PAKISTAN STOCK EXCHANGE LIMITED

Transcription

1 REGULATORY AWARENESS SESSION FOR BROKERS REGULATORY AFFAIRS DEPARTMENT PAKISTAN STOCK EXCHANGE LIMITED MARCH 03 MARCH 04, 2016

2 Learning Objectives Thematic Reviews: a. Know Your Customer & Customer Due Diligence Policy b. Standardized Account Opening Form c. Consolidated Review of Various Clauses of PSX Regulations d. Minimum Education Requirement for Traders/KATS Operators e. Advertisement of Business by the Brokerage Houses f. Trading by Employees of Brokerage Houses g. Compliance of System Audit Regulations Recurring Violations Observed by SECP & PSX Code of Conduct for Brokerage Houses Trading by Directors/CEOs/Executives during Closed Period Requirements pertaining to Short Selling, Blank Selling, Rectification of Erroneous Trades & Off-Market (NDM) Fortnightly Clients Assets Segregation Statement Investor Complaints & Arbitration

3 Thematic Reviews on Regulatory Compliances SECP conducted thematic reviews of brokers to ascertain their compliances of various applicable rules and regulations. SECP observed that a large number of brokerage houses are non-compliant of majority of the rules and regulations or have serious deficiencies on account of their compliance. To ensure fair, transparent and efficient securities market, SECP & PSX emphasize that it is essential that the Brokers are cognizant of applicable rules & regulations and ensure their compliance in full letter and spirit. 3

4 Thematic Review on KYC and CDD Policies & Procedures Requirements (PSX Regulations) Observation Corrective Measures 4.18: The Brokers shall formulate and implement an effective KYC & CDD internal policy and framework in accordance with the guidelines issued by PSX with the prior approval of SECP and any notices or circulars issued by SECP from time to time. The KYC & CDD policy should be approved by the Board of Directors of the Broker and must be appropriately communicated to every agents and branches of the Broker. The Brokers shall also ensure that the abovementioned policies are effectively disseminated to & understood by the relevant personnel. Brokerage houses were found non-compliant of various requirements of this Clause. Formulate internal KYC & CDD Policy in the light of guidelines issued by PSX Get the policy approved by your Board of Directors Communicate the policy to all agents and branches of your company Ensure that policy is properly disseminated and understood by the relevant staff through trainings, courses etc. PSX Guidelines on KYC & CDD are available in Legal Framework section on PSX website

5 Thematic Review on Standardized Account Opening Form Requirements (PSX Regulations) Observation Corrective Measures : The Brokers shall adopt the Standardized Account Opening Form (SAOF), attached as Annexure-I to chapter 4 of PSX Regulations, as amended from time to time, for all their Account Holders. Explanation: SAOF contains the minimum Terms & Conditions which are equally binding on the Broker and Account Holder(s). However, in order to protect the rights of the concerned parties, the Brokers may include additional terms and conditions preferably in separate section to the SAOF, as long as such terms and conditions do not, in any way, negate or undermine any other applicable laws, rules, regulations, directives/notices/circulars of the Commission, the Exchange etc., and the terms & conditions laid down in SAOF. Brokerage houses were found largely non-compliant of requirements relating to SAOF. Broker should not alter or reduce minimum Terms & Conditions of SAOF in any manner. Broker should adopt the SAOF along with specified Terms & Conditions for each of its clients Broker may insert new terms & conditions in a separately identified section provided that such terns & conditions in no way contradict, negate or undermine any other requirement. SAOF is attached as Annexure-I to Chapter 4 of PSX Regulations which are available in the Legal Framework section on PSX website

6 Thematic Review-Consolidated Review of Various Clauses of PSX Regulations Requirements (PSX Regulations) Observation Corrective Measures A TRE Certificate Holder who individually or through any person acting in concert, directly or indirectly, possesses a Controlling Interest in a TRE Certificate Holding Company may not relinquish, transfer, let, sublet, assign, alienate or otherwise dispose off without the prior written consent of the Exchange. Every TRE Certificate Holder shall submit pattern of shareholding in the format specified by the Exchange at the end of each quarter. A number of brokerage houses submit such information to PSX on annual basis. Every TRE Certificate Holder is required to submit pattern of shareholding in the format specified by the Exchange at the end of each quarter. Format of Pattern of Shareholding is available in the Legal Framework section on PSX website

