The Securities and Exchange Commission of Sri Lanka (SEC) is the regulatory body for capital markets in Sri Lanka. The SEC was established in 1987 under the Securities and Exchange Commission Act to regulate and develop an orderly securities market. The SEC is responsible for supervising stock exchanges, brokers, unit trusts, share registries, securities depositories, clearing houses, securities lending companies and underwriters among other market participants.

The SEC plays a critical role in fostering investor confidence, facilitating capital formation and protecting investors in Sri Lanka’s capital markets. This article provides an in-depth look at the SEC’s history, organizational structure, objectives, functions and powers. We examine key regulations and requirements enforced by the SEC, along with recent developments and future directions for securities regulation in Sri Lanka.

History of the Securities and Exchange Commission of Sri Lanka

The SEC’s origins trace back to the Securities Council established in 1984. Rapid growth in the Colombo Stock Exchange during the late 1970s and early 1980s highlighted the need for a dedicated regulator. The Securities Council was a direct response to this need.

In 1987, the Securities and Exchange Commission Act No. 36 superseded the Securities Council. The Act formally established the Securities and Exchange Commission of Sri Lanka as an autonomous regulatory body.

Key objectives in establishing the SEC were to:

  • Protect investor interests
  • Ensure fair, efficient and transparent markets
  • Reduce systemic risk
  • Facilitate capital formation

The SEC Act No.36 of 1987 has been amended over the years to strengthen regulation and align with international best practices. Some notable amendments include:

  • SEC Act No.26 of 1991 – Expanded SEC powers and prohibited manipulative trading practices
  • SEC Act No.47 of 2009 – Facilitated demutualization of the Colombo Stock Exchange (CSE)
  • SEC Act No.32 of 2018 – Strengthened investor protection and disclosure requirements

The SRC Act governs today’s SEC which has expanded in size, scope and sophistication over the past 35 years.

Organizational Structure of the SEC

The Securities and Exchange Commission of Sri Lanka is structured into specialized divisions and departments covering key regulatory functions:

Commission Members

The SEC is under the general direction and control of a 5-member commission appointed by the President of Sri Lanka. The commission is empowered to establish policies and regulate Sri Lanka’s capital markets.

Chairperson

The chairperson presides over the commission and is functionally responsible for managing and directing SEC staff.

Director General

The Director General is chief executive officer leading the various SEC divisions and operational units.

Divisions & Departments

  • Surveillance Division – Oversees market surveillance, investigations and complaints.
  • Supervision Division – Regulates and monitors stockbrokers, unit trusts and investment managers.
  • Market Development & Externals Relations Division – Develops capital market infrastructure and promotes investor education.
  • Legal & Enforcement Division – Enforces securities laws/regulations and litigates legal actions.
  • Finance Division – Manages SEC finances, budgeting and accounting.
  • Information Technology Department – Maintains IT infrastructure and systems for the SEC’s regulatory functions.
  • Human Resources Department – Recruits and develops SEC staff.
  • Library & Information Centre – Maintains records and provides information services.

This organizational structure allows the SEC to effectively carry out its regulatory oversight across Sri Lanka’s capital markets. The Commission and senior management provide high-level policy direction while divisions and departments execute specialized regulatory functions.

Objectives of the Securities and Exchange Commission

As laid out in the SEC Act, the Commission’s objectives are:

  • Protecting investor interests – The SEC safeguards investors from unfair practices through regulation, supervision and enforcement.
  • Developing capital markets – The SEC builds an enabling environment to channel investments through the stock market and corporate debt securities.
  • Minimizing systemic risk – Prudential regulation and ongoing supervision aim to reduce risks that could destabilize the financial system.
  • Facilitating innovation – The SEC promotes product and infrastructure innovation to bridge capital supply and demand.

Additional objectives include:

  • Enhancing market integrity and transparency
  • Building investor confidence and participation
  • Maintaining fair, orderly and efficient markets
  • Aligning with international best practices
  • Ensuring compliance through surveillance and enforcement
  • Coordinating securities regulation with the government and private sector
  • Advancing economic growth and financial stability in Sri Lanka

Pursuing these objectives allows the SEC to foster the growth of a robust, transparent and efficient capital market that contributes to national economic development.

