Appendix I. Improvements Made in the Last Two Years based on the World Bank FSAP and IOSCO RT
Increasing the number of investigations staff from 2 to 10, including 2 legal counsel (2 of the 10 staff members have been authorized, but have not yet commenced work.) This is particularly significant at the moment since the Commission reopened a number of closed investigations related to suspicious trading during the period of significant market volatility in 2010–2011. Staff informed the mission that the original investigations did not gather and analyze bank and telephone records, the types of information that, typically, are critical to establishing manipulation and insider dealing violations.
As a result of reopening these matters, the Investigations Division is handling a larger-than-usual caseload. The Investigations Division can expect to have an increased docket into the future as the SEC’s jurisdiction and enforcement tools are expanded under the SEA. The appropriate size of the enforcement program should change over time in relation to the size of the market and emerging trends in market behavior. Commission resources committed to enforcement must be sufficient to have a dissuasive impact on market misconduct.
Reorganizing the Investigations Division by bringing in a team of multi-disciplinary professionals, including staff with accounting, supervision and legal backgrounds, and training them in investigation techniques. The strategy has included designing and implementing comprehensive investigation plans. In addition, the assignment of legal counsel ensures that investigation plans are focused from the outset on developing evidence that will satisfy the elements of potential offenses and the required standard of proof, avoiding unnecessary delay on the back end of investigations.
Streamlining the process for opening investigations. The new process eliminates the step of having the Commission approve the opening of investigations and delegates to the Investigations Division discretion in designing investigation plans. There is room, however, for additional streamlining over the next couple of years once a new Investigations Director is in place and the investigations staff establishes a track record of timely and effective enforcement.
Developing electronic investigation and research files accessible by all investigation staff. The new investigations team has established an electronic filing system to maintain investigation plans and keep track of investigation records and other materials relevant to their work. This is a good start toward the larger goal of developing a comprehensive enforcement program policies and procedures manual that can act as a roadmap for investigating and prosecuting enforcement cases. Such a manual will enhance the quality and consistency of staff work product, avoid duplication of effort, facilitate the onboarding of new enforcement program staff and reduce the burden on experienced staff to guide the work of new hires.
Entering into a formal consultation arrangement with the Attorney General’s Department to expedite the selection and completion of investigations that are ready for criminal prosecution. Both the World Bank FSAP and IOSCO RT criticized the SEC for not having formal arrangements with the Attorney General’s Department. The lack of cooperation between the two agencies was believed to have contributed to the dearth of enforcement actions. The new consultation arrangement has tremendous potential to expedite investigations and produce successful criminal prosecutions. Both the investigations staff and the Attorney General’s representatives involved in the new consultation process have confirmed that the process is working well and has already produced important results. The mission was informed that several enforcement recommendations will be submitted to the Commission soon with support from the Attorney General’s staff.
Developing criteria for the CSE to apply in making referrals to the SEC and inviting the CSE surveillance staff to attend meetings of the Surveillance and Investigations Committee during deliberations on their referrals. The CSE and SEC run parallel surveillance programs to identify misconduct in the market. The staff of the two organizations discuss their surveillance results informally, but the CSE claims that it does not get formal feedback as to whether its surveillance activities are of assistance to the SEC. From their point of view, they make referrals to the Surveillance Division, but never see any enforcement actions resulting from their referrals. By inviting the CSE to attend committee meetings during deliberation of CSE referrals the SEC will provide welcome transparency about its internal processes.
The Surveillance Division believes that many of the matters referred by the CSE are too small to merit SEC attention and that the threshold for referrals should be raised. Such matters will remain under consideration by the CSE and be re-evaluated if a pattern of wrongdoing emerges or other circumstances develop to warrant referral to the SEC. By providing guidance to the CSE, the Surveillance Division will save staff review time and the CSE will get the feedback it needs to focus its surveillance activities.
Recruiting a class of management trainees. The SEC has had a difficult time finding trained managers to lead its specialized operations, including investigations. The SEC has proactively instituted a management trainee program selecting eight candidates from an applicant pool of several thousand. The mission is advised that these trainees are undergoing a rigorous program to develop the SEC’s future leaders. This will be particularly important when the SEA is enacted and the SEC is called upon to implement its new authorities.
Creating a new Litigation Division able to focus on litigation management functions. The former Legal and Enforcement Division was responsible for both policy development and litigation supervision. Under the SEA, the SEC will have independent authority to commence civil and administrative enforcement cases. The new powers will require the SEC to have experienced litigation counsel to effectively prosecute cases, rather than simply act as liaison between the SEC and the Attorney General’s Department. Establishing a Litigation Division will position the SEC to be able to move expeditiously to handle both its liaison role and new prosecution functions. The remaining Legal Division will function more as a General Counsel’s Office focusing on policy development in administering the SEC Act and acting as counsel to the Commission, Director General and staff.
The seven factors discussed in the CD report are: Factor 1: Legal certainty: Certain and predictable consequences for misconduct; Factor 2: Detecting misconduct: Being well connected and getting the right information; Factor 3: Co-operation and collaboration: Eliminating safe havens by working together; Factor 4: Investigation and prosecution of misconduct: Bold and resolute enforcement; Factor 5: Sanctions: Strong punishments – no profit from misconduct; Factor 6: Public messaging: Promoting public understanding and transparency; and Factor 7: Regulatory governance: Good governance delivering better enforcement.
The SEC and government of Sri Lanka have been vetting a draft Securities Exchange Act (SEA). The draft SEA would expand the SEC’s jurisdiction to cover more participants in the securities market and provide the SEC significant new enforcement tools, including expanded administrative and civil remedies. While there is no date certain for Parliament to consider the draft SEC Act, the mission is informed that it is possible that it will be enacted by the end of calendar year 2017. The recommendations in this report are applicable in the current regulatory regime and could accommodate the new powers provided in the draft SEA.
Many of the findings and recommendations of the IOSCO RT echo the work of the World Bank FSAP in 2015.
The SEA would significantly expand the enforcement remedies to include administrative and civil enforcement actions and increased fines.
The investigations manual should be updated, at a minimum, to reflect some of the recent organizational and process changes at the SEC. A more comprehensive overhaul will be required when the SEA is enacted.
The following examples of qualitative measures are among those described in the IOSCO CD paper: market cleanliness statistics count the number of potential suspicious market transactions that occur immediately before a company announcement and compare that data to actions against market abuse or insider dealing taken by the regulator. Another example is the number of audit reports qualified for client money reasons.