– First audit in 5 years comes ahead of license renewal – Stockbrokers also under the microscope By Charindra Chandrasena After a period of nearly five years, the Securities and Exchange Commission of Sri Lanka (SEC) has commenced an audit of Colombo Stock Exchange (CSE) to evaluate its performance. The audit, a requirement of the Securities and Exchange Commission Act, is due prior to the renewal of the five-year license issued to CSE by the SEC, which falls at the end of this year. The audit this year is expected to be more rigorous than those of previous years. The Sunday Morning Business reliably learnt that it has been designed to address areas which SEC Chairman Ranel Wijesinha has placed special emphasis on. Chief among these are regulatory scope and effectiveness, adequacy and timeliness of product, and market development. Among a variety of specific issues, this audit is expected to determine in greater detail than prior audits the manner in which CSE receives, investigates, and addresses complaints against brokers as well as whether CSE has fulfilled its capital market development responsibilities. It is understood that the CSE license fee is merely a one-time payment of Rs. 250,000 for the full five-year license period, which translates to Rs. 50,000 annually. Speaking to The Sunday Morning Business, SEC Chairman Wijesinha, who took office in June last year, elaborated on the scope of the audit. “The SEC will determine if CSE is rigorous, proactive, and consistent in capital market and product development, innovative and creative, and relevant and timely in publicity and promotion. Although the audit is a requirement under the SEC Act, the Act does not specify how often such audits should be conducted or what its scope should be. Assessment of how responsive the CSE is to investor complaints and how rapidly the complaint is addressed is to me an inherent expectation we at the SEC have of our licensee, the CSE. Our teams will also examine how effective CSE’s Dispute Resolution Committee is and how responsive its Arbitration and Disciplinary Committee and its Nominations Committee are,” he said. Evaluation of stockbrokers This audit will be part of a broader performance evaluation initiative involving all the licensees of the SEC, which include – in addition to CSE – stockbrokers, margin providers, unit trust companies, etc. “The SEC will be submitting all its licensees to an assessment to ascertain whether they are performing the roles that the licenses were provided for. When the market is as attractive as it is, as the regulator, we believe that the market is not performing and fighting below its weight class because several stakeholders of the capital market ecosystem are not playing their part,” said Wijesinha. He also requested for stockbrokers to go beyond what he terms the “non-performance lament”. “If every broker pays the same licence fee of a mere Rs. 40,000 annually, we can’t have a situation where certain brokers commit to research and others do not. I want brokers to go beyond the market non-performance lament because the license is provided not to remain passive passengers in the capital market eco system, but to develop the market proactively, and through that process to generate more activity in the market and thereby more revenue for themselves,” he noted. It was also learned that the annual registration fee is only Rs. 15,000 for investment managers, Rs. 25,000 for margin providers, Rs. 40,000 for credit rating agencies, and Rs. 25,000 for underwriters. Investing beyond Colombo The performance evaluation will also look at whether the brokers are engaging in awareness-building in outstation areas or catering to investors based in Colombo alone. “The SEC and CSE have regularly conducted investment promotion seminars islandwide. Are the brokers dormant and waiting to leverage upon the benefits of that? Today, there are CSE branches which subsidise the broker to operate in rural parts. So, they have a responsibility to go out there and enhance awareness islandwide. We will also evaluate the effectiveness of the branch network of CSE since this network is designed to take the stock market to a larger segment of society and not necessarily to earn profits,” Wijesinha said. He went on to say that in addition to the CSE and stockbrokers, the SEC was also looking at unit trust companies to ascertain if they are serving their original purpose of engaging the general population in investing. “Unit trusts, which were introduced to Sri Lanka decades ago, have still not managed to serve its original purpose. Unit trusts are for individual investors. We formulated much of the incentives for unit trusts during President Ranasinghe Premadasa’s era as far back as 1989/90, and he gave the nod for it. However, there was a time when the unit trust companies abused these incentives and made sure institutions benefitted over individual investors. So, we will be evaluating the performance of the unit trusts as well,” he said.