7 Thematic Review - Consolidated Review of Various Clauses of PSX Regulations Requirements (PSX Regulations) Observation Corrective Measures : In case a Broker delays any payment to the Exchange and/or Clearing Company for meeting any of his obligations in the Deliverable Futures Contract Market beyond the specified time thrice in a calendar year, he would be liable to deposit Rs.1,000,000/- with the Exchange for a period of 3 months. In case delay in payment has occurred for fourth time in a calendar year, the deposit amount would be enhanced to Rs2,000,000/- to be held by the Exchange for a period of 6 months. Delayed Payments to the Exchange i.e. after opening of the market next day. Brokers are required to make timely payments to PSX against its money obligations in DFC prior to opening of the market next day to avoid any disciplinary action. Deliverable Futures Contract Market Regulations are given under Chapter 13 of PSX Regulations which are available in Legal Framework section on PSX website.

8 Brokers Office/Branch Office Regulations are available under Chapter 22 of PSX Regulations which is available in Legal Framework section on PSX website. Thematic Review-Consolidated Review of Various Clauses of PSX Regulations Requirements (PSX Regulations) Observation Corrective Measures 22.2(g): Branch-wise list of employees, along with their CNIC and residential addresses and the same information shall be provided to the Exchange on quarterly basis; 22.2(i): List of authorized signatories to the bank accounts if maintained separately by that Office/Branch Office and the same information shall be provided to the Exchange on quarterly basis; A large number of brokerage houses submit such information on annual basis. Brokers are required to ensure submission of the requisite information on quarterly basis.

9 Thematic Review-Consolidated Review of Various Clauses of PSX Regulations Requirements (PSX Regulations) Observation Corrective Measures 22.5:OBLIGATIONS OF A BROKER OPENING OFFICE/BRANCH: i. Display name of the Broker outside its Office/Branch Office. ii. Maintain proper books of accounts and all client related record/ information of the Office/Branch Office at the Head Office/ Registered Office. iii. Display of registration certificate of office/branch office. iv. A board at a conspicuous place at the reception/front office containing: a) Name of the person authorized to deal with the customers b) A warning that the branch cannot deal in cash, except as provided in the SAOF. Brokerage houses are generally found non-compliant of these Regulations. Every TREC Holder should carefully read and comply with each provision of the Brokers Office/ Branch Office Regulations specified under Chapter 22 of PSX Regulations.

10 Thematic Review-Consolidated Review of Various Clauses of PSX Regulations Requirements (PSX Regulations) Observation Corrective Measures c) That the customer must demand deliveries as per these Regulations. d) That nobody is authorized to take deposit money on fixed profits which is illegal. v. The Broker shall ensure that all stationery, i.e confirmation/ contract/ cash memo/ any other document will be issued only in his name. The Broker(s) will also be required to clearly state on the printed stationery the addresses of all his offices/branch offices simultaneously. Brokers should refrain from offering fixed returns or soliciting public funds by offering return on their excess cash balances as the same is not a permissible business practice for a brokerage house Brokers Office/Branch Office Regulations are available under Chapter 22 of PSX Regulations which is available in Legal Framework section on PSX website.

11 Thematic Review on Minimum Education for Traders Requirement Observation Corrective Measures Members Agents and Traders (Eligibility Standards) Rules, 2001 inter-alia requires an applicant to have at-least passed graduation or equivalent examination from a Government recognized institution to become eligible for registration as Agent or Trader. Brokerage houses are generally found noncompliant of these Regulations due to lack of awareness. It is important for the brokerage houses to fully comply with Members Agents and Traders (Eligibility Standards) Rules, Where the agent or trader does not have minimum required education, broker may request SECP to relax the educational qualification on merits having regard to the applicant s experience of at-least two years in the related field such as banking, accountancy or in a broker s office. Members Agents and Traders (Eligibility Standards) Rules, 2001 are available in Legal Framework section on PSX website. 11

12 Thematic Review on Business Advertisement by Brokers Requirement Observation Corrective Measures Clause C (4) of Code of Conduct prescribed under Third Schedule of Brokers and Agents Registration Rules, 2001 and Clause 11.1 of Scope of Audit prescribed under Chapter 23 of PSX Regulations stipulate that a brokerage house shall not advertise its business publicly unless permitted by the stock exchange. A number of brokerage houses have advertised their business publicly without obtaining approval from the PSX. Many brokerage houses did not obtain prior approval of PSX despite change in the contents of their previously approved advertisements. Brokers are required to obtain prior approval from PSX each time they advertise their business publically. Brokers and Agents Registration Rules, 2001 and PSX Regulations are available in Legal Framework section on PSX website. 12

