This article has been written by Arpita Tripathy, pursuing BA LL.B ( Business Honours) in KIIT School of Law. This is an exhaustive article which deals with bodies regulating the securities market in different countries.
A company cannot widen up its business without sufficient funds. The need for funds which is required for companies growth is fulfilled by issuing shares of the company in the market which is bought by investors. This issuance of shares is an option to increase the funds of the company and in return, the investors will receive profit proportional to the money they invest.
The buying and selling of shares take place in the security market. These markets have to be regulated because it has been seen time and again that without proper rules and regulations, the security market might be subject to a lot of frauds like insider trading.
Before 1992, the security market in India saw a lot of frauds. The stockbrokers manipulated the markets for their own benefits. Insider trading, which means bringing confidential information to public knowledge which might affect the price of the stocks, was also not illegal and brokers misused it. The trading was done on the floor of the Bombay Stock Exchange. There was chaos on the trading floor on the opening bell. The Harshad Mehta Scam, 1992 shook the entire economy with it’s Rs. 500 crore scam. Loopholes in the entire security market were identified.
Security and Exchange Board of India
The Security and Exchange Board of India was not a statutory body before 1992. But when the loopholes of the security market started becoming evident after the 1992 scam, the SEBI became a statutory body with powers. It ended the monopoly and manipulation of the stockbrokers in the market. SEBI was constituted as a statutory body under the Security and Exchange Board of India Act, 1992.
SEBI ensures that the investors are protected from any corporate fraud. For making sure that the investors are not defrauded due to lack of knowledge, investor’s education has also been taken care of. On the website of SEBI, there is material for the laymen to study and understand the capital market. Further, SCORES has been launched, which is an online platform to register your complaint.
SEBI regulates the security market and has all three, quasi-legislative, quasi-judicial and quasi-executive power regarding the security market. SEBI in pursuant to its legislative powers and its objective to protect the investors it has enacted several legislations. SEBI has enacted a total of 50 regulations which include SEBI Merchant Bankers Regulations, SEBI Underwriters Regulations, SEBI Stock Broker Regulations, SEBI Insider Trading Regulations, SEBI Underwriting Regulations, SEBI Investor Protection Regulations, SEBI Intermediaries Regulations, SEBI Foreign Portfolio Investment Regulations, etc.
For transparency and proper justice, SEBI which has appropriate knowledge about the capital market has been conferred with quasi-judicial power. It can pass orders like a judicial decision. This order can be passed for any unethical practice. The order has to be approved by the Judicial Magistrate.
SEBI’s quasi-executive powers extend to inspecting the books of accounts of an organization when there is a breach of regulations. It makes sure that the regulations enacted by the Security Exchange Board of India are being duly implemented.
The United States of America
The security market of the United States of America is governed by the U.S Securities and Exchange Commission. Prior to the Commission, the rules and regulations relating to the security market and its enforcement was ensured by the state legislature. These laws by the states were termed as ‘blue sky laws’. The blue sky laws are those state made laws that deal with laws of the security market and prevention of frauds in the market. But these laws could not effectively stand for the cause for which they were formulated and the frauds went on. The ineffectiveness of the laws and the infamous stock market crash of 1929, triggered the formation of the U.S Securities and Exchange Commission (SEC).
The U.S Security and Exchange Board Commission (SEC)
The SEC was constituted in 1934 having five different divisions or departments with its headquarters at Washington DC. The SEC has 11 offices in different parts of the United States of America. The SEC was constituted in accordance with the Securities Act, 1933. The Act was formulated by the Federal Trade Commission chaired by Huston Thompson. For the enactment of the SEC, the Commission also made sure that young lawyers having adequate knowledge of the field have also been included. After the enactment of the statute in 1933, until the formation of the Security and Exchange Board Commission, the Federal Trade Commission enforced the statute.
The Security Exchange Commission is an independent Government agency whose ultimate agenda was to magnify the public’s confidence which vanished after the stock market crash on the security market. The three main goals of the commission were to bring transparency, integrity, and fairness in the system, protect the investors, and to stop corporate frauds. Insider trading was strictly banned. Rules and regulations were formed for the registration of stocks, the deadline, the method of trading. New York Stock Exchange which was based on the concept of physical trading on the trading floor, Municipal Security Rulemaking Board, and NASDAQ Stock Exchange which is an online trading system were recognized as stock exchanges.
SEC acts as a legislative body for the security market and amends, enacts, or adds new laws for the better handling of the security market. SEC also looks after the intermediaries of the capital market. If at any point of time, the Security and Exchange Board Commission suspects that there has been any kind of fraud then it can recommend the same to federal investigation. It not only recommends the cases to the federal investigation but also provides with any information to the federal investigations. This ensures that proper enforcement takes place. The Commission also makes sure that the security regulations in the country and all the States are being coordinated properly. SEC provides the investors with appropriate information for making wise investigation decisions.
