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Securities Bill deficient

By Clarence Rambharat

The Securities Bill will be laid in Parliament shortly. It will demonstrate that the Government has learned nothing from the CLICO, Hindu Credit Union (HCU) and Section 34 scandals. Even with its defects, Minister of Finance Larry Howai will expect a rubberstamp, given a yearend deadline for enactment. The Parliament must push back and demand a Bill which shows that the country's leaders are actually learning.

But first, the lesson from Section 34 is that MPs must ask which Cabinet member is responsible for this Bill and its passage to proclamation. In Section 34, the Attorney General denied responsibility, citing his lack of criminal law experience. He and the Minister of Finance lack securities law experience, so which Cabinet member is in charge of the Securities Bill?

In fairness, the CLICO and HCU meltdowns were not on account of deficient securities law. But the issues in both meltdowns spread across the financial services industry, including securities. Without doubt, leadership and regulatory failure are central to the HCU and CLICO problems. So this Securities Bill should signal the core message that the local Securities and Exchange Commission (SEC) will provide public assurance that only fit and proper persons will hold leadership and director positions in the securities industry. The SEC and no one else must take primary interest in the quality of directors and leaders, rewarding and punishing, and assuring the public of transparent decision-making and governance. The new law must also give prominence to whistle-blowing, a proven and reliable way of exposing fraud and wrongdoing.

In these areas this Bill fails.

First, just by its forewarned urgency, the Government is showing that it has not learned anything from the Section 34 scandal. No foundation has been laid for a debate on the Securities Bill. Even as Minister Howai prepares to lay this Bill, his Ministry continues to list the 2008 version of the Bill on its website, and not later versions. The SEC has floated the current Bill for public comment, and has the Bill on its website. But even after a process of public consultation by the SEC, the SEC has not published on its website a commentary, analysis or record of the public submissions received. It has posted older work of Stikeman Elliott LLP on the proposed Securities Act 2005, but nothing more recent. MPs will be pushed to debate and approve this Bill with little information from its proponents.

Second, this Bill does not deal frontally with governance issues, and the human factors which have become more important than the technical and administrative requirements of financial industry legislation. It pares down some of specific director-related provisions in the 2010 Securities Bill, and does not suggest that the SEC will be intimately involved in governance assurance on an entity level.

That entity level involvement is critical to the new order. It is not just the failure of statutory oversight which brought the CL Financial, HCU, Trade Confirmers, Summit Finance and International Trust houses down. Incompetent boards and leadership in these entities watched each go to the brink.

To consider the Bill's main offence of misrepresentation, every legislator should read the recent criminal proceedings in New Zealand, R v Douglas Graham and others. The case involved highly respected directors of the Lombards financial group, prosecuted for misrepresentation in an investment offering. The court focused on the human factors and relationships involved, and found that while there was no intention to mislead investors through misstatements and omissions in the prospectus, trust was misplaced.

These Lombards directors were convicted and sentenced. Still, the Government has removed very specific director-related offences and provisions from the 2010 Securities Bill, and what is retained does not meet best practices for directors and senior officers in the securities industry. MPs must demand that in dealing with the leadership and directors in the securities industry, the Government proves it has already learnt from events still unfolding in Port of Spain.

And third, an unforgivable omission from this Bill is a whistle-blowing provision, critical to exposing securities fraud and misleading practices. Section 14 of the Bill proposes that a person who disseminates confidential information and the receiver commits an offence. This section needs to be reconfigured in light of global developments on whistle-blowing, its recognition as being effective, and the reward for it in the Dodd-Frank legislation enacted by the United States.

Regionally, the Caribbean Procurement Institute (CPI) has taken a lead role in building the technological and training infrastructure for a confidential whistle-blowing programme in the region. CPI's executive director Margaret Rose told the CPI's recent regional conference that this work is driven by data which shows that whistle-blowing is three times more effective than any other method of detecting or exposing corporate misdealing. Surely, the Government can take its cue and accept that whistle-blowing must be in any post-Dodd-Frank securities legislation. The Bill must find a sensible balance between protecting confidential information and enabling confidential whistle-blowing.

This Bill will be laid with an expectation of the political support required to make it law by the end of 2012. Expediency will be the Government's preoccupation, and not the efficacy of the legislation given all that has happened with CLICO, HCU and Section 34.

This is an opportunity for the Government to demonstrate a more diligent approach to law-making following the Section 34 fiasco, mired in sleight-of-hand. But right away, it is a bad start and Minister Howai should not anticipate a rubber stamp on this one.

Continued next week.

• Clarence Rambharat is a lawyer and a university lecturer.

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