LEGAL AND REGULATORY FRAMEWORK AND SUPERVISION

1. LEGAL AND REGULATORY FRAMEWORK AND SUPERVISION PRESENTED BY: ROBERT DOWUONA OWOO GHANA COMMODITY EXCHANGE PROJECT (Project Director) GSE COURSE 401

2. COURSE CONTENT • An Overview of Securities Regulation • The Structure of the Regulatory System in Ghana • The Ghana Stock Exchange as Self-Regulatory Organization • Regulation of Collective Investment Schemes

3. AN OVERVIEW OF SECURITIES REGULATION CHAPTER 1

4. Learning Outcomes • What is a Security? • Why the need for Regulations? • What Regulation of Securities Markets means • What are Self Regulatory Organizations (SROs)?

5. What is a Security? • Definition • Financial Instruments or legal documents signifying either an ownership position in a company (eg. shares) or a creditor relationship with a company or Government ( eg. Bonds, Debentures) • Various Jurisdictions have specific definitions for Securities albeit situated in the above definition

6. What is a Security (Cont.) • In Ghana, a security is defined strictly under the Securities Industry Law,1993, PNDCL 333 as amended, as: • Shares or debentures within the meaning of the Companies Code 1963 (Act 179); • Bonds or other loan instruments of Ghana Government or any other country; • Bonds or other loan instruments of a corporation established under an enactment for the time being in force; • Rights or interests (whether described as units or otherwise) under any unit trust; • Such other instruments as the Minister may by notice in the Gazette prescribe.

7. Why the need for Regulations? • In order for financial markets to thrive, there must be adequate safeguards, which will enhance public confidence in the markets. • Financial markets are therefore regulated by Government institutions/bodies which are empowered by laws to effectively supervise players in the market.

8. Background to Securities Regulations • Trading in Securities has existed for many centuries, however, • Fraudulent market practices in the1920s in the US, resulted in the market crash of 1929 leading to the Great Depression. • It was realized that the absence of full disclosure principles was the main cause of this crash. • The need for a body to regulate that aspect of the Financial Market to ensure “Equity” and “Protection” of investors was realized.

9. Background to Securities Regulations • The Securities Act of 1933, also known as the “truth in securities act” was the first legislation passed in the US to govern the securities industry. • In 1934 the US government passed the Securities Exchange Act of 1934 which established the Securities and Exchange Commission (SEC), U.S.A to administer the provisions of the Securities Act of 1933.

10. Background to Securities Regulations • Since the beginning of market regulation in the US, many countries have embraced the concept and have established institutions charged with capital markets regulation as pertains in Ghana. • Formalized trading in securities in Ghana started in 1990 with the establishment of the Ghana Stock Exchange. • Fraud in schemes like Pyram and R5 in the mid 90s were dealt with by the BoG which at the time regulated securities in Ghana in addition to banking. • The Securities & Exchange Commission was established in 1998 to regulate the securities industry in Ghana.

11. Background to Securities Regulations • All the Securities Regulators in the world have come together to form an international association of regulators known as the International Organization of Securities Commissions (IOSCO). • It is to ensure co-operation among regulators. • It also comes out with standards and guidelines which member regulators follow in supervising their capital markets. • Ghana is a member of IOSCO.

12. Objectives of Regulation • The are three (3) core objectives of securities regulation: • Investor protection • Ensuring that markets are fair, efficient and transparent • The reduction of systemic risk.

13. In Summary, Securities regulation is driven by the need to: • Protect investors from insider abuse and fraud • Promote financial disclosure • Prevent fraud and abuse • Enforce fiduciary responsibilities of financial institutions • Promote safety and soundness of financial institutions • Increase competition • Develop the capital market

14. 1. Investor Protection • The basic tenet of public securities regulation is investor protection. • Need to protect unsophisticated investors against the disadvantage of lack to information to make cogent decisions • When provided with complete, timely and material information, an investor is the best judge of the worth of an investment. • Laws exist to restrict managers from buying and selling securities using information which only they, by virtue of their position, have access to. • External auditors verify the financial information provided by firms

