THE IMPLICATIONS OF THE AMENDMENTS TO THE

SECURITIES ACT

FOR THE SECURITIES INDUSTRY

INGRID PUSEY

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Salutation

Chairman of the Board of Commissioners of the FSC, other members of the Board, Colleagues, Licensees, Media, Ladies and

Gentlemen, I am here to present on the topic

“The Implications of the Amendments to the Securities Act on the securities industry”.

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Investor Protection

The overarching mandate of the Financial Services Commission (FSC) is investor protection. However, in relation to the Securities Industry the FSC’s mandate is twofold- (i) To protect investors from unfair, improper, or

fraudulent practices; and (ii) To foster fair and efficient capital markets and

confidence in those markets. .

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The FSC’s regulation of the securities industry is

meant to achieve those broad objectives. The

recent amendments to the Securities Act seek to

modernize the regulatory framework for the

securities industry in order to enable the FSC to

achieve those goals.

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Protecting investors from unfair, improper or fraudulent practices

How did the amendments treat with this issue- • Firstly, by prescribing clear prohibitions against ponzi

schemes, pyramid schemes and other unlawful operations;

• Next by enhancing the investigative and enforcement powers of the FSC; and

• Finally, by making clear the remedial actions that are available to the FSC where the law is flouted. Some of the remedies may be applied for the benefit of investors who have suffered losses or have otherwise been adversely affected by the unfair or fraudulent practices of operators in the market.

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Ponzi schemes and other unlawful operations

• In the last decade or so, Jamaica witnessed the proliferation of ponzi schemes operating in the island.

• Ponzi schemes are by their very nature fraudulent: “robbing Peter to pay Paul”.

• The are considered to be insolvent from inception since they usually have no genuine capital base.

• They may be regulated or unregulated. • Such schemes have limited lifespans and usually their

demise usually is accompanies by losses to the large base of their investors.

• It has been estimated that two of the major ponzi schemes in Jamaica accounted for over $35 Billion from over 50,000 investors.

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Losses

• You can no doubt imagine the scale of losses suffered by investors as a whole, when the schemes failed.

• The cycle of establishment, proliferation and eventual crash of fraudulent investment schemes can have significant socioeconomic effect both at the levels of the household and at the level of the aggregate economy .

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New Provisions in the Law

• The amendments to the Securities Act provide clear definitions of the terms “pyramid” and “ponzi” schemes. They also prohibit the operation of those schemes.

• In general, ponzi schemes derive their income from investors’ contributions rather than by genuine profits (See definition in the New Section 17B)

• The pyramid selling schemes that are prohibited under Act are schemes which sell financial products (in this case securities) in circumstances where a promoter or operator of the scheme, or an investor in the scheme induces or attempts to induce other persons to make payments into the scheme on the promise that they will receive payments from the introduction of new members or from other investors in the scheme .

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PROVISIONS IN THE LAW

• It is noted that the original anti-fraud provisions under the Securities Act, in particular section 49, were sufficiently broad to be used to prosecute persons who operated such schemes.

• However, given the novelty of the issue and the absence of local judicial precedent on the subject, specific definitions of “ponzi schemes” and “pyramid schemes” were placed in the Securities Act to provide clarity for the judiciary, prosecutors and other such persons .

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Who will be liable? (New section 17B)

• Persons who established the schemes

• Operators of the schemes

• Persons who promote the schemes

“ persons who knowingly invite other persons to become investors in the scheme”

• This would include persons operating feeder

funds and perhaps investors who deliberately

promote the schemes.

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Section 17D

17D. - (1) No licensee, or person registered under section 10 ( for example a dealer's representative) shall, in the course of business to which the licence or

registration pertains, effect any transaction referred to in subsection (2) ( e.g transactions with ponzi schemes, pyramid schemes, unregistered or unlicensed persons) knowingly or without exercising reasonable care to ascertain whether the transaction is a transaction referred to in subsection (2).

• This provision makes licensed dealers libale for doing business with unlawful schemes.

• This approach is not novel, and it is related to your anti-money laundering responsibilities (eg. customer due diligence etc)

• It is also an offence for dealers to trade in unregistered securities

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NCB v OLINT

The Privy Council validated NCB’s decision to

close Olint’s accounts . The lower court was of

the view that regulatory environment made it

necessary for the bank to act in the manner

that it did as it had to comply with the

Anti- Money Laundering Guidelines of the Bank

of Jamaica.

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Anecdote

One of the problems faced by the FSC in combating the proliferation of ponzi schemes was that a number of securities dealers continued to conduct business with such schemes in spite of notices issued to the public by the FSC in relation to those schemes.

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Ill-effects of relationships with ponzi schemes

Dealers’ business relationships with unauthorized persons could compromise the health and soundness of the dealers’ own business, particularly in circumstances where they depend on such schemes to generate returns.

