SECP teams to conduct joint inspection of brokers

SOHAIL SARFRAZ

ISLAMABAD: The inspection teams of the Securities and Exchange Commission of Pakistan (SECP) would be empowered to conduct joint inspection of securities brokers of exchanges to ensure compliance with the requirements of Securities Act, Code of Conduct for Brokers, Regulations of Central Depository and NCCPL, Central Depository Act, Demutualization Act, Securities Act and other relevant rules and regulations.

Through SRO.889(I)/2015, the SECP has proposed Joint Inspection Regulations, 2015.

Under the proposed rules, the Inspection Team shall carry out inspection to ensure compliance with the requirements of the Securities Act, Securities and Exchange Rules, 1971, the Code of Conduct for Brokers as enshrined in the Third Schedule of the Brokers and Agents Registration Rules, 2001, Rule Book of KSE, Regulations of LSE and ISE (whichever is applicable), Regulations of Central Depository and NCCPL, Central Depository Act, Demutualization Act, Securities Act, Securities and Exchange Commission of Pakistan Act, 1997 and any other relevant rules/regulations of the Commission, and directives/circulars/guidelines issued by the Commission/Securities exchange/Central Depository/ NCCPL. Provided that the scope of inspection shall at least include the minimum activities as specified in Appendix III or as may be prescribed by the Commission from time to time under the Securities Act.

The Joint Inspection will be carried out by joint inspection team of Self-Regulatory Organizations and includes all Securities exchanges, Central Depository and NCCPL (SROs) as per the requirements of these regulations. The Oversight Committee may order Inspection of books and record required to be maintained by a Securities broker of Securities exchange under respective rules and regulations.

All Securities brokers of the securities exchanges shall be liable for Inspection under these Regulations. The selection criteria shall be assessed by the Oversight Committee at the start of each quarter.

The oversight Committee shall determine the total number of Securities brokers for Inspection at the start of the each quarter on the basis of available information and details using risk based approach as per the requirement of this regulations. The Oversight Committee may assign risk based rankings to Securities brokers by giving appropriate weightage to the specified factors at the start of each quarter.

The cumulative weight should be used to assign risk based ranking and Oversight Committee shall use the latest available data for this purpose and the process shall be repeated at the start of each quarter, proposed rules said.

On the basis of categorization, Securities brokers with the highest risk rankings shall be selected by the Oversight Committee for Inspection at the start of each quarter. The decision of the Oversight Committee regarding selection of securities broker shall be binding on the respective Securities brokers. The Securities brokers selected for joint inspection shall be excluded from the forthcoming balloting of system audit of respective securities exchange in which the said securities broker was required to be considered for selection.

The Securities brokers selected by Oversight Committee for inspection and data and basis used including related workings for its selection shall be communicated to the Commission by the Oversight Committee on immediate basis.

Under the proposed rules, the inspection shall be carried out by the Inspection Team comprising of members from SROs. The Manager and/or Supervisor of the Inspection Team shall be from respective securities exchange. The Managers and Supervisor of the inspection team shall be from the securities exchange where the respective broker has most actively carried out business in the review period.

Where a securities broker selected for inspection is TRE certificate holder of more than one securities exchange. Inspection shall be carried out to cover the regulations of the securities exchange where respective broker has most actively carried out business.

The Inspection Teams shall carry out the inspection in accordance with the scope defined in these Regulations and submit its Report to the Oversight Committee within 75 days from their appointment including the views, counter views and comments of the Securities brokers as well as Inspection Team. The Oversight Committee shall forward to the Commission as well as to respective SRO copies of the Inspection Reports along with comments of Oversight Committee, if any, on the discrepancies/observations, within 30 days of receipt of the Reports from the Inspection Teams. The Oversight Committee shall also forward its adjudication recommendation note to respective SRO on each observations/non-compliances identified by the inspection team in their inspection report.

Provided, that, if the Report highlights any material non-compliance by the Securities broker, the Oversight Committee shall forward such Report to the Commission immediately. The Oversight Committee shall exercise judgment in determining the severity of non-compliance in the context of protecting the interest of the Investors and reputation of the Securities exchange and capital market, it said.

