Market intermediaries: SECP, bourses working to boost monitoring of conduct: IOSCO

International Organisation of Securities Commissions' (IOSCO) has observed that the Securities and Exchange Commission of Pakistan (SECP) and stock exchanges are working together to strengthen monitoring of the conduct of market intermediaries participating in the market place. In the country report-2015 of the IOSCO on detailed assessment of SECP, the organisation has given positive assessment of the commission, sources revealed.
According to the Summary Implementation of the IOSCO Principles - main findings of the report said that the Companies Ordinance 1969 provides for penalties for particular offences that are in some cases inadequate. While the catch-all section 22 of the Ordinance 1969 to some extent closes this gap, providing for penalties of 50 million rupees, it does not provide for prison terms. However, the lack of imprisonment for insider trading is being addressed through the Securities Bill. The deterrent effect of the penalties regime may be blunted by the ability to delay cases for long periods through legal challenges; the lack of actions resulting in prison sentences; and the relatively light penalties imposed, given the large potential profits from market misconduct. These matters are largely beyond the SECP's control.
There are weaknesses in the monitoring of the conduct of market intermediaries participating in the market place. The SECP and exchanges are working together to strengthen such monitoring, it added. The SECP has by letter of 25 February 2015 directed exchanges to conduct a Systems Audit process using an independent audit/consultancy firm with excellent repute and having significant expertise in capital market related operations. It is not yet clear whether the scope and the expertise of the auditor will sufficiently replicate those of the SECP was it to carry out the inspection itself, so that this will achieve the required outcome. This may not be sufficient in all cases, eg underwriting of new issues. Provisions have been inserted in the Securities Bill which may resolve the issue. The new rules require the underwriters to ascertain, before entering into an underwriting agreement, that the regulatory requirements relating to the exposure limits on investment in securities are not breached.
The exchanges and the SECP have adequate access to information to be able to monitor exposure levels, and adequate powers to demand more information where needed and to intervene where necessary, it added. The exchanges have appropriate and publicly available arrangements to deal with default risk and isolate the problems of a failing firm. The practice of short selling is subject to adequate controls, designed to minimise risks to stability, it observed.
IOSCO has also declared that the SECP has clear and consistent regulatory processes, as it has the capacity to interpret legislative provisions during the consultation process and holds regular roundtables with industry participants. The SECP seems to have sufficient capacity to perform its functions and exercise its powers. Recent initiatives in investor education and an enhanced staff training program from 2015 appear to have remedied previously identified deficiencies in these areas.
Findings of the report further revealed that the SECP responsibilities are clear and objectively stated. SECP has discretion to interpret its own authority and the interpretative process is transparent. SECP identifies and addresses risks through reviewing the regulatory framework on an ongoing basis. This can be initiated by market feedback,
The SECP has in place measures and procedures for oversight of the eligibility requirements of SRO's. Regulation making powers has been delegated to the SROs which are to be reviewed by the SECP prior to approval. Co-operation between the SECP and SROs is an on-going process; however, no formal guidelines for co-operation have been established. Furthermore, SECP at present does not conduct annual assessments on compliance with its obligations as a licensee as well as any onsite inspections of the SROs. However, weekly meetings are currently in place. The SECP has proposed to initiate a Systems Audit process using an external auditor but it is not clear whether the scope and the expertise of the auditor will sufficiently replicate those of the SECP were it to carry out the inspection itself, it said.
IOSCO further highlighted that the SECP has the ability and capacity to share information and cooperate with other authorities in Pakistan and internationally. The SECP can share confidential information with any other foreign regulatory authority. The SECP is a signatory to the IOSCO MMOU, and has bilateral MOUs with 12 of its international counterparts. It has bilateral MoUs with the SBP, Federal Board of Revenue (FBR), Employees Old Age Benefits Institution and the Karachi Centre for Dispute Resolution.
The accounting standards applicable in Pakistan are in practice consistent with IFRS. However, standard setting and the interpretation process of audit standards is effectively with the Institute of Chartered Accounts Pakistan (ICAP) which is not and cannot be seen as acting in the public interest. Although there is a framework for and effective exercise of oversight of those performing audit services and of the quality and the implementation of auditing, independence and ethical standards in Pakistan, the regime is effectively under exclusive control of ICAP, which cannot be seen as acting in the public interest and which is not independent from the audit/accounting profession.
The current regulatory regime has been effective in providing for rules governing the legal form and structure of CISs and the segregation and protection of client assets. Although Trustees play a major role in the CIS business and are required under the current regulations to oversee the activities of AMCs they have not been subject to inspection by SECP. There are two trustees and one is dominant. SECP has recently begun an on-site inspection program. Subject to a judgement of the scope and intensity of the inspection process, an upgrade may be merited in due course, IOSCO added.