Functions and Powers of the Securities and Exchange Commission

The Securities and Exchange Commission Act No.36 of 1987 enumerates several regulatory functions for the SEC:

Key Ongoing Functions

  • Registering and authorizing market intermediaries
  • Overseeing exchanges, clearing houses and securities depositories
  • Supervising listed entities’ compliance and disclosure
  • Reviewing prospectuses, financial reports and other filings
  • Conducting investigations and market surveillance
  • Monitoring insider trading and other trading malpractices
  • Enforcing securities laws and imposing sanctions
  • Issuing rules, regulations, codes and guidelines
  • Advising the government on securities regulation
  • Promoting investor education and public awareness

Powers of the Commission

To effectively carry out its functions, the SEC is equipped with the following powers:

  • Rulemaking – Power to implement securities regulations and rules.
  • Review & Oversight – Authority to review regulatory filings, undertake inspections and request information.
  • Investigation – Power to investigate potential securities law violations.
  • Enforcement – Authority to impose penalties and pursue legal action over any breaches.
  • Registration – Power to allow or deny registration of brokers, dealers, investment managers and other intermediaries.
  • Authorization – Authority to permit establishment of stock exchanges, clearing entities and securities depositories.
  • Policy input – Power to advise the government on securities regulation and development of capital markets.
  • Public education – Authority to conduct education programs to improve securities literacy.
  • Coordination – Power to coordinate domestic and international organizations connected with securities regulation.

Robust powers enable the SEC to effectively regulate securities markets in line with its mandates. The Commission leverages these capabilities to supervise market institutions, ensure compliance and take enforcement action when necessary.

Key Regulations Enforced by the SEC

The Securities and Exchange Commission of Sri Lanka administers and enforces a wide spectrum of regulations governing securities markets and participants. Some of the most important regulations include:

  • Securities and Exchange Commission Act No. 36 of 1987 – Establishes the SEC and provides statutory powers to regulate markets.
  • Registration of Stock Brokers Regulations – Sets qualifications and requirements for stockbrokers.
  • Unit Trust Code – Regulates unit trusts including registration, investments, disclosures and governance.
  • Takeovers and Mergers Code – Governs takeovers and mergers of listed companies.
  • Listing Rules of the Colombo Stock Exchange – Prescribes listing requirements and ongoing obligations.
  • Corporate Governance Rules – Lays out governance standards for listed entities.
  • Shareholder Voting at General Meetings Regulation – Specifies shareholder voting procedures.
  • Market Manipulation and Fraudulent Practices Regulations – Prohibits manipulative and deceptive conduct.
  • Securities Lending & Borrowing Rules – Regulates securities lending and borrowing.
  • Investment Manager Code – Specifies obligations of investment managers.
  • Proprietary Day Trading Regulations – Governs proprietary trading activities by brokers.

The SEC continues enhancing regulations to align with international standards and close regulatory gaps. Robust enforcement of regulations helps strengthen investor protection and confidence in the capital market.

Registration and Supervision of Market Intermediaries

The SEC registers and conducts ongoing supervision of various capital market intermediaries to ensure they operate in a fair, efficient and transparent manner.

Key intermediaries regulated include:

Stockbrokers

  • Must meet stipulated qualifications and capital requirements
  • Subject to inspections of financials, governance, risk management and compliance
  • Must segregate client funds and submit periodic reports

Unit Trusts

  • Must register individual funds and comply with investment limits
  • Required to make timely disclosures and file reports
  • Must appoint approved managers and trustees

Investment Managers

  • Must meet fit and proper criteria with requisite expertise
  • Subject to periodic inspections by the SEC
  • Must comply with investment mandates, guidelines and codes

Credit Rating Agencies

  • Rated entities cannot provide more than 10% of rating agency’s revenue
  • Required to disclose rating methodologies
  • Must avoid conflicts of interest with training requirements

Securities Depositories & Clearing Houses

  • Subject to inspections covering governance, risk management and operations
  • Must maintain investor protection funds and comply with SEC regulations
  • Technology systems are evaluated to ensure integrity and cybersecurity

Rigorous entry standards, ongoing supervision and enforcement help maintain high industry standards critical for investor protection and capital market quality.

Regulation of Stock Exchanges in Sri Lanka

Stock exchanges represent a crucial pillar for capital markets. The SEC regulates the licensing, governance, listings, trading, clearing and surveillance of stock exchanges.

The Colombo Stock Exchange (CSE) is the country’s sole stock exchange under the SEC’s purview. The CSE is a company licensed by the SEC as a stock exchange.

