1 This Order shall dispose of the proceedings initiated through Show Cause Notice SMD SOUTHISCN/111/07 dated August 03, 2007 issued to Growth Securities (Pvt.) Ltd. (the "Respondent"), by the Securities and Exchange Commission of Pakistan ("the Commission") for violation of Rule 3, Rule 12 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/KEE) and is registered with the Commission under the Brokers Rules, An enquiry was initiated by the Commission in exercise of its powers under Section 21 of the Securities and Exchange Ordinance. 1969 and Ford Rhodes Sidat Hyder & Co. ("the Enquiry Officer) was appointed as the Enquiry Officer under the above mentioned section inter alias a) to enquire into the dealings, business or any transaction by the Broker during the period from April 01, 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 ROI limited to the Brokers Rules and Regulations for Short Selling under Ready Market, 2002 The findings of the Enquiry Officer revealed several instances of potential non compliances with applicable laws and regulations. A copy of the Enquiry Officer's report was sent to the Respondent under cover of a letter dated May 07, 2007 which required 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 these 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 October 11, 2007 for a hearing, to be attended either in person and/or through an authorized representative.
6. The hearing was held on October 11, 2007 which was attended by Mr, Nasir Habib -CEO the Representative of the Respondent who submitted a written reply and argued the case.
A summary of the contentions that were raised by the Respondent in the written submission / during the hearing and the findings I conclusion of the Commission on the same are as follows: 8 Book entry securities of different customers held in a single CDC-sub account 8.1 In terms of Section 2(27) of CDC Act 1997, "sub-account' has been defined as: "sub-account " means a sub-account maintained, as part of the account of a participant, in ac dance with the regulations by a central depository in the name of a sub-account holder so as to record the title of the sub-account holder to any book-entry securities entered in such sub- account.
8.2 Findings of the Enquiry Officer revealed that Book-entry Securities beneficially owned by different customers were kept in a single CDC sub-account opened in the name of a certain customer in violation of the above Section 2 (27) of the CDC Act.
8.3 In relation to this Issue ("issue No. 1"), the Respondent admitted that the default occurred due to inexperienced staff and insufficient workforce at that time. The Respondent further pleaded that the shares have now been transferred to the respective CDC sub accounts.
8.4 l have considered the contention of the Respondent and am of the view that CDC sub accounts are opened to establish the title and beneficial ownership of the shares. Keeping the shares of clients in a CDC sub account opened in the name of another customer is a serious violation of the CDC Act, as it results in the change in the beneficial ownership of the shares.
8.5 Considering the above mentioned facts, it is established that the Respondent has violated Section 2(27) of CDC Act 1997. In terms of Section 28 read with Section 3 of the CDC Act, it is provided that the Commission can impose a penalty for contravention or an attempt to contravene any provision of the CDC Act or CDC Regulations. Therefore, I am of the view that a penalty of Rs.251000 (Rupees Twenty Five Thousand) be imposed on the Respondent.
9. Order Register 9.1 In terms of Rule 4(1) of the Securities and Exchange Rules 1971 (1971 Rules"), it is provided that: "All orders to buy or sell securities which a member may receive shall be entered, in the chronological order, in a register to be maintained by him in a form which shows the name and address of the person who placed the order, name and number of the securities to be bought or sold, the nature of transaction and the limitation, if any, as to the price of the securities or the period for which the order is to be valid."
9.2 Findings of the Enquiry Officer revealed that the register as mentioned above was not maintained by the Respondent during the Review Period, 9.3 The Respondent made the following submission on this Issue ("Issue No. 2"): The Respondent contended that the register as provided above was not possible to maintain due to practical difficulties and daily activity reports are maintained as a solution.
9.4 I have considered the contention of the Respondent and am of the view that the daily activity reports as maintained by the Respondent is not a substitute for the Order Register as required under the Rule 4(1) of the 1971 Rules, since these reports only record those orders that are placed by the brokerage house into KATS and not the orders received from the clients.
9.5 However, the Commission is cognizant of the practical difficulties associated with the maintenance of such an Order Register manually and in order to facilitate the brokerage houses in meeting the requirements of the said rule, the KSE is developing a system which will be provided in due course. However, it is noted with disappointment that the brokerage houses and exchanges were not able to keep pace with evolution in technology and significant increase in trading activities whereby a system should have been developed to enable simultaneous recording of orders received from clients and their incorporation in a database to generate the order register as required under the requirements of the Rule 4(1) of the 1971 Rules.
9.6 Considering the above mentioned facts I am inclined, on this occasion, to take a lenient view in the matter and will not take any punitive action under Rule 8 of the Brokers Rules. As such, I believe a 'caution' in this instance to the Respondent would suffice and I would further direct the Respondent to ensure that full compliance is made of all the Regulations in future for avoiding any punitive action under the law.
10. Order Confirmation 10.1 In terms of Rule 4 (4) of the 1971 Rules, it is provided that: A member executing an order of a customer shall, within twenty four hours of the execution of the order, transmit to the customer a confirmation which shall include the following information, namely:- i. date on which the order is executed name and number of the securities; iii. nature of transaction (spot. ready or forward and also whether bought or sold); iv. price: v. commission, if the member is acting as a broker; vi whether the order is executed for the members own account or from the market."
10.2 Findings of the Enquiry Officer revealed that confirmations of orders executed were not provided to the clients on a regular basis despite the above legal requirement.
10.3 The Respondent made the following submission on this Issue ("Issue No. 3"): The Respondent contended that it has in place a system of sending the order confirmations to its clients through email on a daily basis. Further, majority of its clientele comprises of retail clients who collect their trade confirmations personally on daily basis.
10.4 Considering the above mentioned facts l am inclined to take a lenient view and no punitive action is required under Rule 8 of the Brokers Rule, However, I would direct the Respondent to take measures to maintain evidences of dispatch of order confirmations/ acknowledgements of customers in order to demonstrate compliance with the above mentioned rule.
11. CDC Balance statements 11.1 In terms of Regulation 6.2A.1 of the 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."
11.2 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 10,11 of each month as required under the CDC Regulations and where the CDC Balance statements were sent, the same were not generated from the CDS, instead the statement was sent on the Respondent's own format.
11_3 The Respondent made the following submission on this Issue (issue No. C): 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.
Furthermore, it has now started the practice of sending the CDC Balance statements to all of its clients on a weekly basis.
11.4 Considering the above mentioned facts I am inclined to take a lenient view and no punitive action is required under section 28 of the CDC Act. However, I would direct the Respondent to take measures to maintain evidences of dispatch of order confirmations' acknowledgements of customers in order to demonstrate compliance with the above mentioned rule.
12. In view of what has been discussed above, I am of the considered view that no punitive action is necessary in relation to Issues No. 2, 3 and 4 and a simple caution will suffice in case of Issue No, 2.
As regards Issue No. 1, as stated above, a penalty of Rs. 25,000 (Rupees Twenty Five Thousand is imposed, which should be deposited with the Commission not later than fifteen (15) days from the date of receipt of this Order