SRI LANKA: SEC Announces Regulations on Market Institutions Introduces Code for Collective Investment Schemes

Wednesday July 13 2022

On 5^th July 2022, the Securities and Exchange Commission of Sri Lanka (SEC) announced that the securities market regulator has prepared Rules pertaining to Market Institutions, Market Intermediaries and a Code for Collective Investment Schemes following the enactment of the new Securities and Exchange Commission Act No. 19 of 2021. These Rules which were made in terms of the powers vested in the Commission under Section 183 of the Act

The key components of the Rules for the three Market Institutions, namely an Exchange, a Central Depository and a Clearing House, include the licensing procedure, minimum financial requirements, reporting and infrastructure requirements, governance structures, compliance and internal controls.

The new SEC Act has redefined Market Intermediaries and has included a range of new Market Intermediaries such as corporate finance advisors, derivatives brokers, derivatives dealers and market makers.

The newly gazetted Rules pertain to eight Market Intermediaries. They are Investment Managers, Margin Providers, Credit Rating Agencies, Underwriters, Stock Brokers, Stock Dealers, Managing Companies and Corporate Finance Advisors. They cover the licensing procedure, minimum financial and infrastructure requirements, qualifications and experience required for persons dealing with clients, maintenance of books and records, ceasing of operations etc. Rules in respect of market makers are being prepared with the assistance of experts from the Asian Development Bank and Rules in respect of derivative brokers and dealers will be published when derivatives are to be introduced.

The new SEC Act contains specific provisions for the setting up of Collective Investment Schemes (CIS) which go beyond the presently available Unit Trusts and paves the way for the introduction of Interval Funds, Exchange Traded Funds, Money Market Schemes, Umbrella Schemes, Real Estate Investment Trusts and Hedge Funds to name a few. Section 183 of the new SEC Act defines what Collective Investment Schemes are. The detailed definition makes it clear as to what type of scheme or arrangement will be considered a Collective Investment Scheme and also explains what type of pools of funds are not included within it

The Collective Investment Scheme Code of 2022 (the CIS Code) which has  been brought into force repeals and replaces the Unit Trust Code which was introduced in 2011. The CIS Code will thus provide for the creation of numerous types of collective investment Source: Daily News schemes involving different asset classes including equity securities and fixed income securities to Real Estate, Gold, Derivatives etc. Unit Trusts will also come within this fold.

They will cater to investors with diverse risk appetites. It will be possible to set up Hedge Funds although they are possible of being marketed only to Accredited Investors. The issue of high – risk instruments to the market is thereby facilitated whilst at the same time ensuring the protection of non-sophisticated investors

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