Financial Times

No whistle blowing at SEC - new DG

Palitha Gunawardena, the new Director General of the Securities and Exchange Commission, the financial markets watchdog, appears to have two sets of rules for 'whistle blowers' - those employees who, in the post-Enron corporate world, squeal about wrong doings in the organisations they work for, in the public interest.

While he wants to encourage greater disclosures and 'whistle blowers' in the companies the SEC regulates as part of an effort to improve transparency and corporate governance among listed firms, he does not say whether he would encourage such 'whistle blowers' in the SEC itself, implying that he may not be in favour of 'whistle blowers' at the commission. The SEC was rocked by an insider dealing scandal earlier this year involving its own chairman, Michael Mack, who was subsequently forced to resign. Several SEC Commissioners tried to defend Mack and block the investigation, giving rise to fears of a cover-up of the sort 'whistle blowing' is meant to expose. They even went to the unprecedented extent of getting an 'independent' opinion on the AG's advice that there were grounds for prosecution, prompting the AG to say the Commission had acted 'improperly'. Gunawardena's predecessor resigned over the scandal, alleging serious conflict of interest among these Commissioners. But Gunawardena doesn't seem to care that there may be people with conflicts of interest serving as Commissioners and refuses to discuss the issue. Following are excerpts of an e-mail interview with Gunawardena in which we had to repeatedly rephrase our questions in order to try to elicit an answer:

Can you describe how the wider powers given to the SEC in the recent amendments to the SEC Act could help your organisation do its work more effectively in future?

This amendment came into effect only relatively recently. The wide mandate given by the amendment is expected to facilitate more effective discharge of our functions. Inter alia several market intermediaries and unlisted securities of listed companies would now be regulated whilst the SEC is given relatively wider powers to discharge its mandate. Actual instances could be best narrated in due course.

Improve tranparency

What new measures are being considered to improve transparency and corporate governance among companies listed on the CSE?

It is proposed to encourage self-regulation and greater disclosures including world-class standards and practices that promote both market development and orderly conduct of the market. This has been identified internationally as a more effective regulatory practice than merit-based regulation.

It is proposed that the market participants be encouraged to have 'whistle blowers' in their companies and associations and to forewarn the participants of dangers of possible or impending violations of the legislation. This is intended to result in lesser need for periodic closer supervision.

We would implement subsidiary legislation/guidelines where necessary and proceed with decisive action if there is credible evidence that statutory provisions are transgressed.

You say that among the new measures being considered to improve transparency and corporate governance among listed firms is a move to encourage 'whistle blowers' in companies. Would you encourage 'whistle blowers' in the SEC itself, especially if there are attempts to block SEC investigations into market irregularities?

I would not want to respond on the basis of hypothesis. We intend giving reasoned decisions and having due processes. We will also comply with the recently published Public Enterprises Guidelines for Good Governance.

How do you interpret Section 42 (2) of the SEC Act that the director general shall be subject to the "general direction and control" of the Commission? To what extent can Commissioners get involved in investigations by the SEC Secretariat?

I do not see the necessity for an interpretation. The phrase is clear enough. In any event I am not the authority to interpret Statutes. This answers your follow up question as well, i.e. in the discharge of their (Commission's) Statutory mandate.

To what extent are the SEC Commissioners empowered to get involved in investigations by the SEC Secretariat under Section 42 (2) of the SEC Act?

As I stated before to the extent mandated by the Statute.

CSE investigation

What is the current status of the investigations into allegations of insider dealing in Aitken Spence shares by the former SEC chairman, Mr. Michael Mack, ex-directors of Aitken Spence Mr. Norman Gunewardene and Mr. G.R.M. de Mel, and some of their family members, particularly Mr. Ajit Gunawardene, former chairman of the Colombo Stock Exchange?

As these are pending Court cases I would refrain from commenting on connected issues whilst such circumstances prevail.

Why aren't you willing to let the investing public know the current status of the investigation into allegations of insider dealing against former SEC chairman Michael Mack, especially given this government's professed commitment to transparency and your own assertion that you wish to encourage transparency among the listed firms you regulate?

It is not a matter of my unwillingness. As I stated before this is a matter presently before Courts. Court proceedings are not confidential to the best of my knowledge. However, in principle, until such circumstances prevail I would refrain from commenting on any connected issues.

What is the current status of the investigation into allegations of insider dealing against former Colombo Stock Exchange chairman Ajit Gunewardene?

There is no court case involved here.

The issues here are connected to the cases now before Courts.

In the investigation into the transactions of Mr. Mack, the reluctance of some SEC Commissioners to act on the advice of the AG's Department and proceed with legal action gave rise to a perception in the market of a cover-up in this investigation. The actions of these Commissioners, which your predecessor Dr. Dayanath Jayasuriya himself described as "bizarre" in his letter of resignation of December 26, 2002, affected the credibility of the SEC. As the new SEC director general how do you intend restoring the organisation's credibility and give confidence to investors that your organisation acts impartially?

For the reasons stated earlier I would presently refrain from responding. It is unfortunate that there appears to be misconceived perceptions. I am confident that the misconceptions could be addressed in due course on the basis of action and facts.

