SECURITIES AND EXCHANGE COMMISSION OF SRI LANKA

By Hand

29th September 2015
Ref: SEC/LEG/15/09/28

TO: ALL MARKET INTERMEDIARIES REGISTERED WITH THE SECURITIES AND EXCHANGE COMMISSION OF SRI LANKA

Directive issued under Section 13 (c) of the Securities and Exchange Commission of Sri Lanka Act No. 36 of 1987 (as amended)

The Securities and Exchange Commission of Sri Lanka (SEC), at its 359th meeting held on 11th August 2015 decided to re-issue the regulatory standards approved by the SEC for compliance by Registered Market Intermediaries and currently issued under the title 'Rules Applicable to Market Intermediaries', by way of a Directive.

Pursuant to the above said decision, the SEC, in the exercise of the powers vested in terms of Section 13 (c) of the Securities and Exchange Commission of Sri Lanka Act No. 36 of 1987 (as amended), hereby directs all Market Intermediaries registered with the SEC to comply with the regulatory standards specified in the Annexure attached hereto under the title "Regulatory Standards Applicable to Market Intermediaries".

These standards are binding on all Market Intermediaries.

Review and revision of 'Regulatory Standards applicable to Market Intermediaries:

The SEC is currently reviewing these 'Regulatory Standards Applicable to Market Intermediaries' to determine its adequacy and effectiveness.

Comments and recommendations on these standards as currently applicable and any proposed amendments are invited from Market Intermediaries and should be sent in by the 30th of October 2015 to Regulatoryreview@sec.gov.lk

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Vajira Wijegunawardane
Director General
Aa/Nu

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28 සහ 29 මැද, අස්ථානික පුරාවාසය
ඔල්ඩ් වෙළෙඳුම් දිගුත්තුරු
එච්ලෝන් ස්ක්වෙර්, කොළඹ 01.

දුරකථනය
+94 11 2439144-8
+94 11 2331013-5

28 හා 29 ආසාදිත පුරාවාසය, සාමාන්ය අස්ථානික පුරාවාසය ආර්ථික නියෝජනය, සිටියා සැප්තැම්බර් ගැටළුවා 01.

ෆැක්ස්
+94 11 2439149

Level 28 & 29, East Tower
World Trade Center
Echelon Square, Colombo 01, Sri Lanka.

වෙබ් අඩුප්පු www.sec.gov.lk www.cmet.sec.gov.lk www.cmic.sec.gov.lk

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ANNEXURE

REGULATORY STANDARDS APPLICABLE TO REGISTERED MARKET INTERMEDIARIES

GENERAL STANDARDS

1. The Regulatory Standards set out herein shall apply to all Market Intermediaries registered under Section 19 A of the Securities and Exchange Commission of Sri Lanka Act No. 36 of 1987 (as amended) and shall be deemed as requirements or criteria to be complied with, in accordance with Part V to the Schedule of the Securities and Exchange Commission of Sri Lanka Act (the SEC Act). Every Market Intermediary as defined under Section 55 of the SEC Act shall be bound to comply with:

• the standards set out herein and any amendments or additions thereto;
• other terms and conditions contained in Part V to the Schedule of the SEC Act; and
• all directives issued and that may be issued as applicable to Market Intermediaries from time to time by the Commission.

2. No person shall engage in any activity of a Market Intermediary or hold himself out as doing so unless he is a holder of a Certificate of Registration issued by the Securities and Exchange Commission of Sri Lanka as a Market Intermediary belonging to the category of that regulated activity.

3. The SEC may waive compliance with any of the standards set out herein after having satisfied itself that the attendant circumstances justify such waiver.

REGISTRATION FEE:

4. A Registered Market Intermediary shall pay such registration fee in respect of each regulated activity in such manner as may be specified or prescribed.

MINIMUM FINANCIAL REQUIREMENTS

5. No holder of a Certificate of Registration as a Market Intermediary shall carry on any regulated activity in respect of the registration without the written consent of the Commission if the minimum financial requirements as may be specified by the Commission are not met.

