SECP bench cautions stock brokers

SOHAIL SARFRAZ

Islamabad: The Appellate Bench of the Securities and Exchange Commission of Pakistan (SECP) has cautioned that the stock market brokers cannot violate laws for using their own resources to facilitate some of their long term clients through unlawful financing for developing a strong client relationship.

According to a latest order issued by the SECP Appellate Bench, the broker company extended financing to its clients by way of executing their trades despite non-availability of sufficient funds in clients’ accounts in contravention of section 34 of the Securities (Leveraged Markets and Pledging) Rules, 2011 (the Securities Rules).

Furthermore, the continued debit balances were also in contravention of Regulation 4.18.1 (c) of the Rule Book of Pakistan Stock Exchange (the PSX Rule Book) which requires the broker to maintain a collateral amount under its participant account. This collateral account is to be used for instances where outstanding payment has not been received from clients in respect of securities purchased on their behalf and relevant purchase obligation is to be settled.

Broker has informed the bench that it had used its own resources to facilitate some of its long term clients and the SECP completely ignored the fact that developing a strong client relationship requires time and effort. It is unjust to expect from the broker to vigorously pursue and collect the outstanding dues from its clients, especially where such clients have a long-term relationship with the Appellant. Furthermore, the broker never defaulted in making the required payments to NCCPL and the SECP can furnish evidence of the payments duly cleared by such clients, broker added.

The order said that the SECP Appellate Bench has heard the parties, i.e, the Appellant (broker) and Respondent (Commissioner (Securities Market Division), SECP.

SECP Appellate Bench is of the view that while it is important to have a strong client relationship, it does not justify violation of the relevant provisions of the law, i.e, Rule 34 of the Securities Rules which the broker violated by extending unlawful financing to clients and executing trades in their accounts despite non-availability of sufficient funds as well as by making payments to clients despite existence of debit balance. Moreover, the continued debit balances were also in contravention of Regulation 4.18.1 (c) of the PSX Rule Book which required the broker to maintain a collateral account under its participant account in the Central Depository System which was to be used where outstanding payment had not been received from clients in respect of securities purchased on their behalf and relevant purchase obligations had to be settled. Furthermore, the broker failed to recover market to market (MtM) losses from its clients and also did not collect margins in contravention of Regulation 19.5 of the Appellate PSX Rule Book read with Regulation 12.9.3 of the NCCPL Regulations. The broker has not come with any cogent reasons or given any satisfactory explanation as to why the said violations took place.

SECP Appellate Bench is of the view, therefore, that the broker has violated the regulatory framework.

Commissioner (Securities Market Division), SECP has already taken a lenient view by giving a warning and not imposing a penalty.

In view of the foregoing, the Impugned Order of the SECP is upheld and the Appeal of the broker is disposed, SECP added.