Your predecessor, in his resignation letter, referred to a "very serious conflict of interest" on the part of four Commission members in dealing with the inquiry against Mr. Mack. What is the practice or policy with regard to the private business interests and share transactions of members of the SEC? How do such SEC commissioners prevent a conflict of interest between their private business activities and their role in and work for the SEC?

For the reasons stated earlier I would presently refrain from responding.

Conflict of interest

Most of these members referred to by your predecessor still serve on the Commission. Do you share your predecessor's opinion that they have a "conflict of interest" relating to an on-going investigation?

I would like to refrain from commenting on my predecessor's 'opinions'. I was appointed subsequent to the issues you highlight. I have to look forward and not behind.

Do you believe that "eminent personalities" should not be investigated by the SEC?

Investigations are based on alleged violations of Statute and credible evidence. I intend acting on the basis of the Statute. No one is above the law.

Do you believe SEC commissioners who publicly disagree with opinions given by the AG's Department on SEC investigations should continue to serve as Commissioners?

I do not recall such public disagreement. Don't we all anyway have differing opinions and or disagreements some time or another? What is important is reasoned decisions in the effective discharge of the Statutory mandate.

Can you describe the SEC's procedures relating to its inquiries into stock trading irregularities such as insider dealing especially with regard to the following: at what stage does the SEC seek an opinion from the Attorney General's Department in the course of an inquiry?

It is sought when such an opinion is deemed necessary.

Is the decision to seek the AG's Department's advice left to the discretion of the SEC Secretariat or is the approval of the Commissioners required beforehand?

One cannot act in watertight compartments. One has to take the situation on its merits.

What was the past practice in seeking the AG's Department's advice on SEC investigations? Was it left to the discretion of the SEC Secretariat or was the approval of the Commissioners required beforehand?

AG's Department advice has been sought when the need arose. Careful examination would have to be made of such instances to ascertain a consistent past practice.

What is the significance of an opinion from the AG's Department with regard to an SEC investigation? Is the SEC obliged to act on the AG's Department's advice? Does the SEC usually seek an independent opinion regarding its investigations after receiving the AG's Department's advice as was done in the case involving Mr. Mack? Will others under investigation be allowed the same privilege in future?

For the reasons stated earlier I would presently refrain from responding.

AG’s opinion

What is the significance of an opinion from the AG's Department with regard to an SEC investigation?

I am not the person who should pass judgement on AG's Department opinions, which are the opinions of the principle law officer of the State.

Is the SEC obliged to act on the AG's Department's advice?

Such advice in my view is meant to facilitate decision-making.

Does the SEC usually seek an independent opinion regarding its investigations after receiving the AG's Department's advice?

As I stated before I would refrain from commenting on matters connected to issues before courts while such circumstances prevail.

Can those under investigation by the SEC seek independent legal opinion about the advice of the AG's Department?

Any person has a right to seek legal opinion if he/she so wishes.

Second opinion

Did the SEC pay for this 'second opinion' or 'independent opinion' sought by some Commissioners in the case involving Mr. Mack?

For the reasons stated earlier I would presently refrain from responding.

Can SEC funds be used to pay for private legal advice or to obtain 'independent opinion' on SEC investigations?

If SEC decides to seek any service we would pay for such services.

What is the practice or policy with regard to the private business interests and share transactions of members of the SEC? How do such SEC commissioners prevent a conflict of interest between their private business activities and their role in and work for the SEC?

The members of the Commission and the staff are bound by ethics, which is meant to address such issues. For example as soon as I assumed duties as the Director General I made a declaration with regard to my interests.

What are the safeguards to ensure the independence of the SEC Secretariat in its investigations and to prevent interference in inquiries by SEC Commissioners as happened in the case of Mr. Mack's investigation where there was an attempt by some Commissioners to ignore the opinion of the AG's Department that there was enough evidence to proceed with legal action against Mr. Mack?

For the reasons stated earlier I would presently refrain from responding.

What are the safeguards available to ensure the independence of the SEC Secretariat in its investigations and to prevent interference in its inquiries by SEC Commissioners?

I have not come across such interference. The Commission and the Director General have Statutory mandates, which are related.

Why does the SEC usually compound offences and not prosecute offenders? This has given the investing public the impression that the SEC treats 'white-collar' criminals differently from 'blue-collar' ones. How do you respond to this perception?

Compounding is a discretion that SEC is statutorily provided for. Even during some judicial processes settlements are arrived at.

This is no different. Therefore there does not seem to be the in-equitability attributed to.

Why is the SEC reluctant to reveal information with regard to ongoing investigations? Doesn't the investing public have a right to know about such inquiries? If the law prevents the SEC from divulging such information, shouldn't the law be changed? Shouldn't the SEC be more transparent in the interest of generating more confidence among the investing public?

The way to maintain the confidence of all its stakeholders including the investing public is to discharge duties conferred on us by the Statute impartially and effectively. This includes giving reasoned decisions and expediting due processes to the extent feasible.

This would facilitate greater transparency as well. We have to act with responsibility and equity.