRA continues to maintain that they had an agreement with CRISIL of India?
It was a MoU and not an agreement and it did not cover sharing of technical or methodological practices. When we checked with CRISIL they failed to give us a satisfactory answer on the nature of their MoU. In fact, their response was vague. LRA later approached us with another rating agency CARE India, which is recognised by the Indian regulator. But they haven’t done anything since. A Pakistani company also approached us and inquired into what the SEC was looking for. We told them they needed to have an internationally accepted rating methodology. But here again, nothing happened.

But LRA was earlier a unit of RAM Ratings Malaysia, so couldn’t they have continued with the same methodologies?
Methodologies evolve constantly, so when RAM pulled out, LRA no longer had access to updated methodologies.

The previous commission was happy with LRA and promoted the home-grown concept. What’s the change?
Frankly, we are not interested in what the previous commission did. We cannot continue to allow anyone to contravene SEC rules and regulations. Our mandate is to protect the interest of investors. Debenture issues especially depend on ratings and if the ratings are not right who gets played out? Investors. In the 2010-12 period how many investors got played out in the market? We need to stop this. Another matter is that whenever a company was given a lower rating by one agency they ran to LRA for a better rating. This is not acceptable. Even large corporates have done that. The rating cannot change significantly from one rating agency to another.

The SEC rules on ratings agencies is clear on conflict of interest, but we saw board members of LRA rate companies in whose boards they sit. Why was this allowed in the first place?
Yes, conflict of interest was also there. As I said earlier, I am not interested in commenting on the previous administration. But just because they did what was not right then does not mean that we have to continue with the same thing now.

When will we finally see the new SEC Act?
Since the appointment of the new commission, the drafting of the new SEC Act has been put on a war footing. An extremely competent team headed by a Senior President’s Counsel who is a specialist in Company Law is working on the new SEC Act and I expect the draft to be completed by end October 2015, then it must go to the commission for approval. Then it will take the usual path of going to the Legal Draftsman, translated into Sinhala and Tamil, sent for approval from the relevant ministry to the Cabinet, and finally to Parliament. As we are fast tracking this process I am confident of getting the whole process completed by end 2016.

What does the new Act mean for governance?
We are doing our very best to get the new Act to be International Organisation of Securities Commissions (IOSCO) compliant. Not only governance, but all aspects of our mandate will be well covered. This will empower us to minimise all the wrongdoings in the capital market and all other related players.

We are also fast-tracking implementation of a Central Counter Party clearing system to mitigate systemic risk in the stock exchange. I expect this to come online before the end of 2016. The demutualization of the Colombo Stock Exchange is expected to be completed by then too. I know I sound optimistic, but I am confident we can meet these deadlines.