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CODE OF CONDUCT FOR ALL MARKET INTERMEDIARIES

6. All Registered Market Intermediaries shall comply with all general or special directives issued to them by the Commission and must observe both the letter and spirit of the directives issued.

7. No Registered Market Intermediaries shall contravene any written law enacted for the protection of the members of the public against financial loss by dishonesty, incompetence or malpractice.

8. All Registered Market Intermediaries shall always furnish true information to the Commission.

9. All Registered Market Intermediaries shall not act fraudulently or dishonestly in the performance of the regulated activity and shall not engage in any business practices appearing to the Commission to be deceitful or oppressive or otherwise improper (whether unlawful or not) or which reflect in the opinion of the Commission discredit on its or his method of conducting business.

10. No Registered Market Intermediaries shall engage or be associated with any other business practices in such a manner as to cast doubt on its or his competence and soundness of judgment.

11. All Registered Market Intermediaries shall always strive to act in the best interests of clients.

12. All Registered Market Intermediaries shall always strive to act efficiently, honestly and fairly.

13. All Registered Market Intermediaries shall ensure that all directors and individuals employed to carry on the registered activity shall be fit and proper persons as may be determined by the Commission and shall possess the requisite qualifications as required by the Commission.

14. All Registered Market Intermediaries shall maintain a register containing the names of the individuals referred in 13 above in such form and manner as may be specified by the Commission.

DEALING WITH AUTHORIZED PERSONS WHO CARRY OUT SUPERVISION

15. Where the Commission appoints a person for purposes of supervising the compliance by a Market Intermediary in terms of the provisions of the SEC Act, the terms and conditions set out in Part V to the Schedule of the SEC Act and the criteria stipulated under this Directive, the Registered Market Intermediary shall;

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(1) furnish the authorized person with any information that the authorized person may require to determine whether the Market Intermediary has complied with the provisions of the SEC Act (as amended) or with the terms and conditions set out in Part V to the Schedule of the SEC Act and the standards stipulated herein or under any other Directives which are applicable to Market Intermediaries; and

(2) take such steps as are necessary to ensure compliance with the provisions of the SEC Act, the terms and conditions set out in Part V to the Schedule of the SEC Act and the standards stipulated hereunder all other directives as may be applicable to the Market Intermediaries.

DUTY TO FURNISH THE COMMISSION WITH SUCH RETURNS AND INFORMATION AS THE COMMISSION REQUIRES

16. A Registered Market Intermediary shall furnish such returns and provide such information relating to its business as the Commission may require.

17. The Commission may specify that any information required herein shall be submitted within such period at such intervals in such manner or in such form as the Commission may specify and the Registered Market Intermediary shall comply with such requirement.

KEEPING OF BOOKS AND FURNISHING OF RETURNS

18. A Registered Market Intermediary shall;

(1) maintain or cause to be maintained, such accounting records and other books as will sufficiently explain the transactions and financial position of its business and enable true and fair profit and loss accounts and balance sheets in keeping with the Sri Lanka Accounting Standards to be prepared from time to time;

(2) maintain or cause to be maintained such accounting records and other books in such a manner as will enable them to be conveniently and properly audited; and

(3) retain such accounting records or other books as may be required to be maintained by the Commission for a period of not less than 6 years.

DUTY OF REGISTERED MARKET INTERMEDIARY, ITS DIRECTORS AND OFFICERS TO FURNISH INFORMATION

19. It shall be the duty of all Registered Market Intermediaries to furnish to an auditor or to an independent auditor appointed by the Commission;

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(1) all the information within its or his knowledge or which it or he is capable of obtaining; or (2) any information which the auditor or independent auditor requires to enable him to carry out his duties; and (3) shall ensure that all the information which is furnished to the auditor or independent auditor as the case may be is not false or misleading in any material particular.

20. Where the Commission having considered that it is in the interests of the Registered Market Intermediary or those of its or his clients, appoints an independent auditor or such other person or a body of persons to examine, audit and report either generally or in relation to any particular matter, upon the books, accounts and records of and assets held by the Market Intermediary, it shall be the duty of such intermediary;
    (1) to produce any books, accounts and records of and any assets held by the intermediary relating to his business; and (2) shall answer all questions relevant to an examination and audit which are put to him by the independent auditor or such other person appointed by the Commission.