15. Investor Protection (Cont’d) • Elements of Investor Protection (Securities Industry Law, 1993, PNDCL333 as amended): • A system of full and timely disclosure of all material information • License or Registration of participants (Stock Exchanges, Investment Advisers, Dealers, collective investment schemes and their agents etc.) • Capital Requirements (e.g. GHC100,000 requirement for Investment Advisors) • Segregation of customer account from firm’s account • Guarantee funds or bonding should be established to protect against employee error, malfeasance, or payment failure) • A system of competitive/negotiated broker commission should be adopted • Internal system to monitor compliance with regulations

16. Investor Protection (Cont’d) • An industry compliance manual • Brokers understand the financial needs of clients and recommend suitable investment for them • Brokers disclose potential conflict of interest • Brokers invest client fund according to client needs • Brokers buy for clients at best possible price • Brokers give priority to client accounts during trades • Low cost and flexible system for filing complaints and arbitration should be available to clients

17. 2. Promotion of Financial Disclosure • Ensures equal access to information by all market participants • To enable the investing public to make an informed investment decision, financial information must be: • Reliable • Accurate • Timely

18. 3. Prevent Abuse and Fraud • Laws exist to prevent abuse and fraud in order to maintain confidence in the financial system since participating in the financial system involves money • Market Manipulation connotes intentional or wilful conduct designed to deceive or defraud investors by controlling or artificially affecting the price of securities • For example fraud in connection with the purchase or sale of security in breach of fiduciary duty by secretly converting for personal use information that has been entrusted to that person

19. 4. Promote Safety and Soundness • Regulators establish criteria for supervision to avoid failure of financial institutions, since a failure of one firm could cause a run on the others. • Regulation for safety and soundness of financial institutions is called prudential regulations. • Prudential regulations allay: • Financial panics, which disrupt economic activities • Loss of wealth of market participants, resulting from failure of financial intermediaries

20. 5. Enforce Fiduciary Responsibilities of Financial Institutions • A fiduciary is a person who occupies a position of such power and confidence with regard to the property of another that the law requires him to act solely in the interest of the person who he represents. • Examples of fiduciaries include Agents, Trustees, Investment Advisors, etc • Financial institutions are in fiduciary relationship with their clients, as a result of investment decisions they make on their behalf.

21. Fiduciary Responsibilities of Financial Institutions (cont’d) • A fiduciary must NOT: • Make secret profit at the expense of his client • Compete with his client without his consent • Act unfairly towards his client • Delegate performance of his fiduciary duties to a third person without the client’s consent. • A fiduciary MUST: • Make full disclosure of all facts when dealing with his client • Respect his client’s confidence and trust.

22. 6. Development of the Capital Market • Development of the capital market involves both the demand and the supply side • Policies emanating from the Regulations must result in the development of the capital market. • Optimal level of regulation may bolster investor demand for securities and hence result in development of the capital market

23. 7. Increase Competition • Gives access to financial markets on equal terms and under uniform set of Rules • Provides quality service at lower prices

24. Regulation of the Securities Market • Targets different segments of the market • Institutions include: • Issuers (Public Companies) • Investors (Individual and Institutional) • Dealers • Brokers • Registrars • Central Depositories etc. • Investment Advisors • Exchanges (Over The Counter and Organized)

25. REGULATION OF MARKET INSTITUTIONS (cont’d) • Securities Issuers • Regulated to ensure compliance with guidelines, registration, and disclosure requirements • E.g. (1) Securities issuers are required to prepare prospectus (2) Listed companies are required to prepare quarterly financial statements

26. REGULATION OF MARKET INSTITUTIONS (cont’d) • Organized Exchanges and Over-the-Counter Markets • Organized exchanges (e.g. GSE) have physical location, organized on not-for-profit basis, trade securities following a set of rules and procedures • Over-the-Counter (OTC) markets generally do not have single location, but comprise a network of brokerage firms. OTCs may also be organized formally as electronic securities exchanges, e.g. the NASDAQ (National Association of Securities Dealers Automated Quotations) in the United States.

