SEC: Regulator or manager of stock markets?
Thursday, 26 May 2011
Farjad Siddiqui and Md Mizanoor Rahman
The probe committee on the stock market scam reported that the Securities and Exchange Commission (SEC) is partly responsible for the recent debacle, as it created opportunities for vested quarters to make fortunes by indulging in illegal practices. The fundamental role of the commission is to ensure that the stock markets operate in a way that is fair to all investors. Unfortunately, the SEC completely failed to do that and ultimately the market crashed. The stock market crash began after having gained by about 80 per cent during the year 2010, in both the stock markets-Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE)-the share prices nose-dived, which sparked violent protests from the investors. After the recovery of 1996-crash, the market hibernated for a couple of years and finally investments in the stocks, mostly by the educated middle-class people, increased. They were finding ways out of the market in order to minimise their earlier losses. The government came under pressure to intervene to protect the hard earned money of the small investors from being lost due to the unusual crash of the stock market. As a regulator, one of the major roles that the SEC is supposed to play is to prevent insider trading. The practice is unfair because it allows insiders to make profits by exploiting information that is not available to the investors. So, the SEC is supposed to ensure that the markets will be fair by preventing insider trading. The SEC is an independent agency established in 1993 to enforce securities laws. The aim of this agency is primarily to oversee that all dealings are fair so that the investors are not cheated. The SEC does not ensure that investors will always make a profit from trading in the stock markets. It only ensures that they are provided with the right information. This includes financial information about the businesses carried out by companies, disclosure of share holdings and sale and purchase of shares. It also tries to see that there is no price manipulation by large traders, so that small retail investors are protected. But, before the market crash, price manipulation was very common in the DSE and CSE, as SEC surveillance was virtually inactive and the stock exchanges did not perform proactive role in this regard. The role of company director or any third-party should be examined in case of any unusual price hike. Sections 17 and 25 of the Securities and Exchange Commission Ordinance' 1969 clearly states imposition of financial penalty or jail terms in case of personal involvement in price manipulation in any particular share. The listing rules of stock exchange mentioned that if any company director is found involved in the price manipulation of that particular company share, the company can be de-listed from the bourses. The SEC's role is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation through supervision and inspection of securities firms, brokers, investment advisers and rating agencies. During the bubble formation, the SEC's role was of a manager of the stock markets, as it sometimes stopped transactions and restricted some of the companies to transact in the over-the-counter (OCT) market for petty reasons, and this broke the confidence of the inventors. One other primary responsibility of the SEC is to make sure that business practices are legal and transparent in terms of being accessible to the stockholders of a company as well as to the public. It monitors how businesses regulate themselves and how businesses conduct transactions. In their focusing on stock transactions, the SEC pays attention to any potential irregularities that might be happening in the purchasing and selling of stocks and seeks to expose anything that might be financially improper or seeking to make money at the cost of one over another. The SEC is most commonly associated with policing DSE and CSE. They make certain that trades that are transacted are done legally and monitor irregularities that may occur. It was believed that the SEC could police the stock markets and everything would be fine. The recent downturn led many people to question the effectiveness of SEC as a watchdog. It was found that the SEC rules are not strict enough to prevent dishonest behaviour. The probe committee also commented that the market manipulators acted unethically and not illegally. There are about 3.3 million investors, most of them from the middle class, who raised their fund mainly from family andor from friends, parents, and sale of personal belongings, as they found, during the bubble formation, investment in stock markets was a very profitable business. Now, the inventors who own stocks are waiting helplessly as share prices have dipped and continue to plummet for the last six months. The stock market crash, along with other factors, has already produced economic slowdown and the Finance Minister, AMA Muhith, said in a TV interview that he would be taking some corrective measures for protecting the inventors' money in the next budget. It means that the market crash issue has been one of the policy priorities of the government, as it has serious economic and social implications. In addition to economic and financial impacts, there are social and psychological effects on over three million people, mostly small and medium-scale retail investors, who have lost millions in the crash. Therefore, in Bangladesh the situation, after the crash, is such that the society has been negatively impacted by the market crash, which is likely to contribute to the negative growth in the economy. The finance ministry found that the SEC played the role of a manager instead of a regulator of the stock exchanges and the investigation committee recommended restructuring of the commission, as some of the officials were found involved in manipulating the stock prices. The ministry has meanwhile appointed a new chairman and two members of the commission. Let us wait and see how the SEC restores the confidence of the investors, as a regulator and not as a manager of the stock markets. Farjad Siddiqui is Research Analyst of the Mindspring Research (email: farjad@mindspringbd.com) and Md Mizanoor Rahman is Assistant Professor of Finance and Banking (email: mizan2006@yahoo.com) at the Bangladesh Open University
