' ZAFAR ABDULLAH, EXECUTIVE DIRECTOR (SECURITEIS MARKET DIVISION).---This order shall dispose of the proceedings initiated through Show-Cause Notice SMDSOUTH/SCN/95/07 dated July 31, 2007 issued to Mr. Abdul Jabbar Khanani (the "respondent") by the Securities and Exchange Commission of Pakistan (the "Commission") under Rule 8 of the Brokers Rules for violation or Rule 12 of the Brokers Rules and Clause A5 of the code of conduct contained in the Third Schedule to the Brokers Rules and under section 28 of the CDC Act.
2. Brief facts of the case are that the respondent is a member of the Karachi Stock Exchange (Guarantee) Limited ("Exchange/KSE") and is registered with the Commission under the Brokers Rules. An enquiry was initiated by the Commission in exercise of powers under section 21 of the Securities 9nd Exchange Ordinance, 1969 and A. F. Ferguson & Co. ("the Enquiry Officer") was appointed as the Enquiry Officer under the above mentioned section inter alia:--
(a) to enquire into the dealings, business or any transaction by the Broker during the period from April 1, 2006 to June 15, 2006 ("the Review Period");
(b) to identify any and all the acts or omissions constituting the violation of the Securities and Exchange Ordinance, 1969 ("1969 Ordinance") and the Rules made thereunder;
(c) to identify violations of any other applicable laws, including but not limited to the Brokers Rules and Regulations for Short Selling under Ready Market, 2002 ("2002 Regulations") and The Centtal Depository Company of Pakistan Limited Regulations ("CDC Regulations") read with the CDC Act.
3. The findings of the Enquiry Officer revealed several instances of potential non-compliances with applicable law and regulations. A copy of the Enquiry Officer's report was sent to the respondent under cover of a letter dated April 30, 2007 which required the respondent to provide explanations on the observations of the Enquiry Officer together with supporting documents.
4. After perusal of the respondent's replies to the above-mentioned letter, which did not adequately explain the position, a show-cause notice was issued to the respondent under Rule 8 of the Brokers Rules and under section 28 of the CDC Act, stating that the respondent has prima facie contravened Rule 12 of the Brokers Rules read with Clause A5 of the code of conduct contained in the Third Schedule to the Brokers Rules and requirements of the CDC Regulations. Rule 12 of the Brokers Rule and clause AS of the Code of Conduct are reproduced as under:-- Rule 12.--" A broker holding a certificate of registration under this rules shall abide by the Code of Conduct specified in the Third Schedule"
Clause A5 of the Code of Conduct.--"A broker shall abide by all the provisions of the Act and the rules, regulations issued by the Commission and the stock exchange from time to time as may be applicable to them".
5. The respondent was called upon to show-cause in writing within seven days and appear before the Executive Director (SMD-South) on August 16, 2007 for a hearing, to be attended either in person and/or through an authorized representative.
6. The hearing was held on August 16, 2007 which was attended Mr. Shahid, Director and Mr. Sikandar, General Manager, the representatives of the respondent, who submitted a written reply and argued the case.
7. A summary of the contentions that were raised by the respondent in the written submission and during the hearing and findings and conclusion of the Commission on the same is as follows:--
8. blanks Sales 8.1. In terms of Regulation 4 of the 2002 Regulations, blank sales are not permissible. The findings of the Enquiry Officer revealed 132 instances of blank sales during the Review Period.
8.2. The respondent made the following submissions on this Issue "Issue No,1"):-- The respondent claimed that these instances were in fact not blank sales and proper evidences were submitted to the Enquiry Office in support of the claim.
The respondent submitted evidences in support of its claim, a perusal of which establishes that the instances identified by the Enquiry Officer were indeed not blank sales and the respective clients had pre-existing interest at the time of sale. However, the respondent is strongly advised that the evidences provided pursuant to the show-cause notice should have been produced before the Enquiry Officer and submitted to the Commission in response to the Commission's letter dated April 30, 2007 wherein the respondent was provided with an opportunity to respond on the issues raised by the II Enquiry Officer.
9. CDC Balance statements 9.1. In terms of Regulation 6.2A-1 of CDC Regulations, it is provided that:-- "Every Participant shall send by the 10th day of every month to all Sub-Account Holders maintaining Sub-Accounts under the control of such Participant Holding Balance statements showing the number of every Book entry Security entered in every such Sub-Account as of the end of the preceding month. Such Holding Balance statements shall be generated from the CDS and shall be sent to the Sub-Account Holders in the manner set out in Regulation 2.6.4".
9.2. Findings of the Enquiry Officer revealed that the respondent did not have a practice to send the CDC Balance statements to all of its customers by the 10th of each month as required under the CDC Regulations and where the CDC Balance statements were send the same were not generated from the CDS, instead the statement was sent on the respondent's own format.
9.3. The respondent made the following submission on this Issue ("Issue No, 2"):-- "The respondent contended that its clientele mainly comprised of retail clients who obtain their CDC balance statements and other details by hand on a daily basis. However, record of provision of CDC Balance Statements to the clients is not maintained due to large number of client."
9.4. Considering the above, no punitive action is necessary under section 28 of the CDC Act. As such, I believe a 'caution' in this instance to the respondent would suffice and I would further direct the respondent to take measures to obtain acknowledgments of its clients to demonstrate compliance with the DC Regulations.
10. In view of what has been discussed above, I am of the considered view that no punitive action is necessary in relation to Issues Nos. 1 and 2 and a simple caution will suffice in relation to Issue No, 2.