27. REGULATION OF MARKET INSTITUTIONS (cont’d) • Institutional Investors • Require attention in national securities laws • May play multiple roles such as underwriting of issues, purchase or invest in an offering etc. • Some institutional investors act only as passive investors, and only assume substantial equity positions (e.g SSNIT)

28. REGULATION OF MARKET INSTITUTIONS (cont’d) • Dealers • Stock brokers • Share transfer agent • Trustee of a collective investment scheme • A person who provides custodial services with regards to securities • Central depository • Registrar etc.

29. REGULATORY AGENCIES • Role and Power • Regulator must be an independent agency with qualified staff • Regulator must have sufficient inspection, monitoring, and regulatory powers • Must have the ability to issue opinions, and exercise quasi-legislative and quasi-judiciary powers • Functions of securities commissions normally include overseeing the registration of securities, public offerings, and exchange listings (Part II of PNDCL333)

30. REGULATORY AGENCIES (cont’d) • Market Regulation • Involves supervision of the operations of the securities markets and professionals within the markets • Extends to registration of securities (both listed and OTC), registration of broker/dealers, and setting of capital requirements for securities firms, exchanges, and clearing corporations, and depositories.

31. REGULATORY AGENCIES (cont’d) • Self-Regulatory Organizations (SROs) • SROs generally provide first level capital market regulation • SROs are not-for-profit organizations such as exchanges and professional societies of broker/dealers, securities analysts, RPBs etc • Regulatory authorities empower SROs to create rules, and monitor and enforce industry practices among membership • Typically, regulators hold professionals to a legal standard of conduct, but SROs go beyond that to hold members to ethical and moral standard of conduct • Functions usually delegated by regulator to SROs include the following:

32. REGULATORY AGENCIES (cont’d) • Establishment of information and prudential requirements for offering or listing of securities • Authorize prohibit, or suspend trading of publicly offered securities • Monitor issuers to authenticate and ensure compliance with information requirements • Ensure the transparency and legitimacy of trading • Establish industry eligibility and membership requirements • Establish standards for financial record keeping for members • Exercise disciplinary powers • Establishment of trade conventions for instruments, clearing and settlement

33. ADVANTAGES OF SROs Advantages • Flexibility • Cost • Preserve autonomy and independence of investment sector • Expertise of regulators

34. DISADVANTAGES OF SROs • Lack of direct accountability. • SROs may arrogate more powers to themselves than intended by Parliament. • Customers could easily be exploited by the professionals in the market without being aware (unsophisticated investors). • Complex institutional structures

35. SROs PROVISION UNDER THE SIB • The regulation of other self-regulatory organisations in the Securities Industry in Ghana is provided for in Part II of the Securities Industry (Amendment) Bill. • A self-regulatory organisation may make rules with respect to matters for which the self-regulatory organisation has functions. However, the rules must not be inconsistent with the law, Regulations or rules of the Commission or any other applicable law.

36. THE STRUCTURE OF THE FINANCIAL REGULATORY SYSTEM IN GHANA CHAPTER 2

37. THE STRUCTURE OF THE FINANCIAL REGULATORY SYSTEM IN GHANA • Statutory regulatory bodies • Bank of Ghana • Securities and Exchange Commission • National Insurance Commission • National Pensions Regulatory Authority • In Ghana regulation is aimed at simultaneously maximizing investor protection and enhancing intermediation role by financial institutions

38. INTRODUCTION (2) FINANCIAL MARKET CAPITAL MARKET PENSIONS BANKING INSURANCE Why do we need to regulate the Financial market?

39. Introduction(4) • In order for Financial markets to thrive, there must be adequate safeguards, which will enhance public confidence in the markets. • Financial markets are therefore regulated by Government institutions/bodies which are empowered by laws to effectively supervise players in the market.

