The Finance Act 2007 has amended the Securities and Exchange Commission Act, 1997, making the finance minister or, in his absence, adviser to the prime minister on finance, as the case may be, chairman of SECP policy board.
The SECP Act specifies that the role of policy board is to “oversee the performance of the Commission” and “all policy decisions, including any change in previously established policy, in respect of all and any matters within the jurisdiction of the Commission shall be made only by the Board.” Policy board also approves compensation of commissioners and service rules for the SECP employees.
This amendment in SECP Act evoked interest in capital market because: (i) SECP was envisioned as an autonomous regulator under the ADB-financed capital market development programme because its predecessor Corporate Law Authority, a department in ministry of finance, in the words of an ADB report, “suffered from inherent structural weaknesses”, (ii) in the past, this government has been appointing chairman of SECP as chairman of SECP’s policy board, and (iii) due to upcoming elections, there are probably just a few months left in the jobs of the said adviser and the finance minister (a portfolio retained by the present prime minister).
According to the International Organization of Securities Commissions (IOSCO), the most prestigious forum in securities regulation, in order to achieve the objectives of securities regulation – the foremost being protection of investors – a principle about the securities regulator is that it “should be operationally independent and accountable in the exercise of its functions and powers.” Contrary to the guidance provided by IOSCO, the said amendment in SECP Act would reduce the degree of independence and accountability of SECP at a time when it is already lacking in both. Let’s look at the reasons why.
First, finance minister is already exercising excessive powers over SECP. Under the SECP Act, all commissioners, chairman of the SECP, all nine members of policy board, and chairman of policy board are appointed by the finance minister on behalf of the federal government. Five out of nine members of policy board are ex-officio, comprising three secretaries from finance, commerce, and law divisions, chairman SECP, and a deputy governor of SBP. Remaining four members of the policy board are handpicked from the private sector. (The amendment has also increased the size of policy board to 10 to make room for new chairman).
Now when the adviser or the finance minister himself would take over the office of chairman of policy board, political considerations would start dominating day to day affairs. Shrewd officers, at all levels, would quickly find out who is the boss, who is and who is not a friend of the boss, and then they would only make the kind of noises which would please the boss and his friends.
Second, it is doubtful that with its present composition and past record, the policy board can make policies. SECP has a vast regulatory jurisdiction and it requires technical expertise to make a policy. There is little evidence to suggest that the policy board possesses such expertise. Add to it that making policies for such a regulatory body is a time consuming process whereas members of the policy board have full time careers of their own. There is also no information in annual reports of SECP or its website that would suggest that policy board has been making policies for the SECP.
A change in the chairperson of policy board cannot fix what is fundamentally wrong with the board. On the other hand, it is quite possible that SECP could be micromanaged under the guise of policy making. The Act does not specify what it means by “policy” and in such a situation what is and isn’t a policy decision is subjective. Take for instance, some of the current issues facing the stock market. Was it or was it not a policy decision to introduce CFS Mk-II, demutualise stock exchanges, and implement client level netting or unique identification numbers? And is lifting or amending Rs55 billion cap on CFS – the top most wish of market participants – a policy issue? In case any courageous element in SECP dare disagree with its policy board, chairman of policy board can turn an issue into a “policy issue” and then force the “policy decision” on the management.
Third, the current government has shown through its actions that it cannot tolerate independence of SECP. It set a bad precedent through a sudden and controversial removal of a chairman of SECP in January 2006 even though as per section 19(2) of the Act, “…a Member (of policy board) or Commissioner shall not be removed or his appointment revoked without an enquiry by an impartial person.”
Off and on news media has been suggesting that government had stopped SECP (and later NAB) from going after the culprits of March 2005 crisis and executed a white wash through diligence. This sort of a track record can only raise suspicion about the motives underlying the amendment.
Fourth, the amendment is against international practices. Internationally, ministry of finance has a role in appointing senior management and board members of securities regulators, subject to checks and balances, but it is very unusual for finance minister to chair the board. In most securities regulators, be it SEC (USA), FSA (UK), ASIC (Australia), Kredittilsynet (Norway), FI (Sweden), SFC (Hong Kong), SC (Malaysia), FSB (South Africa), or SEBI (India), the finance minister or equivalent is not the chairman of the concerned board of the securities regulator. In developed democracies (such as USA), parliament is also involved in appointment or accountability of the securities regulator.
Experience has shown that control of securities regulator by a government can do great harm. Take the case of Thailand, where in a highly charged political environment in 2006, the Thai SEC had to investigate the former prime minister and his family for violating securities laws. Ironically, it is in Thailand where the finance minister chairs the board of SEC and as Thai news report said, the then finance minister was “casting a large dark shadow over the SEC.”
In Pakistan, where allegations of involvement of government high ups and their friends in scandals (sugar, cement, stock market, etc) are all too frequent, it is all the more important to shield SECP from government’s interference.
Fifth, if the idea were to improve accountability of SECP, better options were available. The government could have redone the policy board adding respectable technocrats, reduced its discretionary powers in SECP appointments, and separated the office of chairman of SECP and chairman of SECP’s policy board.
Like the code of corporate governance for listed companies, a mandatory code of governance could also be devised for SECP. Since Pakistan is (or at least is supposed to be) a parliamentary democracy, appointments of the chairman SECP and members of its policy board could be subject to appropriate parliamentary approvals. The chairman of SECP could be required by law to present SECP’s performance to a parliamentary committee in addition to SECP’s board. After all, the only body which has ever brought a sense of accountability to SECP is not the policy board or the government but a standing committee of National Assembly.
In sum, there is much that could have been done to make SECP an independent and accountable regulator so that it can protect the investors but the cure offered by the Finance Act 2007 is worse than the disease.
The Finance Act 2007 has amended the Securities and Exchange Commission Act, 1997, making the finance minister or, in his absence, adviser to the prime minister on finance, as the case may be, chairman of SECP policy board.