The Security and Exchange Commission has been constituted in a way that it does not tend to favour one party and discriminate against another, in other words, the SEC is non-partisan. Not more than 3 commissioners can be appointed from the same party. The SEC is composed of a total five commissioners who are elected by the President. Among the five commissioners, one of them is nominated as the chairman of the Commission by the President. The Commissioners are appointed for a term period of 5 years.
The security market of Australia is governed by the Australian Securities and Investment Commission. The ASIC was formed later on July 1 1998, after it started taking up consumer protection regarding the pension plans which are formulated for the employees and insurance policies. The ASIC was earlier known and worked as Australian Securities Commission which was constituted in 1991 in pursuance of the Australian Security Commission Act, 1989. The Commission is located in all the capital cities of Australia. The ASIC regulates the financial market which includes stocks, debentures, insurance, superannuation.
Australian Securities and Investment Commission
The Australian Securities and Investment Commission was formed with an aim to bring fairness and transparency to the security market. The protection of investors is one of the major agendas of the Commission. It ensures that the investors are not defrauded and attempts to instill confidence in the investors and make the security market more efficient and smooth. It has a target to constantly improve the financial market with innovative developments. The procedural requirements have also been trimmed down by the AISC. Consumer protection is also taken up by the AISC. The ASIC also focuses on how companies are being operated and regulated, which is also called corporate governance.
The Australian Securities and Investment Commission has been vested with legislative power to manage, efficiently, and smoothly run the financial market. It has the regulatory power to manage the financial market and it can also provide relief from any legislation. The ASIC also has investigative powers when it suspects a breach of some regulation that might affect the financial market. It has the power to prosecute the accused, ask them to pay penalties and it can also further ban activities that are harmful to the market. Licenses are granted and financial service providers are registered by the ASIC. When there is a breach of the regulatory law then the ASIC can refer the matter to the Director of Public Prosecutor.
Australian Security Exchange Limited (ASX)
The Australian Security Exchange Limited is the major security exchange market of Australia. The ASX is involved in the trading, clearance, settlement of equity, debentures, commodities, and derivatives. A memorandum of Understanding (MoU) was entered into between the Australian Securities and Investment Commission and the Australian Security Exchange Limited (ASX) on 28th October 2011. The MoU between them was regarding the smooth functioning of the security market. The MoU was entered into so that there can be coordination between the ASIC and ASX, the MoU does not create any new obligations or does not affect the existing ones.
If at any point of time the ASX suspects a breach of any regulation then it has to give ASIC a notice regarding the same as soon as possible. The ASIC will then review the matter and would inform and suggest ASX if it should take further action or not.
Unlike other countries, Canada does not have a security market regulator at the Central level. There are 13 provinces in Canada. In Canada therefore, there are 13 different provincial and territorial regulators of the capital market.
Canadian Securities Administrators (CSA)
There are different provincial security market regulators in Canada and Canadian Securities Administrator is the umbrella regulator with an aim to protect the investors from fraud and make sure that the security market runs smoothly. The provincial security market regulators handle the investors’ complaints and work upon them. It is also considered a more convenient method because the provincial regulators are nearer than the Central ones. The enforcement of the regulations is also left on the provincial security market regulator.
CSA also maintains the market’s integrity by coordinating between different security market authorities of all the provinces. The CSA handles operations that relate to a foreign country and Canada. It also looks after the disclosures to be made in the security market. The CSA convenes meetings for all the provincial security markets. In the meeting, all the provincial security markets contribute innovative ideas for better security market regulation. The CSA takes up these ideas which help in formulating rules and regulations. The rules and regulations are kept similar for smooth functioning and to avoid overlapping of the laws.
An investor can enter the market and participate in it from any territory. To facilitate this, the CSA has developed a method of passport system, according to which anyone can participate in the market from anywhere in the country. The CSA has taken a step forward for the investors who are new to the market. Investor education policies have been taken up by the CSA. For the ease of the investors, all the material for the investors has been uploaded on the official website of the CSA. The materials cover all the important concepts of the market to facilitate the investors’ wise decision. Canadian Investor Protection fund has been formulated which will ensure that the property of the investor is being held by a member firm, if the firm suffers through insolvency. The CIPF attempts to reduce the loss to be incurred by the investor. The CSA is also attempting to provide investors with a fair and transparent security market and to prevent market manipulation and frauds.
The structure of CSA was changed in 2003 to adopt a new and effective structure. The CSA works through meetings, calls, and conferences. The chairman of the CSA calls for the meeting and the meeting is held in different places each time. The meeting occurs every quarter of the year. The chairperson and the vice-chairman is appointed by the members for a term period of 2 years. The CSA has been structured to have a permanent secretariat which was established in 2004. The CSA has three different committees, Policy Coordination Committee, CSA IT Systems Office, and CSA Standing and Project Committee.
The security market is a very important element for the prosperity and growth of businesses in a country. The security market also affects the investors and the economy as a whole. It is very important to regulate these markets and protect investors from fraud. An efficient capital market regulator would help the businesses to prosper and would also positively impact the economy.
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