The Securities and Exchange Commission of Pakistan (SECP) has directed the securities brokers not to deal in securities on account of their customers without instructions of such customers. The SECP's guidelines for internal control system and compliance function for securities brokers issued here on Tuesday has highlighted compliance of Securities Brokers (licensing and operations) Regulations, 2016 (the Regulations).
These Regulations introduced various new requirements and strengthened existing requirements for the securities brokers to help achieve the objectives of risk management and enhanced investor protection. The Regulations require securities brokers to implement an adequate internal control system and compliance function, commensurate with the size and nature of services performed. In order to provide guidance to the securities brokers for effectively complying with the requirements of the Regulations, the SECP has issued guidelines on internal control framework as laid down under the Regulations.
The guideline provides minimum controls along with policies and procedures required to promote control structure and awareness to the securities brokers. Controls, processes or procedures given in the guideline covers basic internal accounting controls and risk management areas that are minimum and could be increased by the securities brokers depending on the size and nature of the business. Policies and procedures for the business support function as set out in this document should be developed by the securities brokers with the intent to protect the interest of the investors and also for the smooth running of the business.
In case, there is inconsistency between Guideline and the Regulations the later shall prevail, SECP said. Controls over order acceptance and execution to ensure compliance with regulatory requirements: There should be a clear policy to deal on behalf of a customer. A securities broker should not deal in securities on account of customer without instructions of such customer.
The SECP said that appropriate controls must be developed and implemented to ensure this objective including maintenance of evidence of instructions by the customers and matching the trades executed on behalf of customer with the instructions by compliance function on a test basis. An authorized personnel of a securities broker should take reasonable measures to execute the orders placed by the customers on the most advantageous terms as expeditiously as practical in the prevailing market conditions.
All orders placed by customers through telephone should be recorded by authorized personnel over dedicated telephone lines. Orders received in-person from visiting customers should be adequately recorded and acknowledgement should also be obtained from the customers. Priority should be given to outstanding customer orders.
Amount transferred from securities broker's bank account to NCCPL account for settlement of position and transactions from daily NCCPL bank activity report should be on the same date. Controls should be established for excess/short payment, if any, and reason should be documented, SECP said. Trade procedures should ensure that the reconciled authorized orders are executed recorded, confirmed, settled in the customer's account and in the case of TSC or deemed TSC broker, the broker maintains the segregated custody of customer balances to prevent misuse of client funds.
In the case of TSC or deemed TSC broker, the securities brokers should demonstrate that funds of clients are not used for brokers own benefit. For this, a designated customer bank account should be kept segregated from any account holding money belonging to the securities broker and its compliance should be checked by securities broker.
In the case of TSC or deemed TSC broker, the securities broker should keep records of all amounts deposited into the designated bank account(s), specifying the customers on whose behalf the amounts are held and the dates on which the amounts were received and all payments from the designated bank account(s) through cross cheques or other banking channels, the dates of those payments, and the names of the customers on whose behalf the payments are made.
In the case of TSC or deemed TSC broker, there should be controls over movement of securities from customer account and pledge or deposit of these securities as collaterals as per the customer authorization. The SECP said periodic trade activity reports should be sent to the clients for verifiable and agreed mode of confirmation of trades and maintenance of client segregated assets where applicable.
Verifiable and agreed mode of confirmation should be used. The contents of the activity reports should be matched with the securities brokers licensing regulations and the rule book of PSX. The frequency of reporting should also adhere with the regulatory requirement.
In the case of TSC or deemed TSC broker, there should be adequate maintenance of control over reconciliation of balances (custody and account balance) with a) customers; b) NCCPL; c) CDC. The SECP said that a securities broker should ensure that roll forward of future contracts are carried accurately and corresponding margin calls, if any, are made on timely basis from customer. Proper policy of communication and settlement with the Exchange and customer should be prepared.
A securities broker should ensure that roll forward of future contracts are carried accurately and corresponding margin calls, if any, are made on timely basis from customer. Proper policy of communication and settlement with the Exchange and customer should be prepared. There should be controls over maintenance of key books and records including order register, trading system generated reports, activity log and customer telephonic trading call logs as per the securities broker's SOPs and regulatory requirements.
There should be a standard policy over trade activities carried out by the employees of the broker, as provided in the licensing regulations, including their written permissions, maintenance of unique identification database stating the particulars of employees and establishment of required monitoring procedures.
The compliance function should check its compliance for design and implementation. Control and procedures established to ensure compliance should be checked for design and implementation. The SECP said that a securities broker should comply with the requirements given in the Third Schedule of the Securities and Exchange Rules 1971, the Securities Brokers (licensing and Operations) Regulations 2016 and the clarifications issued by Securities and Exchange Commission of Pakistan (SECP) for maintaining net capital balance.
Compliance function should ensure that the calculation of Net Capital Balance (NCB)/ Liquid capital is made in accordance with Schedule II & III of the Regulations. The calculation should also be reconciled with the back office record. NCB/ Liquid capital should be reported to the Stock Exchange in accordance with the guidelines prescribed by the PSX/ SECP.
A securities broker should comply with the requisite Liquid Capital and BMC requirements. A securities broker should submit an audited Statement of NBC/Liquid Capital semiannually. A compliance officer should ensure the accuracy and timely filing of the above statements Brokerage Commission, SECP added.