SEC directs Colombo Stock Exchange to suspend enforcement for non-compliance

MECHANISM TO BE ADOPTED BY THE CSE WHEN GRANTING APPROVAL FOR TEMPORARY SUSPENSION OF ENFORCEMENT ACTION APPLICABLE FOR NON- COMPLIANCE WITH THE MINIMUM SHAREHOLDERS’ FUND REQUIREMENT

May 2019 Ref: SEC/LEG/19/05/32, the By way of a letter dated 17 th Securities and Exchange Commission of Sri Lanka (SEC) has directed the Colombo Stock Exchange (CSE) to temporarily suspend the initiation of enforcement procedures set out in Rules 5.3.2 (b) and 5.5.2 of the CSE Stockbroker Rules in respect of stockbroker and/or stock dealer Firms trading in equity and/or debt securities which are non-compliant and shall be non- compliant with the minimum Shareholders’ Fund Requirement as stipulated under Rule 5.2.1 of the said Rules until 30 November 2019, subject to the conditions stated therein . th As per Item (ii) of the aforesaid SEC Directive, the CSE has been further directed by the SEC to adopt a ‘suitable mechanism’ when granting approval to a stockbroker/stock dealer Firm, which is non-compliant with the minimum Shareholders’ Fund Requirement, based on a written request, on a ‘case by case basis’, with due consideration of the particular circumstances of such request. Accordingly, the CSE has developed a mechanism to be adopted when granting approval for a temporary suspension of enforcement action relating to non-compliance with Minimum Shareholders’ Fund Requirement by a Stockbroker Firm as stipulated under Rule 5.2.1 of the CSE Stockbroker Rules. The said mechanism is set out in Annex 2. Furthermore, as per the aforesaid Directive, the Stockbroker and/or Stock Dealer Firms which are non-compliant with the minimum Shareholders’ Fund Requirement as at 01 December 2019 st shall be subjected to the enforcement procedures set out in Rule 5.2.3 (b) and Rule 5.5.2 of the CSE Stockbroker Rules (as applicable) with effect from 01 December 2019. st

r- ANNEX 1 l---.l_ | L I AND EXCHANGE SECURTTTES coMMrssroN oF sRt LANKA gs!i&.ri 6 och D&o6 uttaltitFr Ed@ €@ @0ad € q,o**q5q9 L8aru.lrirrei ooDo

SEC/LEGIL9lAsl32Ref: BY HAND

t7h May 2019

T0: The Colombo Stock Exchanqe

to Securities and the the Stock representations made ICommissionIBroking Companies IExchange Whereas to who are unable toon pertaining Broking Companies certain of Sri Lanka March 2019 28h (SEC) Stock wifh regard Rules of the toof with Rule the confonn Exchange Colombo Stock (CSE) Stockbroker 5.2.1

SEC to consider offering a temporarythe the Minimum and requested Fund requirement Shareholders' moratorium the said on Rule. by the to the at request made pursuant on 07h 2019 its May The Stockmeeting held 419d' Commission to suspend the procedure enforcement decided to Companie Stock the Colombo direct Exchange Broking

in equity debt securities of Stock are who and/or trading and/or in respect non-Stock Dealers Brokers with the as stipulated Fund Shareholders' compliant and be minimum shall non-compliant of the CSE be Rules until 30h and same 2019 under Rule 5.2.1 November dulyStockbroker It that to the further was such temporary relevant suspensionstakeholders. nesolved ccmmunicated a request being made in of by a non-compllant wriilng party only be availed upon citingcould on a case basis with by case approved by the for same which be then should reasons/justifications CSE of such the particular request.of due consideration circumstances to following with immediate the effect;direded implement hereby Therefore the CSE is i. the enforcement Impose a procedures laid down underfrom initiaUng temporary suspension respect of licensed (b) and Rule 5.5.2 of the in Stock BrokersStockbroker Rules Rule 5.2.3 CSE shall securities who and debt and/or are non-compliant Dealers trading in beand/or Stock equity the minimum 5'2.1 under Rule requirement as stipulated non-compliantwith Shareholders'Fund of 2 Page 1

m9. roc wxi'q& oridtr :9 4D 28 28 60 29 Ooer Levd do@o66 29, To,vst'ryorn aoa(mdeE{$A5 28 nirelci & Eaet rg6ab{frcrgO. 6do C€fiFr Trsdo World Ocnq|irl a0et 0q0qc @88 0l Squ..o, trnkE Edr€lon Cob{nbo 01, Sd ,@ Alr.'MofsGt l {x 1t 2143843l Of,raoFrd r"w' I wwtv.l , Fut+94 11 2439148 uv{/v.