13 Thematic Review on Trading by Employees of Brokers Requirement (PSX Regulations) Observation Corrective Measures : TREC Holders may allow securities trading to their employees only through their own houses : TREC Holders shall register their employees into the UIN database with all registration details including their respective designations and update/modify the registration details whenever any change occurs : TREC Holders shall not allow trading on behalf of another TREC Holder s employees. TRE Certificate Holders shall use the facility mentioned in Regulation above for this purpose. Brokerage Houses are generally found noncompliant of these Regulations due to lack of awareness. Brokerage Houses may allow trading to their employees only through their own house. Brokers are required to register all their employees into the UIN database of NCCPL and update the same as & when required. Brokerage Houses should not accept orders of employees of other Brokerage Houses. 13

14 Thematic Review on System Audit of the Brokers Requirement (PSX Regulations) : If the Report contains any non-compliance(s), the Broker shall rectify the same immediately and such Broker shall be subject to limited scope audit in the following year to confirm that such Broker has now rectified the noncompliances reported by the Auditor. The period for limited scope audit shall not be less than 3 months ensuring the discrepancies identified in the Report are rectified and the Broker has remained compliant during the said period. Observation It was observed that many non-compliances highlighted by Auditors in initial System Audit Reports of Brokerage Houses were reported as un-rectified in the subsequent Limited Scope Reports. Measures Brokers shall ensure that noncompliances identified in their System Audit Reports should be fully complied with in Limited Scope Audit. 14

15 Recurring Violations Observed by SECP SECP has observed during its broker inspections that the brokers have committed following recurring violations of PSX Regulations: S.# Recurring Violations Description 1 Circular KSE/N-330 dated January 21, 2008 and Clause 18 of Special Terms and Conditions of SAOF prescribed under Chapter 4 of PSX Regulations Telephonic recording of orders not maintained 2 Clause of PSX Regulations Margins collection from clients 3 Clause 4.21 of PSX regulations 4 Rule 4 of SEC Rules, 1971 and Clause 4.20 of PSX Regulations Leverage market agreement between broker and client not in accordance with the regulatory requirement Trade confirmations not provided to Account Holders. 15

16 Regulatory Requirements relating to Telephonic Recording of Clients' Orders PSX Regulations Clause 2 of Scope of Audit in Chapter 23 Recording of Orders Placed through Telephone Clients orders received and/or confirmed via telephonic [landline] communications must be recorded in the manner specified by the Exchange. Where orders are received by mobile phones, an appropriate and reliable recording of the time of receipt and order details are being maintained. Effective procedures are in place to ensure the integrity, reliability and security of the telephone recording system and timely detection of any malfunctioning therein. Adequate compliance monitoring is exercised over the office staff that is responsible for recording the telephone order instructions. Telephone recordings are being retained for a minimum period of six months or any other period specified by the Exchange and/or Commission. Further, in case of any complaint lodged by an Investor, the Broker has retained the record of such Investor till the resolution of the complaint. All telephone lines under use of the traders, agents, dealers and authorized persons who are involved in trading, are connected to the telephone recording system of the Broker. 16

17 Regulatory Requirements relating to Leverage Market PSX Regulations Clause 4.21 General Obligations of TRE Certificate Holders/Brokers relating to Leveraged Markets No transaction is executed by the Broker on behalf of a client in the Leveraged Market unless an appropriate agreement has been executed between the broker and such client. All risks involved in the relevant transactions have been fully disclosed and the broker has obtained a written confirmation from its clients that they have understood and have the ability to bear the risks in such transactions. The options available to a client in respect of various financing facilities in the securities markets have been fully disclosed and explained to the clients. All provisions of the Anti-Money Laundering Act, 2010 (Act VII of 2010) and any rules and regulations made there-under are complied with at all times. The credit worthiness of clients is evaluated through a proper credit risk assessment methodology and credit limits are assigned to each client beyond which the client shall not be allowed to take a position in the Leveraged Market. Maintenance of records evidencing compliance with the aforesaid obligations and that such records remain available for inspection by the Commission or any other person authorized to do so, at any time. 17