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IMF Publication- Ponzi Schemes in the Caribbean

Ana Carvajal, Hunter Monroe, Catherine Pattillo, and Brian Wynter

IMPACT ON THE FINANCIAL MARKETS AND INSTITUTIONS

• Undermining confidence in financial markets;

• Loss of investor confidence

• Undermines the integrity of financial markets;

• Indignation by overseas counterparts

• Diverting deposits and investments from legitimate enterprises

• Legal and reputational risk of persons who conduct business with such schemes

• Money Laundering

HOW WOULD THIS AFFECT YOUR BUSINESS?

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IMPLICATIONS

• Operating a ponzi scheme may attract a penalty of up to 10 years imprisonment or

a fine.

• The new law requires greater diligence on the part of securities dealers.

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SCOPE OF ANTI-FRAUD PROVISION

It is useful to mention that the anti-fraud provisions of the Securities Act will now apply to a wider range of businesses and products

including stocks and shares in private companies and certificates of deposits offered by a broad spectrum of financial institutions.

Those institutions will not be required to be licensed or regulated by the FSC, but the FSC will have to power to investigate fraud in relation to the products that they offer which fall within the rubric of the Act.

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Investment Clubs

During the height of the operation of unregulated financial schemes, many of the operators of the schemes claimed that they were investment clubs. The operators clamoured for special treatment under the law. The amended Act now provides allows genuine, non-fraudulent investment clubs that do not solicit membership from the public at large to be subject to regulatory requirements that were less rigorous than before. In order to qualify for such treatment, the investment clubs must satisfy certain requirements. They include but are not limited to the following: • A limit of 20 members. • Equal contributions by all members at agreed periodic intervals. • A limit on the maximum annual contribution by any member ( to be prescribed). • Equal participation and voting rights for all members; • Prohibition on borrowing from the public; and • Restrictions on remuneration to designated officers of the club and so forth.

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INVESTMENT CLUBS

The amendments will not capture the traditional “partner” schemes in circumstance where persons get only what they put in, and where there are no promised interest payments based on the management of the funds and the investment of the funds . They will also not capture enterprises that solely involve the sale of a genuine product.

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Enhanced investigative and enforcement powers of the FSC

• The amendments to the Securities Act will enhance the investigative and enforcement powers of the FSC.

• This is also geared towards investor protection but also has other benefits

• It is said that the question of whether or not securities regulation is beneficial to the economy depends on how regulation is

designed, implemented and enforced (this is based on a study conducted at the Columbia University)

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Enhanced investigative and enforcement powers of the FSC

• The studies suggests that only one legal variable—the level of enforcement— distinguishes jurisdictions in a manner that can explain national differences in the cost of capital The Role of Securities Regulation in the Development of the Thai Stock Market – John Fagan

www.thailawforum.com/articles/faganstock.html‎ • The studies also indicate that investors will seek

higher returns where they perceive greater risks in the market. Where the market is looking more robust, investors may be tempted to place a lower price on this risk thus reducing the cost of capital.

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Enhanced investigative and enforcement powers of the FSC

The amendments will also–

• strengthen the FSC’s powers to obtain information from licensees and registrants and other persons; and

• Broadens the range of circumstances under which the FSC may obtain search warrants

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ISPs and TSPs

• Consequential amendments were made to the Interception of Communications Act providing a mechanism for the Commission to obtain data on telephone calls. The data will include the time and duration of calls, the names of individuals involved and so forth. This power is necessary to investigate offences such as insider trading.

• It is to be noted that the Commission will not be empowered to intercept calls.

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Group Information

• The FSC will be empowered to access group records where a licensee is a part of the group.

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Amendments cont.

The new provisions will: (i) strengthen the powers of the FSC to compel records, under section 4 of the Securities Act; (ii) broaden the authority of the FSC to obtain and execute search warrants; (iii) strengthen the authority of the FSC to enter the premises where an applicant for licensing/registration or an existing licensee does business; (iv)confer on the FSC wider powers to issue directions to that persons that it regulates for the purpose of securing compliance with the Act. (v) make clear the authority of the FSC to make and take copies of documents; (vi) provide greater protection for providers of information (vii) clarify the effect of a cease and desist order.

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CONTEMPT OF COURT

Any person who fails to comply with a summons, call , direction or notice of the FSC requesting information necessary for the FSC to perform its functions under the Act, commits an offence . In addition, where ordered by the court ordered to comply with such requests, a persons who fails to so do will be punished for contempt of court.

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Cooperation with overseas regulators

• The information obtained by the FSC pursuant to an investigation, may be shared with overseas securities regulators for the purpose of ensuring compliance with the securities laws administered by the overseas regulator. This power may be exercised by FSC, whether or not the FSC has an independent interest in the investigation.

• Given the trans-border nature of crimes, it is necessary for regulators to cooperate with their overseas counterparts in combatting financial crimes.

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REMEDIAL ACTIONS

The new remedies available to the FSC by virtue of the amendments to the Act will –

• Prevent an over-reliance on criminal proceedings

• Facilitate the prompt and speedy disposal of matters

• In some cases, compensate investors for losses suffered.

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Other Remedial Orders

Restitution and compensation Orders The amendments introduce restitution and

compensation orders in circumstances where – (a)profits have accrued to a person as a result of the

contravention of the Act or any regulations made under the Act;

(b) investors have suffered losses or have otherwise been adversely affected as a result of a contravention.