The probe committee on the stock market scam reported that the Securities and Exchange Commission (SEC) is partly responsible for the recent debacle, as it created opportunities for vested quarters to make fortunes by indulging in illegal practices. The fundamental role of the commission is to ensure that the stock markets operate in a way that is fair to all investors. Unfortunately, the SEC completely failed to do that and ultimately the market crashed. The stock market crash began after having gained by about 80 per cent during the year 2010, in both the stock markets-Dhaka Stock Exchange (DSE) and Chittagong Stock Exchange (CSE)-the share prices nose-dived, which sparked violent protests from the investors. After the recovery of 1996-crash, the market hibernated for a couple of years and finally investments in the stocks, mostly by the educated middle-class people, increased. They were finding ways out of the market in order to minimise their earlier losses. The government came under pressure to intervene to protect the hard earned money of the small investors from being lost due to the unusual crash of the stock market. As a regulator, one of the major roles that the SEC is supposed to play is to prevent insider trading. The practice is unfair because it allows insiders to make profits by exploiting information that is not available to the investors. So, the SEC is supposed to ensure that the markets will be fair by preventing insider trading. The SEC is an independent agency established in 1993 to enforce securities laws. The aim of this agency is primarily to oversee that all dealings are fair so that the investors are not cheated. The SEC does not ensure that investors will always make a profit from trading in the stock markets. It only ensures that they are provided with the right information. This includes financial information about the businesses carried out by companies, disclosure of share holdings and sale and purchase of shares. It also tries to see that there is no price manipulation by large traders, so that small retail investors are protected. But, before the market crash, price manipulation was very common in the DSE and CSE, as SEC surveillance was virtually inactive and the stock exchanges did not perform proactive role in this regard. The role of company director or any third-party should be examined in case of any unusual price hike. Sections 17 and 25 of the Securities and Exchange Commission Ordinance' 1969 clearly states imposition of financial penalty or jail terms in case of personal involvement in price manipulation in any particular share. The listing rules of stock exchange mentioned that if any company director is found involved in the price manipulation of that particular company share, the company can be de-listed from the bourses. The SEC's role is to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation through supervision and inspection of securities firms, brokers, investment advisers and rating agencies. During the bubble formation, the SEC's role was of a manager of the stock markets, as it sometimes stopped transactions and restricted some of the companies to transact in the over-the-counter (OCT) market for petty reasons, and this broke the confidence of the inventors. One other primary responsibility of the SEC is to make sure that business practices are legal and transparent in terms of being accessible to the stockholders of a company as well as to the public. It monitors how businesses regulate themselves and how businesses conduct transactions. In their focusing on stock transactions, the SEC pays attention to any potential irregularities that might be happening in the purchasing and selling of stocks and seeks to expose anything that might be financially improper or seeking to make money at the cost of one over another. The SEC is most commonly associated with policing DSE and CSE. They make certain that trades that are transacted are done legally and monitor irregularities that may occur. It was believed that the SEC could police the stock markets and everything would be fine. The recent downturn led many people to question the effectiveness of SEC as a watchdog. It was found that the SEC rules are not strict enough to prevent dishonest behaviour. The probe committee also commented that the market manipulators acted unethically and not illegally. There are about 3.3 million investors, most of them from the middle class, who raised their fund mainly from family andor from friends, parents, and sale of personal belongings, as they found, during the bubble formation, investment in stock markets was a very profitable business. Now, the inventors who own stocks are waiting helplessly as share prices have dipped and continue to plummet for the last six months. The stock market crash, along with other factors, has already produced economic slowdown and the Finance Minister, AMA Muhith, said in a TV interview that he would be taking some corrective measures for protecting the inventors' money in the next budget. It means that the market crash issue has been one of the policy priorities of the government, as it has serious economic and social implications. In addition to economic and financial impacts, there are social and psychological effects on over three million people, mostly small and medium-scale retail investors, who have lost millions in the crash. Therefore, in Bangladesh the situation, after the crash, is such that the society has been negatively impacted by the market crash, which is likely to contribute to the negative growth in the economy. The finance ministry found that the SEC played the role of a manager instead of a regulator of the stock exchanges and the investigation committee recommended restructuring of the commission, as some of the officials were found involved in manipulating the stock prices. The ministry has meanwhile appointed a new chairman and two members of the commission. Let us wait and see how the SEC restores the confidence of the investors, as a regulator and not as a manager of the stock markets. Farjad Siddiqui is Research Analyst of the Mindspring Research (email: farjad@mindspringbd.com) and Md Mizanoor Rahman is Assistant Professor of Finance and Banking (email: mizan2006@yahoo.com) at the Bangladesh Open University