21. A Registered Market Intermediary with intent to defeat the purposes of 20 above or with intent to prevent delay or obstruct the carrying out of any examination shall not;
    (1) destroy, conceal or alter any books or property relating to the business of the Market Intermediary; or (2) send or attempt to send or conspire with any other person to send out of Sri Lanka any such books or any property of any description belonging to or in the disposition of or under the control of the Market Intermediary.

NOTIFICATION ON THE HAPPENING OF CERTAIN EVENTS

22. Without prejudice to the generality of the duties imposed under Section 25 of the SEC Act, a Registered Market Intermediary shall on the occurrence of any one or more of the following events shall give to the Commission written notice, forthwith setting out the particulars of the event;
    (1) if the Registered Market Intermediary is in the course of being wound up or otherwise dissolved whether within or outside Sri Lanka or ceases to carry on the business to which the registration relates;

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(2) where the Market Intermediary has failed to comply with the provisions of the SEC Act, Part V to the Schedule of the SEC Act and the standards stipulated herein or any other Directive issued by the Commission from time to time; (3) where any information or document furnished to the Commission is false or misleading; or there is any change in any information or document furnished to the Commission; (4) where any execution against the Market Intermediary in respect of a judgment debt has been returned unsatisfied in whole or in part; (5) where a receiver, liquidator or an equivalent person has been appointed in respect of any property of the Market Intermediary; (6) where the Market Intermediary whether within or outside Sri Lanka has entered into a compromise or scheme of arrangement with its creditors being a compromise or scheme of arrangement that is still in operation; (7) where the directors, or the chief executive officer has been convicted of any offence involving fraud or dishonesty or a violation of securities law within or outside of Sri Lanka; or (8) becomes an undischarged bankrupt.

23. Where a Registered Market Intermediary ceases to carry on the business in all or any of the regulated activities to which the Certificate of Registration relates, shall return the Certificate of Registration to the Commission within fourteen days of the date of the cessation.

SURRENDER OF CERTIFICATE OF REGISTRATION

24. (1) Subject to subsection (2) below, a Registered Market Intermediary may surrender the Certificate of Registration by sending it to the Commission together with a written notice of its surrender.
    (2) The surrender of a Certificate of Registration shall not take effect until the Commission is satisfied that adequate arrangements have been made to meet all the liabilities and obligations of the Registered Market Intermediary that are outstanding at the time when the notice of surrender was given by the Market Intermediary.

REVOCATION AND SUSPENSION OF A CERTIFICATE OF REGISTRATION OF A MARKET INTERMEDIARY
25. A Certificate of Registration of a Market Intermediary shall be deemed to be revoked;

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(1) if the holder of the Certificate of Registration is wound up or otherwise dissolved whether within or outside Sri Lanka; or (2) in the case of an individual holder of a Certificate of Registration, if the individual dies.

Interpretation

26. The words and terms defined in the Securities and Exchange Commission of Sri Lanka Act No. 36 of 1987 as amended by Act No. 26 of 1991, Act No. 18 of 2003 and Act No. 47 of 2009 shall unless the context so requires have the same meaning assigned to it in the said Act.

"Commission" means Securities and Exchange Commission of Sri Lanka; "Connected Party" means the parent, subsidiary or an associate company of such party; "Liquid Capital" means cash or investments which can be readily converted to cash such as bank/call deposits, re-purchase agreements with maturity of less than three months, commercial papers which are endorsed or guaranteed by a licensed commercial bank or licensed specialized bank with a term to maturity of less than three months and government issued securities with a term to maturity of one year or less; "Net Capital" means, a) The aggregate value of;

1. Stated Capital;
2. Reserves; and
3. SEC approved subordinate debt
   or b) Total assets minus total liabilities adjusted by deducting any other item as specified by the SEC from time to time.
   "SEC" means the Securities and Exchange Commission of Sri Lanka; "SEC Act" means the Securities and Exchange Commission of Sri Lanka Act No.36 of 1987 as amended from time to time; "Single Client" in the context of a corporate body means the borrowing company its parent and subsidiary company and in the context of a natural person means the borrower, his/her spouse and dependent children.