Continuation SheetSECURITIES AND EXCHANGEII ICOMMISSION OF SRI LANKA

2019; that such Stock provided Rules until Brokers and/orof the CSE Stockbroker 30th November a written to the Colombo Exchange immediately upon Stock request Stock Dealers make itscomply with the minimum to then be which should Fund Requirement inability Shareholders' approved by the CSE on a of the case by basis with due consideration case pafticular circumstances of such request,

\ (i) to implement To adopt a suitable mechanism above

Stock Dealer to submit a time Infornr the non-compliant Broker and/or bound capitalStock repoft to be made and a thereafter on along with its progress plan application augmentation a monthly basis to both the CSE and SEC. terms of iv. Re-impose Rule 5.5.2 of the (b) rules in the enforcement and 5,2.3 Rule CSE20t9; andfrom 01't Stockbroker Rules with effect December

1. Dealers of this Inform Stock Brokers and/or all licensed Directive. Stock of shall be expected Dealer who avail toThe Stock Broker and/or Stock th'b suspension themselves the Rules mentioned fromcomply with above the minimum stipulated in Shareholders'Fund 0l't December 2019. at 01st who are December 2019 shall non-compliant as The and/or Stock Dealers Stock Brokers be Rules for non-compliance subjected to the enforcement out in the withset procedure CSE Stockbroker of the said Rules from 01't December with effect the minimum Shareholders'Fund in terms

20L9. until 30th November from the date hereof directive shall be effective 2019.This

Tushara Jayaratne

Page2of 2

Annex 2 Mechanism to be adopted by the CSE when granting a temporary suspension on minimum Shareholders’ Fund Requirement to a Stockbroker Firm:

1. The Stockbroker Firm shall submit a written request to the CSE for the suspension of the
   enforcement action applicable for non-compliance with the minimum Shareholders’ Fund Requirement.

2. The CSE would take into consideration whether the Stockbroker Frim has become non-
   compliant prior to the effective date of the Directive or during the period on which the Directive is effective.

3. The Stockbroker Firm requesting for the temporary suspension shall be required to carry
   out an assessment on the following factors and forward the same to the CSE along with the written request:  Utilization of all possible avenues to comply with the minimum shareholders’ Fund The Stockbroker Firm shall assess whether the Firm has considered all possible avenues to comply with the requirement. The Stockbroker Firm should demonstrate that the Firm has already considered all possible steps to comply with the requirement along with evidence to support the assessment.  Stockbroker Firm’s ability to comply with the requirement by the end of the period set out in the SEC Directive In respect of a Stockbroker Firm which is non-compliant as at the date of the SEC Directive, the balance enforcement actions set out in Rule 5.2.3 (b) and Rule 5.5.2 of the CSE Stockbroker Rules will be imposed with effect from 01 December st

4. A Stockbroker Firm, which was compliant with the said requirement as at
   the date of the SEC Directive but becomes non-compliant thereafter up to 30 th November 2019 will be required to comply with the said requirement by 01 st January 2020. In this regard, the Stockbroker Firm shall assess its ability to comply with the requirement by such date, including the shareholders’ ability to infuse fresh capital to the Stockbroker Firm. Accordingly, the Stockbroker Firm shall be required to submit a confirmation to the CSE on the ability to comply with the minimum Shareholders’ Fund Requirement w.e.f. 01 December 2019. st  Reason for non-compliance The Stockbroker Firm shall assess the reason for the non-compliance with the minimum Shareholders’ Fund requirement based on the past financial position of the Firm. Upon assessing same, the Stockbroker Firm shall be required to forward to the CSE its findings on the reason for the non-compliance with the minimum Shareholders’ Fund requirement.

5. The CSE Secretariat will take into consideration the assessment submitted by the
   Stockbroker Firm, along with the written request, and decide to grant approval, on a case by case basis.

6. Communication of the decision of the CSE Secretariat to the relevant Stockbroker Firm in
   writing.

7. In the event the request of the Stockbroker Firm to suspend the enforcement action for
   non-compliance is approved by the CSE, the Stockbroker Firm shall be required to submit a time bound capital augmentation plan to the CSE.