Sums paid in compliance with the Orders are to be

distributed to investors who suffered losses .

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Other actions- punitive / deterrent

• The new section 68(3B) of the Act will allow the FSC to settle matters in lieu of prosecution. Settlement agreements may provide for the payment of a monetary penalty by the person affected.

• Civil monetary penalties may be ordered by the Courts.

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Remedies for breaches of the Act

Pecuniary Penalty Order The court may make a pecuniary penalty order of one million dollars in the case of an individual and five million dollars in the case of a corporation. Restraint Order The court may make a restraint order preventing the disposal of assets. Injunction The Commission may seek from the Court an injunction restraining a person from continuing a contravention of the Act.

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Stock Exchange Compensation Fund

An amendment to Section 30 was made to allow monies from the Compensation Fund to be used for the payment of premiums in respect of insurance against potential liabilities which are chargeable to the Fund. The Amendment makes it clear that the resources of the Fund may only be applied to losses resulting from trading on the Jamaica Stock Exchange.

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Ability to make public statements

If one where to look on the websites of the SEC and the securities regulators of the UK and Canada, one would notice that all actions taken by the regulators are published on their website. The FSC should have the ability to do likewise.

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Public Statements in the interest of the public

The FSC now has the discretion to make such public

statements as it deems fit in relation to-

• Any breach committed by a licensee or registrant;

• Any enforcement action taken by the FSC as a result of the breach;

• The winding-up or the bankruptcy of the licensee and so forth.

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Maintaining organized, evenhanded and proficient securities markets.

Greater oversight of the markets by the FSC

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Greater oversight of market

The amendments will- • Provide Greater oversight of issuers • Provide access to group records • Ensure that new products are brought under the

regulatory net ( e.g derivatives and futures contracts ) • Allow the FSC to respond more readily to changes in

the market by increasing their regulation making powers

• Facilitate a modernized approach to the regulation of collective investment schemes (CIS). The definition of CIS in the Act improves on the definition of “mutual fund”.

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Issuers

While it is recognized that issuers who do not directly interface with the public need not be regulated in the same way as dealers, it is felt that the Commission should have the powers to access information concerning their affairs without dependence on a stock exchange.

The Securities Act will therefore prescribe a new regulatory framework for issuers. The new regulatory framework will – (a) Regulate secondary trades that for the first time, will be made available to the public. (b) Set out the bases for refusal of registration of an issuer. Such bases will include circumstances

where the Commission has reason to believe that the issuer had previously breached the securities law or committed an act of fraud or misrepresentation.

(c) Require the issuer to maintain proper records of its securities and of its operations. (d) Require the issuer to keep proper accounts in accordance with the generally accepted

accounting principles prevailing in Jamaica at the time. (e) Empower the Commission to access the records of the issuer during normal business hours

and so forth. (f) Give an issuer expanded powers to obtain, on its own initiative or at the request of the

Commission, information on the beneficial owners of the securities ithas outstanding. The provision will prescribes a seven year record keeping timeframe with respect to such information

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Continuing education

As market products and services develop both locally and internationally, and as regulatory requirements change to keep pace with such developments , there needs to be a mechanism to ensure that persons who provide services in the securities industry are kept abreast of changing practices and standards. It is to be mandatory for persons in the securities industry who offer services to members of the public to receive continuing training.

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Barring Professionals from practicing before the Commission

The FSC is now empowered to refuse to allow certain professionals such as

accountants, auditors and attorneys-at-law from dealing with any matter that is before

the FSC. These powers may be exercised where the person –

• has contravened a provision of the Act or regulations made under the Act.

• has been convicted of an offence involving fraud or dishonesty; or

• has made a false statement, or an omission, in respect of any material fact in any application or return made to the Commission.

The effect of this provision is that it will allow the FSC to refuse to accept or consider any statement,

opinion or valuation produced by such professional for the purpose of fulfilling any requirement or

obligation by a licensee or registrant under the Act.

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Termination and Winding8up

In cases of winding –up

• The Act now requires that the FSC shall become an interested party in the winding-up proceedings of a licensee; and

• A liquidator in the winding –up proceedings shall give to the FSC such information about the affairs of the company as the FSC may require from time to time.

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Termination and Winding-up

• All dealers, investment advisers and other licensees must notify the FSC and the public where it intends to voluntarily wind-up the company.

• All dealers and investment advisers are now required to forthwith notify the FSC of the termination of the employment of any of their representatives.

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CONCLUSION

In summation, the amendments to the Act –

• create a more robust and modernized regulatory framework for the securities industry

• Improve the reputation of our local securities market

• Inspire investor confidence

• Require the dealers to conduct due diligence on their clients and service providers

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CONCLUSION

They will also foster-

• Acceptance by our international counterparts

• More efficient capital markets

• Position the market as a one to invest in

• Greater protection for investors

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Conclusion

These new powers will not only serve to protect

investors but will also inspire confidence in the

FSC’s ability to regulate the market.

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The end

Thank you!

DISCLAIMER

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