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SPECIFIC STANDARDS APPLICABLE TO MARGIN PROVIDERS

The criteria set out in this Part shall be applicable to bodies corporate carrying on business as Margin Providers.

FIT AND PROPER CRITERIA FOR DIRECTORS AND PERSONS DEALING WITH CLIENTS

01 (1) A Registered Margin Provider shall not appoint an individual as a director or a person dealing with clients for and on its behalf, if such person has been:
(a) convicted by any Court of Law in Sri Lanka or abroad subsequent to a finding of guilt for the commission of any offence which involves fraud, deceit or dishonesty; or (b) found to have committed or been connected with the commission of any act which involves fraud, deceit or dishonesty by any regulatory or supervisory authority; or (i) established by law in Sri Lanka or abroad; or (ii) constituted under law as a commission of inquiry, tribunal or other similar body; or (iii) by any professional body which in the opinion of the SEC is of an established and credible stature; or (c) where a commission of an offence by such person has been compounded in terms of Section 51A of the SEC Act during the past 3 years, preceding the date of the appointment; or (d) found guilty of a capital market offence by a court of law in terms of the SEC Act or the Securities Law of any other country; unless the prior approval of the Commission is obtained for such appointment.

The Commission on an application made under this provision by a Registered Margin Provider, may grant approval for such person to be appointed notwithstanding the above said prohibition under exceptional circumstances.

01 (2) (a) A Registered Margin Provider shall not allow an individual to continue as a director or a person dealing with clients, for a period as determined by the Commission, if such person, subsequent to his appointment as a director or

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a person dealing with clients has been;
(i) convicted by any Court of Law in Sri Lanka or abroad, subsequent to a finding of guilt for the commission of any offence which involves fraud, deceit or dishonesty; or (ii) found to have committed or been connected with the commission of any act which involves fraud, deceit or dishonesty by any regulatory or supervisory authority; a. established by law in Sri Lanka or abroad; or b. constituted under law as a commission of inquiry, tribunal or other similar body; or
c. by any professional body which in the opinion of the SEC is of an established and credible stature; or
(iii) where a commission of an offence by such person has been compounded in terms of Section 51A of the SEC Act; or (iv) found guilty of a capital market offence by a court of law in terms of the SEC Act or the Securities Law of any other country.

01 (2) (b) For the avoidance of doubt, the period in which a person described in 01 (2) (a) above shall be barred from functioning as a director or a person dealing with clients for and on behalf of a Registered Margin Provider may be; (i) for a period of months or for a period of years with a right to reapply at the end of the said period; or (ii) a permanent bar from the industry; or (iii) for a period from acting in a supervisory capacity or from performing a particular duty; depending on the gravity of the offence, the impact of such offence on the market or other factor which the Commission shall deem to be relevant considering the circumstances surrounding the commission of such offence.

ACADEMIC QUALIFICATIONS AND EXPERIENCE

2. Every person, whether as director, employee or agent dealing with clients on behalf of the Margin Provider shall possess the qualifications and/or experience set out in sub clause (a) or (b) below.

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(a) (i) - Associate of the Institute of Chartered Accountants of Sri Lanka;

• Associate of the Chartered Institute of Management Accountants;
• A degree from an accredited Sri Lankan or foreign university;
• Chartered Financial Analyst;
• Associate of the Chartered Certified Accountants;
• Associate of the Chartered Institute of Bankers;
• Associate of the Institute of Bankers of Sri Lanka; or
• An equivalent or higher professional and/or academic qualification acceptable to the SEC;
  and
  (ii) active experience in the financial/securities market for a minimum period of two years.

Experience in the financial/securities market for a minimum period of seven years.
Provided that experience for the stipulated duration per se will not fulfill the required qualification and the Commission shall consider the nature, scope and intensity of experience in determining its adequacy.