The Inspection Team shall ensure that the Securities broker has rectified non-compliances identified in the previous Report and specify the areas along with the reasons where the Securities broker has not been able to rectify the non-compliance(s), if any. The inspector shall ensure that the Inspection is carried out in a fair, just, efficient and transparent manner;

If the Inspection Report forwarded by the Oversight Committee to the Commission and respective SRO contains any non-compliances, the Securities broker shall rectify the same immediately and such Securities broker shall be subject to limited scope Inspection in the same/following year to confirm that it has rectified the non- compliances reported by the inspection team.

The decision of limited scope Inspection of a non-compliant Securities broker shall be taken by the Oversight Committee.

It said that the Oversight Committee may require the Inspection Teams to initiate limited scope Inspection of a Securities broker, and the inspection team will be required to report to the Oversight Committee rectification status within 30 days from the date of initiation of limited scope inspection;

The Commission shall constitute an “Oversight Committee” comprising of members from each SRO to provide overall supervision and direction for conducting joint inspection and to liaise with the Commission for all joint inspection related matters.

The SECP said that if the Inspection Report identifies any non-compliance(s) including that of the CDC Act, Articles, Rules, Regulations and directives/notices/circulars/guidelines of the Central Depository, NCCPL and/or Securities exchange, the respective SRO(s), as the case may be, may, after giving the Securities broker, an opportunity of being heard and considering the severity and materiality of the non-compliances, take appropriate enforcement action under its regulatory framework; Explanation: For the purposes of these regulations the expression “regulatory framework” means CDC Act, Rules, Regulations, Guidelines, Directives, Circulars, etc. of NCCPL, Securities Exchange(s) and CDC.

If a Securities broker fails to provide the documents as per the list included in the Inspection Notice issued and/or any other communication by the inspector at the commencement of the Inspection or fails to co-operate with the inspector/inspection Team including failure to provide the documents required during the course of Inspection, the Oversight Committee shall, upon receiving a written complaint from the inspector through its Secretary, refer the matter to respective securities exchange to call a hearing of the Securities broker and the Securities exchange may issue a warning letter or may impose a penalty not exceeding Rs.50,000 per day during which the default continues on the said Securities broker. If the Securities broker, subsequent to the imposition of the said penalty fails to cooperate with the inspector or fails to pay the penalty, the Oversight Committee shall refer the matter to respective securities exchange for initiation of disciplinary actions against non-compliant Securities broker as per law. The entire penalty amount recovered by the respective Securities broker shall reimburse to the Commission on immediate basis.

If the Securities broker fails to pay the audit/inspection fees and charges within the specified time, the Oversight Committee shall refer the matter to respective securities exchange and the securities exchange may impose a penalty on such Securities broker as it may deem fit.

If the inspector/inspection Team, who/which has been appointed under these Regulations to conduct inspection, fails on account of intentional misconduct to discharge his/its duties or does not carry out the Inspection in accordance with the scope of the Inspection on account of the aforesaid reason, the Oversight Committee shall refer the case to respective SRO to initiate such action against the inspector/inspection Team as deemed appropriate by the SRO in the interest of the capital markets and may remove the inspector from the panel.

Where the Securities Exchange, Central Depository, NCCPL or any of its employees, officers, directors including, where the context so permits, Board, any Committee, subcommittee to whom any function of the securities exchange may for the time delegated falls to discharge its/his duties or does not carry out the enforcement action(s) in accordance with the provisions of these regulations on account of intentional misconduct, the Commission may on its own or on receiving any complaint after giving due opportunity of hearing to the employees, officers, directors including members of Committee, sub-committee of Securities Exchange, Central Depository, NCCPL, impose penalties as provided under the law and such other necessary action against such employees, officers, directors and respective member as it may deem fit for such intentional misconduct.

The information and details obtained by the Inspection Team during Inspection under these regulations shall be retained through working paper file. The information/details/data/explanation obtained during Inspection under these regulations are required to be maintained at least for a period of five years from the completion of Inspection, proposed rules added.