Fund managers are lamenting that their businesses are taking a big hit with the strict guidelines of the Securities and Exchange Commission (SEC), but the regulator insists that it’s just a'cleaning up' exercise.
Market sources said that under Central Bank pressure on the back of the volatile capital market situation together with the infamous Sakvithi Ranasinghe case, the SEC has woken up to regulating fund managers.
However Channa de Silva, Director General, SEC told The Sunday Times FT that the SEC is looking into fund managers to ensure there is no regulatory arbitrage between the Central Bank and SEC. Explaining this, he said, "Now some take the SEC licence for fund management, advertise it and conduct business which should be regulated under the Central Bank such as mobilising money. We will not allow this. Now we are cleaning up."
One market source said one of the strict rules the SEC has forced upon fund managers is to open accounts in a bank or a registered finance company for each client.
"But our customers are reluctant to open accounts like this. They say if they open different accounts to the ones which they already transact through, (they currently have one dedicated account for all their transactions to be rooted through) they are likely to be exposed to tax and that their details will be out to government authorities," he explained.
When asked whether fund managers are encouraging customers to 'hide' from the tax authorities, he said, "No, these monies that our customers invest with us are not their hardcore money. This is their disposable income. But if they keep to the SEC directions and open another account (in addition to the bulk accounts they have), they will be 'exposed' to government authorities such as the Inland Revenue. They feel given their experience with such authorities that it will be a 'hassle'."
However the SEC has another story to say. "Investment management rules have been formulated with international practices around the world. These rules need proper guidelines for investing with clients, they need to have investment agreements, there cannot be any pooling funds and assets and liabilities cannot accrue in the fund management companies. Also no guarantees such as returns (in interest terms) can be provided to the clients," Mr. De Silva said.
He explained that there is a need for a separate bank or custodian accounts with limited power of authority granted to operate such accounts to the fund managers.
He also pointed out that there can be instances where companies get registered as fund managers and in the pretext of doing this business, they could be mobilising money. “The SEC is making sure they strictly adhere to the Fund Manager rules," he noted.
The market source said that the SEC has called in several fund management firms and given them a warning to comply with some provisions. "There have been some fund managers who have been contravening some provisions and conditions under which the fund management licence has been granted to them," he explained.
"SEC has sent letters to all 32 fund managers," he said, adding that what SEC was doing all this time was renewing their licences once a year together with a yearly onsite examination. “Now within a short period SEC wants to see whether the companies are 'sound' due to Central Bank pressure,” he added, saying that the regulator has told SEC to 'watch out'.
Mr. De Silva said the SEC has made sure that the registered fund managers of the SEC will strictly comply with these regulations and the failure to do so will result in cancellation of the Fund Management Licence and directing the Central Bank to take the necessary steps.
There are three categories of 32 fund managers governed by the SEC Act sections 19 (A) and 53 unit Trust Managers (five), Individual Portfolio Managers (13) and Margin traders (14) come under these categories.