REQUIREMENT FOR MINIMUM NUMBER OF PERSONS DEALING WITH CLIENTS

3. The Margin Provider shall ensure that at least two persons with the 'qualifications and experience' specified in 02 above are employed by such Margin Provider and available to deal with clients.

The SEC may vary the number of such qualified personnel on account of the volume of business proposed to be undertaken or currently undertaken by such Margin Provider.

SEC SANCTION REQUIRED FOR OTHER BUSINESS

4. Business other than that of a Margin Provider may be carried out only with the prior written approval of the SEC.

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FINANCIAL AND INFRASTRUCTURE REQUIREMENTS

05.a) A Margin Provider shall at all times maintain:

(i) A minimum Net Capital as stipulated by the SEC from time to time;

(ii) A minimum Liquid Capital as stipulated by the SEC from time to time.

b) The Margin Provider’s exposure against the aggregate value of loans extended as margin should at no time exceed the value stipulated by the Commission from time to time.

The above requirement shall not be applicable to Registered Margin Providers licenced and regulated by the Central Bank of Sri Lanka. Such institution shall abide by the requirements stipulated by the Central Bank of Sri Lanka on credit exposure, which is determined according to the capital adequacy requirements imposed by the Central Bank of Sri Lanka.

c) The Initial Margin (or own funds requirement)

The Margin Provider shall ensure that the initial margin credit permitted to its clients on share purchases does NOT exceed 50% of the market value of the total securities portfolio of a particular client.

(Example: If a client has Rs.100 in cash (or stocks) but wishes to purchase shares exceeding that amount, your firm may allow the client to purchase up to a maximum of Rs. 200 worth of shares extending Rs. 100 worth of credit or 50% of the total value of the purchase to the client.)

d) Maintenance of Margin

The Margin Provider shall ensure a minimum Maintenance Margin of 30% at all times. Maintenance Margin is the minimum amount of borrowers’ equity (own funds) that should be maintained at all times. A maintenance margin of 30% permits the market value of the share/portfolio of shares to drop until the credit component reaches 70% (0.70) of the Total Portfolio

e) The margin call

A margin call is required to be made when the value of the share/portfolio of shares falls below the maintenance margin requirement. The investor would be required to provide cash or securities to satisfy the maintenance margin requirement. In the event the investor fails to meet the shortfall within 03 market days, the Margin

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Provider shall ensure that the securities pledged are sold with due notice to the relevant parties on the next market day to ensure compliance with paragraph (d) above, and notice shall be given to the client at the end of the market day, the sale is concluded.

f) Pledged securities may only be re-pledged by the Margin Provider to entities licensed by the Central Bank of Sri Lanka and only up to a maximum of 100% of the value of the margin loans portfolio.

g) The Margin Provider shall not extend margin facilities to its employees for the purchase of securities.

h) All cash and securities of clients shall be maintained as segregated accounts and separate from securities and monies held by the Margin Provider on its own account.

i) The maximum margin loan extendable by a Margin Provider to a single client shall at no time exceed 15% of the maximum margin loan exposure permissible in terms of criteria 5 (b) above.

j) A Margin Provider shall always maintain adequate financial human and other resources sufficient to carry out the business as a Margin Provider.

REPORTING REQUIREMENTS

6. a) A Margin Provider shall provide the SEC with the information itemized below:

(i) A Financial Report prepared monthly compliant with the format and time lines as specified by the SEC

(ii) The Interim Financial Report shall;

(a) conform to the Sri Lanka Accounting Standards; and

(b) be signed pursuant to a Board resolution by a Director and the Chief Executive Officer.

b) A copy of the statement of audited accounts of the Margin Provider, prepared annually in accordance with the Sri Lanka Accounting Standards shall be submitted to the SEC within a period of six months from the close of each financial year.

c) The SEC shall be informed on a quarterly basis;

(i) of the location of scrip pledged and re-pledged with adequate details to enable verification by the SEC;

(ii) details facilitating clear identification of the first ten largest clients in value in terms of margin facilities afforded by the Margin Provider.

