{{Under Rule 8 read with Rule 12 of the Brokers and Agents Registration Rules, 2001 ("the Brokers Rules") and Section 28 of the Central Depositories Act, 1997 (the CDC Act)}}
1. This order shall dispose of the proceedings initiated through Show Cause Notice SMD SOUTH/SCN/105/07 dated August 03, 2007 ("Show Cause Notice") issued to Dalai Securities (Private)
Limited (the "Respondent") by the Securities and Exchange Commission of Pakistan (the "Commission") under Rule 8 of the Brokers Rules for violation of 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 (the 'Exchange") 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 read with Section 29(2) of the Securities & Exchange Commission of Pakistan Act, 1997 ("the SECP Acf) and Ford Rhodes Sidat Hyder & 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; and 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 Central 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 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 the Respondent to provide explanations on the observations of the Enquiry Officer together with supporting documents.
4. After perusal of the Respondents 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 the requirements of the CDC Regulations. Rule 12 of the Brokers Rule and clause A5 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'.
The Respondent was called upon to show cause in writing within seven days and appear before the Executive Director (SMD-South) on September 26, 2007 for a hearing, to be attended either in person andior through an authorized representative.
6. The hearing was held on September 26, 2007 which was attended by Mr. M. Ames, 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 findings and conclusion of the Commission on the same are as follows:
8. Order Register 8,1 In terms of Rule 4(t) 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."
8,2 Findings of the Enquiry Officer revealed that the register as mentioned above was not maintained by the Respondent during the Review Period.
8.3 The Respondent made the following submission on this Issue ("Issue No, 1"): The Respondent contended that the register as provided above was not possible to maintain due to practical difficulties and a computerized order book is maintained as a solution, However, it has started to maintain the required Register from May 07, 2007, 8.A I have considered the contentions of the Respondent and am of the view that the order book as mentioned by the Respondent is not a substitute for the Order Register as required under the Rule 4(1) of the 1971 Rules, since the order book only records those orders that are placed by the brokerage house into KATS and not the orders received from the clients.
8.5 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 Exchange 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.
8.6 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.
9. CDC Balance statements 9.1 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."
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.
9.3 The Respondent made the following submissions on this Issue (issue No. 2"): The Respondent admitted that the CDC Balance statements were provided only to its clients upon request. The Respondent further stated that it has made arrangements to comply with the requirements of above mentioned regulation in future, 9.4 Considering the above mentioned facts and corrective measures taken by the Respondent, and acknowledging the practical difficulties in sending the CDC balance statements to all of the clients of the Respondent, including the dormant accounts, I am inclined, on this occasion, to take a lenient view in the matter and will not take any punitive action 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 ensure that full compliance is made of all the Regulations in future for avoiding any punitive action under the law
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 No. 1 and 2 and a simple caution will suffice.