18 Regulatory Requirements relating to Trade Confirmation Clause # Rule 4(4) of SEC Rules, 1971 & Clause 4.20 of PSX Regulations Trade Confirmation A Broker executing an order of a customer shall, within 24 hours of the execution of the order, transmit to the customer a confirmation which shall include the following information, namely: (a) Date on which order is executed; (b) Name and number of securities; (c) Nature of transaction (SPOT, Ready, Future, Leveraged Market, Debt Market and also whether bought or sold); (d) Price; (e) Commission rate and any other charges ; (f) Applicable regulatory levies i.e. trade or transaction fee of the Exchange, CDC, NCCPL and SECP etc. (g) Applicable statutory levies i.e. taxes and duties of federal and provincial government; (h) Whether the order is executed for the Broker s own account or from the market. {Rule 4(4) of Securities & Exchange Rules, 1971)}. Standard Format of Confirmation Note is available under Legal framework Section on PSX Website. 18

19 Compliance with Code of Conduct for Brokers All Brokers are required to comply with the Code of Conduct prescribed under Third Schedule of Brokers and Agents Registration Rules, The salient features of the Code are given below: Clause A General Rules Maintain high standards of integrity, promptitude and fairness Exercise due skill, care and Diligence Don t indulge in manipulative, fraudulent and deceptive transactions. Don t indulge in malpractices detrimental to investors interest. Ensure compliance with all applicable acts, rules, regulations of SECP & PSX. Clause B Duty to Investors Best Execution of Orders Issuance of Contract Notes Fairness to clients Competence of Broker Breach of Trust Don t trade for clients with the sole objective of generating commission Investment advice should be on reasonable and adequate basis and suitable to clients 19

20 Compliance with Code of Conduct for Brokers Clause C Broker vis-a-vis other Brokers Cooperate with others in conduct of your dealings Ensure protection of clients interest Don t advertise business publicly unless permitted by PSX. Don t induce clients with unfair means Don t refuse to submit or submit false or misleading returns required to be submitted to the Board and to the PSX. Clause D Brokers vis-a-vis SECP & PSX Don t indulge in dishonorable, disgraceful, disorderly, or improper conduct nor willfully obstruct the business of PSX. Don t neglect, fail or refuse to submit to SECP or PSX any books, special returns, correspondence, documents and papers or any part thereof as may be required. Brokers and Agents Registration Rules, 2001 are available in Legal Framework section on PSX website. 20

21 rading by Directors of Listed Companies during Closed Period Requirement (PSX Regulations) Observations Recommendation As per Clause of PSX Regulations, no director, CEO or Executive of a listed company shall, directly or indirectly, deal in the shares of that listed company in any manner during the closed period. A large number of brokerage houses accept and execute orders of persons restricted from dealing in securities during close period of such company. It is obligatory upon TREC holders to ensure KYC of their clients and maintain a separate database of directors, CEOs and the executives of listed companies Keep continuous track of the closed periods announced by the listed companies Do not accept orders of these persons during the close period 21

22 Requirements pertaining to Short Selling & Blank Selling Requirement (PSX Regulations) Chapter 10: Ready Delivery Contracts Market Regulations Clause PROHIBITION ON BLANK SALES: No Broker shall make any Blank Sale either for his own account or for his clients Observations Misunderstanding or Miscommunication between Clients & KATS Operators/ Traders; Telephonic records/ written instructions not available against client orders; Punching error; Malfunction of Systems; Clients Shares available in House Account Due to Clients debt balance/ Asset Segregation; Deals recorded under NDM after the execution of sale of share under ready Market; RMGS not installed. Corrective Measures Educate KATS Operators/ Traders; Ensure and maintain Telephonic records/ written instructions; Adopt cautious approach while accepting orders; Always ensure pre-existing interest prior to execution of sale; In case of malfunctions of systems/ RMGS report the same to PSX IT in writing; Deploy RMGS. 22

23 Requirements pertaining to Short Selling & Blank Selling Requirement (PSX Regulations) Chapter 13: DELIVERABLE FUTURES CONTRACT MARKET REGULATIONS Clause BLANK SALE AND COMPLIANCE No Broker on his proprietary or client's account shall make Blank Sale unless the trade is declared as a Blank Sale at the time of placement of order through KATS in a special blank sale order window designed in the system for the purpose. Observations Sales erroneously executed through F-5 Window instead of F-8 Window; Telephonic records/ written instructions not available against client orders; Shares sold in Deliverable Future Contract Market (DFCM) against Shares purchased under Regular Market; Misunderstanding or Miscommunication between clients and KATS Operators/Traders; RMGS not installed. Corrective Measures Educate KATS Operators/ Traders; Ensure and maintain Telephonic records/ written instructions; Always ensure preexisting interest prior to execution of sale; In case of malfunctions of systems/ RMGS report the same to PSX IT in writing; Deploy RMGS. 23