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d) SEC shall be informed on a monthly basis any details of clients who have been extended credit in violation of criteria 5 (i); and

e) A Margin Provider shall provide the SEC with financial information in conformity with formats specified by the SEC from time to time.

DISCLOSURE OF HOLDING COMPANIES/PARTIES

7. A Margin Provider shall keep the SEC informed of the percentage holding in it by its parent/owning company(s), subsidiary companies, associate companies and partnerships and of shareholders holding more than 20% or more of its equity.

REQUIREMENT FOR WRITTEN CONTRACTS

8. a) A Margin Provider shall execute a written contract prior to carrying out any business for and on behalf of a client containing all the terms and conditions agreed to between the client, Margin Provider and the broker of the client and shall ensure the due performance of the duties and obligations undertaken by the Margin Provider in such contract.

b) Such contract shall not be modified in any way other than in writing, with due notice given to the client.

c) Such contract shall specify the risks associated with margin trading for the client.

d) A copy of such contract shall be handed over to the client no sooner it has been signed by all parties.

e) The duties and obligations of each party shall be clearly and expressly stated in such contract and it shall be the duty of a Margin Provider to ensure that all parties to the contract discharge their duties and obligation as stated in the contract.

REGULATORY COMPLIANCE AND INTERNAL CONTROLS

9. a) A Margin Provider shall have an internal compliance manual applicable to its directors and employees/agents which sets out adequate compliance procedures and practices to ensure:

(i) that the directors, employees and agents of the Margin Provider do not contravene the provisions of the SEC Act, Part V to the Schedule of the SEC Act, criteria set out herein or any other Directive issued by the Commission

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from time to time; and

(ii) consistent and fair implementation of its operational procedures and administrative processes.

b) A Margin Provider and its directors shall be responsible for due compliance with such internal compliance manual.

c) A Margin Provider shall immediately inform the SEC in writing where any person acting on their behalf contravenes the provisions of the SEC Act, Part V to the Schedule of the SEC Act, criteria set out herein or any other Directive issued by the Commission from time to time as applicable.

d) A Margin Provider shall make an Annual Compliance Report confirming compliance with the SEC Act, Part V to the Schedule of the SEC Act, the criteria set out herein and any other Directive issued by the Commission from time to time, as applicable and forward same to the SEC signed by a director and the Chief Executive Officer within 45 days after the closure of each financial year.

GOVERNANCE

10. A Margin Provider shall:

a) establish and implement good business practices and follow just and fair principles in the conduct of business;

b) comply with Codes and Best Practices applicable to the activities of a Margin Provider as may be issued by the SEC or determined by the SEC to be applicable;

c) have internal procedure manuals sufficient to ensure the continuity of its operational activities;

d) ensure that their account opening procedures are sufficiently diligent to identify clients;

e) maintain an effective complaints handling process; and

f) ensure that it does not carry out any activities which could cause a conflict of interest with its margin providing functions.

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CLIENT INFORMATION, RECORD KEEPING AND CONFIDENTIALITY

11. a) A Margin Provider shall maintain the following records in its office:

(i) all subsisting margin trading agreements entered into by the Margin Provider;

(ii) all margin trading agreements for a minimum period of six years from the date of cessation of such agreements;

(iii) details relating to all transactions including the identity of clients, spanning the immediately preceding period of six years; and

(iv) a comprehensive written record of all complaints received from clients and action taken thereon by the Margin Provider for a period of six years reckoned from the date on which the matter has been considered and concluded.

b) A Margin Provider shall have suitable information recording and retrieval systems and maintain such information for inspection by the SEC.

c) A Margin Provider shall ensure confidentiality at all times of all information relating to clients including such client’s identity and transactions carried out for such client, unless disclosure of such information is required by the SEC or any other provisions of any written law.

ADVERTISEMENTS

12. a) Margin Providers shall ensure that the content in advertisements promoting its services as Margin Providers, are accurate and complete and does not have the capacity to mislead the public.

b) Margin Providers shall submit the contents of all advertisements for the perusal of the SEC at least 5 days prior to its publication in the media.

c) Margin Providers shall comply with any guidelines that may be issued by the Commission from time to time in respect of advertisements.