40. Introduction (5) FINANCIAL MARKET CAPITAL MARKET BANKING INSURANCE PENSIONS NATIONAL PENSIONS REGULATORY AUTHORITY NATIONAL INSURANCE COMMISSION SECURITIES & EXCHANGE COMMISSION BANK OF GHANA

41. IMPORTANT LAWS FOR THE SECURITIES MARKETS • Securities Industry Law, 1993 (PNDCL 333) • Securities Industry (Amendment) Act, 2000 (Act 590) • Securities and Exchange Regulations (LI 1728) • Unit Trusts and Mutual Funds Regulation, 2001 (LI 1625) • The Companies Code, 1963 (Act 179) • The Banking Act, 2004 (Act 273)as amended by the Banking (Amendment Act) 2007 • The Financial Institutions (Non-Banking) Law, 1993 (PNDCL 328) • National Pensions Act, 2008 (Act 766)

42. THE COMPANIES CODE • Types of Companies • Act 179 defines a ‘company’ as “a body corporate formed and registered under the Code or an existing company. • Under the Companies Code, only public companies can invite the public to subscribe to its securities. • Under Act 179, a private company is defined as a company which by its Regulations does the following: • Restricts the rights to transfer its shares, • Limits the total number of its members and debenture holders to fifty,

43. Companies Code • Prohibits the company from making any invitation to the public to acquire any shares or debentures of the company ; and • Prohibits the company from making any invitation to the public to deposit money for fixed periods or payable at call, whether or not bearing interest. • Act 179 provides that any other company shall be a public company. • In other words, a public company is a company that in its regulations has no restriction on the right to transfer its shares, has no upper limit on the number of its shareholders or debenture holders and is not restricted in making invitations to the public.

44. Issues of Securities • Control of Public Issues • First of all, only public companies may make invitations to the public subject to rigorous regulatory procedures. • Meaning of ‘invitation to the Public’: - • 266(1) For the purposes of this Code, an invitation shall be deemed to be made to the public if an offer or invitation to make the offer is, • published, advertised or disseminated in Ghana by newspaper, broadcasting, cinematograph, or any other means whatsoever,

45. Issues of Securities • made to or circulated among any persons whether selected as members of debenture holders of the company concerned as clients of the person making or circulating the invitation or in any other manner, • made to any one or more persons upon the terms that the person to whom it is made may renounce or assign the benefit thereof or of any shares or debentures to be obtained thereunder in favour of any other person,

46. Issues of Securities • made to any one or more persons to acquire any shares or debentures dealt in upon any stock exchange or in respect of which the invitation states that application has been or will be made for permission to deal in those shares or debentures upon any stock exchange.

47. Issues of Securities • Provided That • nothing herein contained shall be taken as requiring any invitation to be treated as made to the public if it can properly be regarded in all the circumstances as being a domestic concern of the persons making and receiving it; • an invitation made by or on behalf of a private company exclusively to its existing shareholders and debenture holders, not being greater in number than 50 and its existing employees shall not be deemed to be an invitation to the public unless it is of the type referred to in paragraph (c) or (d) of this subsection.

48. Consequences of breach • Any person who breaches this provision is liable to a fine or a term of imprisonment or to both and • any person who acquires or disposes of shares as a result of any invitation to the public shall be entitled to rescind the transaction and/or recover compensation for any loss sustained by him.

49. Public Issues • Under the Companies Code, public companies that wish to issue bonds, ordinary and preference shares must do so by way of a prospectus, which must be registered with the Registrar of Companies. • Under the SIL, prospectuses issued with an invitation to the public must also be submitted to the SEC for examination and approval and must include the information specified in Schedule 5 of the SIL. • A prospectus is a document which provides key information about the issuer and describes a new security, including terms and conditions of the issue, information on the issue and the use to which the funds will be put. A prospectus must include the following information:

50. Public Issues • General information regarding the issuer – name, address, legal form, authorized businesses, and names, addresses and occupation of directors and auditors. • information regarding the issue – amount of offer, purpose of issue, denominations of issue, minimum amounts, offer period, maturity and redemption dates…etc • information regarding experts and advisers to the issue. • financial information regarding the issuer – existing indebtedness, audited financial statements