24 Requirements relating to Rectification of Erroneous Trades Requirement Problems Corrective Measures Procedures for Rectification of Erroneous trades Inexperienced KATS Operators/ Traders; Human error; Burden of workload; System problems; Miscommunication of clients/ Traders/ KATS Operators; Utilization of pre-trade margins; Misappropriation of Client Assets; To obtain/ arrange In-house financing; Rectifying excess/ short sales. Educate KATS Operators/ Traders; Deploy RMGS to prevent excess/ short sale; Deploy mechanism/ procedures to detect/ control/ prevent any misuse/ abrupt use of such interface; Ensure and maintain logs/ records/ reports of such erroneous trades; Procedures for Rectification of Erroneous Trades are available in Legal Framework section on PSX website. 24

25 Requirements relating to Negotiated Deals Market With effect from July 13, 2015, all off-market trades are recorded subject to following thresholds and conditions: Above Sub-to-Sub or House-to-House (No verification) Sub-to-House (Verification by PSX) * Threshold Below Sub-to-Sub or House-to-House (Verification by PSX) Sub-to-House (Verification by PSX) Above mechanism applies on both inter and intra broker levels *Threshold of 10% of Average Daily Volume of each security in Ready Market during last six months or Rs10 million, whichever is lower, Off-Market (NDM) Transactions Verification Procedures are available in detail in Legal Framework section on PSX website.

26 Clients Assets Segregation Statement Requirement (PSX Regulations) (a) The Broker shall submit to the Exchange Clients Assets Segregation Statement as per format prescribed by the Exchange within fifteen (15) days of the end of the latest fortnight (b) The Broker within fifteen (15) days of the close of its financial year shall submit an annual Clients Assets Segregation Statement, duly verified by its Statutory Auditor. General Guidelines Brokers must keep all clients monies & securities segregated and secure from its own assets Must maintain a separate bank account(s), with word clients in the title to hold clients money At any point in time, clients payable as per clients cash ledger must be supported with equivalent amount of in clients bank account(s) At any point in time, clients securities position as per back office record must be supported with equivalent holding balances as per CDS record. Any difference (+/-) must be justified through reconciling entries. In addition to fortnightly un-verified submission, Brokers must submit Clients Assets Segregation Statement to PSX within 15 days of close of the financial year verified by its Statutory Auditor. Format of Clients Assets Segregation Statement is available in Legal Framework on PSX website.

27 Investors Complaints & Brokers Risks Investors Complaint types Unauthorized trading in clients accounts Non-provision of duplicate copy of filled-in Standardized Account Opening Form (SAOF) Acceptance of blank SAOF from the account holders Risks If the broker does not properly records the orders of clients or indulges in unauthorized trading in clients accounts, the Broker may be subject to arbitration or litigation risks which will ultimately tarnish the image and business repute of such broker. It is important for a broker to provide a duplicate copy of duly filled-in SAOF to clients to ensure that the client is aware of all rights & obligations and to substantiate in the event of arbitration that the client has agreed with the information in SAOF & its terms and conditions. Such practice is a serious violation of KYC & CDD policies & procedures. KYC of every client without any exception and collection of requisite set of documents at the time of opening of accounts is a must requirement for every brokers. 27

28 Investors Complaints & Brokers Risks Investors Complaint types Allowing staff to operate client account as Authorized Person without performing due diligence and/or obtaining consent of the Account Holder Non-provision of the trade confirmations, quarterly CDS Statements and Account Statement to the Account Holder. Multiple accounts of family members operated by single person Risks In case an account holder has not authorized the concerned staff, the account holder may not be aware of the transactions executed in his trading account and in case of dispute the arbitration award may be announced against the broker. Brokers are required by the applicable laws to provide all such statements to their clients. Brokers must not open anonymous accounts or fictitious accounts. Performing of KYC of every client without any exception and collection of requisite set of documents at the time of opening of accounts is a must requirement for brokers. 28

29 Compliance Quote It takes 20 years to build a reputation and five minutes to ruin it. If you think about it, you will do things differently Warren Buffett 29

30 Q&A Session! 30