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SPECIFIC STANDARDS APPLICABLE TO UNDERWRITERS

The criteria set out in this part shall be applicable to any person who:

(a) is in connection with a public issue of securities of a company which has applied for a listing, guarantees to purchase unsubscribed securities of such company for a fee or commission; or

(b) is in connection with a public issue of securities of a listed public company, guarantees to purchase unsubscribed securities of such company for a fee or commission; or

(c) negotiates with a company as defined in paragraph (a) or (b) above to purchase such securities in the event of the offer being not fully subscribed; or

(d) purchases such issue from the company specifically with a view to offering such securities to the public;

such person shall obtain registration as an ‘Underwriter’ with the SEC, prior to performing the functions mentioned above.

FIT AND PROPER CRITERIA FOR DIRECTORS AND PERSONS DEALING WITH CLIENTS

01 (1) A Registered Underwriter shall not appoint an individual as a director or a person dealing with clients for and on behalf of an Underwriter, if such person has been:

(a) convicted by any Court of Law in Sri Lanka or abroad subsequent to a finding of guilt for the commission of any offence which involves fraud, deceit or dishonesty; or

(b) found to have committed or been connected with the commission of any act which involves fraud, deceit or dishonesty by any regulatory or supervisory authority;

(i) established by law in Sri Lanka or abroad; or

(ii) constituted under law as a commission of inquiry, tribunal or other similar body; or

(iii) by any professional body which in the opinion of the SEC is of an established and credible stature; or

(c) where a commission of an offence by such person has been compounded in terms of Section 51 A of the SEC Act (as amended) during the past 3 years, preceding the date of the appointment; or

(d) found guilty of a capital market offence by a Court of Law in terms of the SEC Act the Securities Law of any other country;

unless the prior approval of the Commission is obtained for such appointment.

The Commission on an application made under this provision by a Registered Underwriter, may grant approval for such person to be appointed notwithstanding the above said prohibition under exceptional circumstances.

01 (2) (a) A Registered Underwriter shall not allow an individual to continue as a director or a person dealing with clients, for a period as determined by the Commission, if such person, subsequent to his appointment as a director or a person dealing with clients has been;

(i) convicted by any Court of Law in Sri Lanka or abroad subsequent to a finding of guilt for the commission of any offence which involves fraud, deceit or dishonesty; or

(ii) found to have committed or been connected with the commission of any act which involves fraud, deceit or dishonesty by anybody with regulatory or supervisory authority; a. established by law in Sri Lanka or abroad; or b. constituted under law as a commission of inquiry, tribunal or other similar body; or
c. by any professional body which in the opinion of the SEC is of an established and credible stature; or

(iii) where a commission of an offence by such person has been compounded in terms of the SEC Act (as amended); or

(iv) found guilty of a capital market offence by a Court of Law in terms of the SEC Act or the Securities Law of any other country.

01 (2) (b) For the avoidance of doubt, the period in which a person described in 01 (2) (a) above shall be barred from functioning as a director or a person dealing with clients for and on behalf of a Registered Underwriter may be;

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(i) for a period of months or for a period of years with a right to reapply at the end of the said period; or

(ii) a permanent bar from the industry; or

(iii) for a period from acting in a supervisory capacity or from performing a particular duty;

depending on the gravity of the offence, the impact of such offence on the market or other factor which the Commission shall deem to be relevant considering the circumstances surrounding the commission of such offence.

QUALIFICATIONS AND EXPERIENCE

2. Every Underwriter shall ensure that a minimum of two of its employees possess the qualifications and experience set out in sub clause (a) or (b) below.

(a)
(i) Associate of the Institute of Chartered Accountants of Sri Lanka; or (ii) Associate of the Chartered Institute of Management Accountants; or (iii) Chartered Financial Analyst; or (iv) Associate of the Chartered Certified Accountants; or (v) Associate of the Chartered Institute of Bankers; or (vi) Associate of the Institute of Bankers of Sri Lanka; or (vii) An equivalent or higher professional and/or academic qualification acceptable to the SEC

and

active experience in the financial/Securities market for a minimum period of two years or substantive experience in underwriting.