Key aspects regulated by the SEC include:

  • Composition and functions of the CSE’s board of directors
  • Minimum capital requirements
  • Member rules governing stockbrokers
  • Equity and debt security listing conditions
  • Trading and market data dissemination frameworks
  • Rules to prevent manipulative trading and unfair practices
  • Clearing and settlement processes
  • Requirements for dispute resolution
  • Measures to manage risks and ensure operational resilience
  • Surveillance systems to detect anomalies and enforce regulations

The SEC’s oversight ensures the CSE maintains investor protection, market integrity and financial stability imperatives. The demutualization and incorporation of the CSE further reinforced governance practices.

Regulatory collaboration with the CSE also continues to enhance market surveillance, risk management, derivatives trading, clearing systems and investor access to Sri Lanka’s capital markets.

Regulation of Listed Companies

Companies listed on a licensed stock exchange in Sri Lanka are subject to stringent disclosure obligations regulated by the SEC.

These obligations aim to ensure transparency and protect shareholder interests. Key requirements for listed companies include:

Continuous Disclosure

  • Material information must be promptly disclosed to the market
  • Events requiring immediate disclosure include mergers, acquisitions, earnings results, lawsuits or regulatory changes among others

Periodic Reporting

  • Submission of quarterly and annual financial statements
  • Compliance with recognized accounting standards
  • Disclosure of related party transactions, board changes, shareholder ownership structure and other details

Corporate Governance

  • Appointment of independent directors
  • Establishment of audit, remuneration and nomination committees
  • Mandatory corporate governance disclosures
  • Voting procedures and treatment of minority shareholders

Prospectus Requirements

  • Stringent disclosure standards for IPO or public offering prospectuses
  • Must provide details on company’s business model, financials, ownership structure, risks and management

Non-compliance with disclosure and governance regulations can result in penalties or delisting by the SEC to protect investors.

Promoting Investor Education and Public Awareness

A crucial function of the SEC is educating the public on capital markets and risks to empower investors. Key initiatives include:

Website & Publications – User-friendly investment education material and guides for downloading or ordering in print.

Workshops & Seminars – Frequent programs for existing and prospective investors to improve financial literacy.

Mass Media Campaigns – Use of television, radio and newspapers to promote SEC advisory services and education events.

School Programs – Securities market familiarization initiatives targeted at students to cultivate knowledge from a young age.

Public Consultations – Events to discuss proposed regulations and solicit investor feedback on issues.

Investor Compensation Fund – Provides compensation to investors who suffer losses due to broker defaults or bankruptcy.

Infoline & Advisory Services – Dedicated investor hotline and inquiry services by the SEC.

Widespread availability of SEC advisory services and simplified securities education empower Sri Lankans to invest knowledgeably in the capital markets.

International Cooperation & SEC Developments

The Securities and Exchange Commission of Sri Lanka actively coordinates with international organizations to implement global best practices and strengthen regulation.

International Memberships

  • International Organization of Securities Commissions (IOSCO)
  • South Asian Securities Regulators Forum
  • Council of Securities Regulators of the Americas (COSRA)
  • Asian Financial Cooperation Association (AFCA)

**Initiatives & Partnerships **

  • Bilateral cooperation agreements with securities regulators in Thailand, Bangladesh, Mauritius and Malaysia
  • Collaboration programs with agencies like the US SEC, Japan FSA and Ontario Securities Commission
  • Working with multilateral agencies including the World Bank, IMF and Asian Development Bank

Recent Developments

  • Revising the SEC Act to establish a Policy Board and strengthen enforcement powers
  • Demutualization of the Colombo Stock Exchange (CSE)
  • Developing a dedicated Commodity Trading Platform at the CSE
  • Implementing risk-based capital requirements for stockbrokers
  • Enhancing transparency through mandatory disclosures of short-selling

International partnerships and internal reforms ensure the SEC adopts global best practices while catering to local capital market needs and evolving investor priorities.

Conclusion

The Securities and Exchange Commission of Sri Lanka plays an indispensable role in regulating and advancing the nation’s capital markets as seen through its mandates, powers, regulations and recent developments. By fostering investor protection, market integrity and financial stability, the SEC cultivates the growth of fair and transparent securities markets essential for broader economic progress in Sri Lanka. However, considerable scope remains for the SEC to deepen capital markets by enhancing efficiency, access and innovation. Sri Lanka’s continued capacity development with international alignment also hinges significantly on the dynamic evolution of the SEC to regulate fast-changing global securities markets while responding to persistent risks.