The Securities and Exchange Commission of Pakistan (SECP) has imposed a penalty of Rs 25,000 on a broker of the Karachi Stock Exchange (KSE) for not maintaining segregation of clients' assets and strictly directed brokers to avoid the violation of the Rules and Regulations of capital markets in future.
According to a SECP order issued here on Tuesday, the Commission has acted against a Trading Right Entitlement Certificate Holder/ Broker of the KSE under Section 22 of the Securities and Exchange Ordinance, 1969 ("Ordinance") read with Rule 8 of the Brokers and Agents Registration Rules, 2001 ("Brokers Rules").
After a detailed and thorough perusal of the facts, evidence/information available on record, contentions and averments made by the representatives of the said broker during the course of the hearing, it is evident that the broker failed to perform its responsibilities by not maintaining the segregation of clients' assets, the SECP said.
The violation of the Rules and Regulations is a serious matter. However, the representative during the course of hearing and the broker in its written response communicated that it is now maintaining segregation of clients' assets in letter and spirit. Moreover, the broker rectified the irregularities highlighted in the inspection report and communicated that it is now complying with the applicable regulatory framework.
Therefore, taking a lenient view, in exercise of the powers under Section 22 of the Ordinance, the SECP has imposed on the Respondent a penalty of Rs 25,000. The broker is further directed to comply with the Rules 1971 and the guidelines issued in letter and spirit; and ensure segregation of clients' assets in letter and spirit. Brief facts of the case are that the Commission in exercise of its powers under Sub-section (1) of Section 6 of the Ordinance read with Rule 3 and Rule 4 of the Stock Exchange Members (Inspection of Books and Record) Rules, 2001 ("Inspection Rules") ordered an inspection of the books and records required to be maintained by the broker.
The Inspection Team submitted the report which was shared with the broker in accordance with Rule 7 of the Inspection Rules. The response of the broker in the context was received vide letter dated April 30, 2014. The Inspection Report highlighted that the Respondent failed to maintain the segregation of clients assets; failed to provide information/reconciliations required by the Inspection team; failed to provide approved Know Your Customer ("KYC") and Customer Due Diligence ("CDD") Policy; and was in violation of Circular 34 of 2009 issued by the Commission.
In light of the Inspection Report and the comments received from the Respondent, the Commission served a show cause notice to the broker under Section 22 of the Ordinance and Rule 8 of the Brokers Rules. The Respondent (broker) in its written response vide letter dated May 29, 2014, submitted the arguments regarding segregation of Clients' Assets, non-provision of information/ reconciliation to the inspection team, reconciliation/clarification of Accrued Expenses.
The Representatives of the broker with regard to segregation of clients' assets and purchase of TDRs worth Rs 16 million on May 31, 2013 communicated that the directors of the Respondent injected an amount of Rs 55 million which was used for the purchase of those TDRs and no clients' funds were used in this context. The representatives further added that initially the funds of the broker and its clients were-mingled but afterwards they were segregated. In order to substantiate their claim of not using clients' funds for the purchase of TDRs, the Representatives of the broker agreed to provide reconciliation of fund position as of the date of purchase of TDRs within ten days of the date of hearing.
The Representatives of the broker with regard to non-provision of information/ reconciliation reiterated the stance taken by the broker in its written response. The Representatives added that their auditors had no objection on netting of the commission received from its clients and commission paid to its employees. However, the Representatives stated that the broker shall be careful in future.
With regard to KYC and CDD Policy, the Representatives asserted the stance of the broker and stated that copy of duly approved KYC and CDD Policy has now been approved and provided to the Commission along with the written response. The Representatives of the broker stated that they have now updated the UIN database and are now in compliance with the requirements as specified in Regulation 43(b) of the General Regulations of the KSE.
The Representatives communicated that the broker has provided the copy of the revised authority letter and further ensured that the Respondent shall not receive the authority letters in the name of the Chief Executive officer of the Respondent to avoid any conflict of interest.
The SECP said that the broker in its written response and the Representatives of the broker during the course of a hearing with regard to the segregation of clients' assets accepted that initially the clients' funds and the funds of the Respondent were comingled. The Respondent vide letter dated July 14, 2014 provided explanation as to the purchase of TDRs from its own funds, however, the Respondent did not provide the requisite reconciliation as was agreed during the course of hearing. Upon telephonic query the Respondent vide email dated July 17, 2014 provided a reconciliation of the funds and payables position as of May 31, 2013 along with its balance sheet of the same date.
The SECP said that it is evident that the purchase of TDRs worth Rs 16 million by the broker as of May 31, 2013 was not solely from its own funds. Because of comingling of clients' funds with its own funds, an amount of Rs 1.89 million approximately of the clients' funds was used by the broker, prima facie, in violation of the requirements specified in the General Regulations of the KSE regarding segregation of clients' assets.
The broker in the context of netting off commission income with commission expense stated that in future due care will be exercised and the expense and the income should have been reported and recorded separately to depict true and fair view of the state of Respondent's affairs.
The Respondent along with its written response provided the copy of the KYC and CDD Policy duly approved by the Board of Directors and the copy of the updated authority letter in conformity with the regulatory requirements, the SECP order added.
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