(b) experience in the financial/securities market relating to underwriting for a minimum period of five years.

Experience for the stipulated duration under clauses (a) and (b) above per se will not fulfill the required qualification and the SEC shall consider the nature, scope and intensity of experience in determining its adequacy.

SEC SANCTION REQUIRED FOR OTHER BUSINESS

3. Business other than that of an Underwriter may be carried out only with the written approval of the SEC, unless such Underwriter is a licensed or a Registered Financial Institution regulated by the Central Bank of Sri Lanka.

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FINANCIAL AND INFRASTRUCTURE REQUIREMENTS

4. (a) Unless regulated as a licensed or Registered Financial Institution by the Central Bank of Sri Lanka, an Underwriter shall at all times maintain a minimum Net Capital stipulated by the Securities and Exchange Commission from time to time.

(b) All Underwriters shall obtain SEC approval on a case by case basis for any underwriting obligation prior to entering into any underwriting contract.

In considering the grant of approval the SEC shall require the Underwriter to demonstrate its financial capacity to meet a particular underwriting obligation.

SEC approval may be conditional on the Underwriter fulfilling further requirements as specified by the SEC. Such requirements will include those related to securing the Underwriter’s capacity to fulfill the financial obligations undertaken in addition to any other requirement as may be deemed to be relevant to the Commission having regard to a particular case.

(c) An Underwriter shall always maintain adequate financial human and other resources sufficient to carry out the business as an Underwriter.

MATERIAL INFORMATION AND CONTRACT

(5) (a) An Underwriter shall execute a written contract prior to carrying out any business for and on behalf of a client containing all the terms and conditions agreed to by and between itself and the client.

(b) Such contract shall not be modified in any way other than in writing, with due notice to the Client.

DISCLOSURE OF HOLDING COMPANIES/PARTIES

6. An Underwriter shall keep the SEC informed of the percentage holdings in it/by it, its parent/owning company(s), subsidiary company(s), associate company(s) and partnership(s) and of shareholders holding more than 20% or more of its equity.

REPORTING REQUIREMENTS

7. An Underwriter shall provide the SEC with the information itemized below.
   (a) (i) A Financial Report prepared on a quarterly basis in conformity with the Sri Lanka Accounting Standards

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(ii) The Financial Report shall be signed by a director and the Chief Executive Officer.

(b) A copy of the statement of audited accounts prepared annually in accordance with the Sri Lanka Accounting Standards shall be submitted to the SEC within a period of six months from the close of each financial year.

(c) An Underwriter shall provide the SEC with information in conformity with formats specified by the SEC from time to time.

REGULATORY COMPLIANCE AND INTERNAL CONTROLS

08 (a) An Underwriter shall have an internal compliance manual applicable to its directors and employees which sets out adequate compliance procedures and practices to ensure:

(i) that the directors and employees of the Underwriter do not contravene the provisions of the SEC Act, Part V to the Schedule of the SEC Act or the criteria set out herein; and

(ii) the consistent and fair implementation of its operational procedures and administrative processes.

(b) An Underwriter and its directors shall be responsible for due compliance with such internal compliance manual.

(c) An Underwriter shall give written instructions to the compliance officer to immediately inform the SEC in writing where any member of the staff or a director contravenes the provisions of the SEC Act, Part V to the Schedule of the SEC Act, the criteria set out herein or any other Directive issued by the Commission time to time

(d) An Underwriter shall make an Annual Compliance Report signed by a director and its Chief Executive Officer confirming compliance with the SEC Act, Part V of the Schedule to the SEC Act, the criteria set out herein or any other Directive issued by the Commission from time to time and forward same to the SEC signed by a director and the Chief Executive Officer within 45 days after the closure of each financial year.

GOVERNANCE

9. An Underwriter shall:

(a) establish and implement good business practices and follow just and fair principles in the conduct of business;

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