Micro managing capital markets?

The Securities and Exchange Commission of Pakistan (SECP) issued a circular on April 13th 2015 directing the stock exchanges, National Clearing Company of Pakistan (NCCL) and Central Depository Company of Pakistan (CDC) regarding the implementation of its earlier direction that provides for Mandatory Certification from a specified Institute of Capital Management (ICM) for all personnel working with brokerage houses of capital markets, NCCL and CDC.

The circular directs all existing professionals and other employees of the brokerage houses who are engaged in the activities related to securities shall obtain Pakistan Markets and Regulation programme (PMR) and Fundamentals of Capital Markets (FCM) certifications currently being offered by the newly-established Institute of Capital Market (ICM) within the next 18 months.

The circular is applicable to all sales and marketing staff, those interfacing and advising clients to buy, sell or hold listed and traded securities, maintain customers’ relations within the brokerage houses and assist in clients opening and updating accounts by completing “Know Your Client” formalities. The research staff, if any of the brokerage houses has also been included in this category. Furthermore, it is also applicable to the junior staff that is involved in trading, receiving and executing customers orders, accounting and back office workers along with the risk assessors. It directs that the circular be meticulously followed in its letter and spirit.

In summary, the circular mentions a comprehensive list of employees that must obtain a particular certification from a particular Institution that presumably has been formed and supported by (SECP). The legal implication of this direction is being under discussion those who are affected. SECP is a statutory body that derives its powers from the Securities and Exchange Commission of Pakistan Act 1997. Part VI, section 20(4) deals with these powers. It includes Para (h) that deals with “promoting investors’ education and training of intermediaries of securities markets.” SECP must have taken refuge under this Para (h) for the issuance of this circular. Therefore, this section seems relevant for our discussion.

If Para (h) is read in line with other paras in the same section carefully that defines the duties of the Commission for the “promotion of investors education and training of intermediaries of the securities markets.” It seems more likely that the Commission was given this task to regulate this area so that it directs the brokerage houses to ensure that their staff is competent and trained enough to perform. SECP is a regulator and its role is formulation of rules and regulations for the capital markets. SECP’s role in the promotion of investors’ education and training should also be seen in the same context so that there is uniformity of standards of training.

SECP may suggest rules and Regulation under Para (h) or for non compliance or substandard quality of training but SECP cannot take the role to micro manage this function by taking over an institution and making it mandatory for others to get the specific certification. The educational or professional requirements of the staff, their training and most importantly honesty and integrity of the employees remain the primary responsibility of the owners of the brokerage houses and SECP does not have any legal authority to take over these functions.

If the present circular is implemented meticulously in letter and spirit as desired by SECP, It means that SECP will only accept one type of certification from a particular designated institute. There will be one nominated certification provider in the country and that the obtainment of this certification is mandatory irrespective that the person involved is already an educated and qualified person from renowned institutions within and outside Pakistan.

If an employee is a qualified professional, ie, ACA, CIMA or ACCA or MBA, he does not need this elementary certification because he is a better qualified professional and his education and training is recognised worldwide and includes much important topics relating to investment analysis and techniques than the elementary certification that is being suggested as mandatory for him.

Interestingly, the institute that has been nominated by SECP for this certification has not been established through any legislative or statutory structure and is not even recognised by the Higher Education Commission of Pakistan (HEC). It may be argued if SECP has a legal authority to establish and sponsor an institution within its current powers. In the absence of such specific powers under section 20 (4) of the 1997 Act, it seems that SECP’s direction may be beyond any lawful authority, or based upon unreasonableness, which may be challenged in a court of law.

Any act may be judicially reviewable for ultra vires in a narrow or broad sense. (Wednesbury case for unreasonableness or bad faith) Narrow ultra vires applies if an administrator did not have the substantive power to make a decision or it was wrought with procedural defects. Both doctrines may entitle a claimant to challenge the directions and there is abundant case law on this issue that supports this point of view.

There is a possibility that the current circular as it stands now seems to be anti competitive in nature and may violate sections 3 and/or 4 of the Competition Law of Pakistan Act 2010.

Section 3 prohibits the abuse of a dominant position that prevents, restricts, reduces or distorts competition. Prima facie, it seems likely that it would be an uphill task for SECP to justify its directions by appointing only one Institution in the country to issue a specific certification and that too as a mandatory requirement for all. This act may tantamount to placing the Institute (ICM) in a dominant position that prevents competition among the course providers.

Similarly, section 4 of the said Act prohibits undertakings or associations from entering into any agreement or making any decision in respect of the production, supply, distribution, acquisition or control of goods or the provision of services, which have the object or effect of preventing, restricting, reducing, or distorting competition within the relevant market. The way SECP has intended to achieve its objective through a single certification provider and mandatory provisions, SECP may face a serious difficulty in proving that its latest circular does not violate section 4 of the said Act also.

It would have been easier to justify a non-anticompetitive behaviour, had there been other certification providers recognised for this purpose and a well-thought exemption policy would have been in place to bypass the mandatory requirement of obtaining certification from the specific Institute (ICM) for skilled professionals. This could have avoided the applicability of section 3 and/or 4 of Competition Act 2010

In case, SECP is desirous to improve governance of capital markets, there is a need to streamline transparent system to appoint nominated directors on the Boards of exchanges and that the conduct of the nominated directors meets the required professional standards. They are not involved in shares trading and do not sit on any other company’s board during their terms of office.

The personnel of the three stock exchanges are qualified enough to accomplish their jobs as there is lot of misunderstanding between SECP staff and stock exchanges in the areas of interpreting rules that creates problems for the intermediaries. It should be ensured that the decision makers who invest billions of rupees of public money into capital markets are well versed with capital markets. Governance of exchanges will be improved substantially if these are demutualized sooner.

(The writer is an LLM in Commercial Law, LLB Hons from Northumbria University UK, fellow member of Chartered Institute of Management Accountants UK, fellow member of Chartered Global Management Accountants UK)