1. ORDER This order shall dispose of the proceedings 'Inflated through Show Cause Notice bearing No MSW/SMD1LSE/1.(5)2H5f5.8-A defer) September 12, 2007 ('the SCN") Issued to Mean Securities (Pvt.)
2. United ("the Respondent"). Member of the Lahore Stock Eghange Guarantee) Limiled ('LSE"} by the Securities and Exchange ComMission of Pakistan ("the Commission") under Rule 8 of the Brokers and Agents RegIstraticin Rules. .2001 ("the Brokers Rules") for violation ci Rule 12. Of the Brokers Rules and Clause A5 of the Code of Conduct contained in the Third Schedule of the Brokers The brief facts of the case are that the Respondent is a member of LSE 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 ("the Ordinance") and KPMG Taseer Hedi & Co ("the Enquiry Officer-) was appointed as the Enquiry Officer under the above menlioneil Section for the lbflowing to enquire inlo thi3 dealings. Business or any transaction by the Respondent during the period iron April 01, 200061a June IS, 2006 ("the Review Ptriod" to Identify. Any and all the acts or omissions constilining a violation of the Ordinance arid the Rules made thereunder.
3. General Rules and Regulations of LSE. Securities and Exchange Rues 1971 ("the 1971 Rules") and directives issued by the Commission from time to lime.
4. The findings of the Enquiry Officer revealed several instances potential non compliances with applicable laws and regulations A copy of the Enquiry Officers report was sent to the Respondent on May 14, 2007 which required the Respondent to provide explanations on the observations of the Enquiry Officer together with supporting documents.
5. After perusal of the Respondent's replies to the above mentioned letter, which did not adequately explain the position In respect of some Instances, the SCN was issued to the Respondent under Rule 8 of the Brokers Rules slating that the Respondent has prima lade contravened Rule 12 of the Brokers Rules read with Clause AS of the Code of Conduct contained Iii the Third Schedule to the Brokers Rules which 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".
6. Clause A5 of the Code of Conduct. 'A broker shall abide by art Vie provisions of the Securities and Exchange Commission of PakiStan Aci, 1997 (`the Act"1 and the rules, regulations issued by the Commission and the stock exchange horn time to time as may be applicable to him' On September 12, 2007, the Respondent was called upon to show cause in writing within seven days and appear before the undersigned on September 25, 2007 for a hearing, to be attended either in person and/or through an authorized represenlative, however, on the Respondent's request hearing was refixed for October 09.2007 The hearing was attended by Mir-za Mahmood Ahmed, legal counsel of the Respondent, who argued the case. The Legal Counsel also submitted written replies cri the behalf of the Respondent.
7. A summary of the contentions and objections that were raised by the Respondent In its written submissions and during the hearing and findings arid conclusions of the Commission on the seine are as follows: Preliminary Objections 8.1 The objections raised by the Respondent, pertaining to the Enquiry, are given as under:- The Enquiry Officer did not conduct the Enquiry in a proper manner and halfway through the enquiry the Enquiry Officer left without providing an opportunity to the Respondent to furnish documentary evidence which could have cleared the objections raised in the Enquiry Report.
8. There is a procedural requirement that in order to initiate an Enquiry the Commission must have a reason, like a complaint etc. However, in this- case the Commission didnot have.Any reason to conduct an Enquiry.
9. These Enquiries were a 'fishing and roving exercise" and as per prior court decisions no Regulatory Authority is authorized to conduct frivolous enquiries. In support of its argument the legal counsel provided copies of a number of such court orcers. These are: Order dated March 08, 1992 in the matter of Civil appeal Nos, 38-K to 40-K Assistant Director Intelligence and Investigation. Karachi vis BR Herman and Others, Order dated October 10, 2003 in the matter of Coristitut;on Petition No_ 1353 of 1998 and ConstitutiOn Petition No. 177 of 2002 - Karachi Administrative Employee cooperative Housing Society Ltd Ws Governmen1 of Sindh; and Order dated 1-;eptember 20: 2004 in the matter Customs Appeal No. K-779/04 - Muhammad Aleeq Paracha & Others v/s The Stale The Commission has converted the Enquiry into an Audit.
10. 8.2 I have considered the contentions and the preliminary objections raised by the Respondent and the issues raised therein and the same are addressed below: The Respondent's assertion that it was not provided an opportunity to furnish documentary evidence to clear different violations reported in the Enquiry Report rs not correct. It may be noted that the Enquiry Officer forwarded draft Enquiry Report to the Respondent for a review and provision of any documents to clear violations reported :herein. Further, before issuance of the SCN by the Commission, the Enquiry Report was forwarded to the Respondent in order lo provide it with another opportunity to clear any violation reported in it. Based on the replies and documents provided by the Respondent a number of issues reported in the Enquiry Report were dropped and only those violations were taken up in the SCN where the Respondent could not provide sufficient evidences. Therefore, sufficient opportunity was provided to the Respondent to clear any violation reported in the Enquiry Report.
11. The assertion of the Respondent that the Enquiry was conducted without any reasonfcomptiant is not true. It may be rioted that the Review Period was a period of high volatility for Stock Market and in order to identify the reasons for such volatility the Commission conducted an initial Enquiry into the affairs of various members of LSE. Including the Respondent. The findings of initial enquiry identified number of areas which needed further in-depth review for identification of possible violations of securities market rues, regulatiOns. Thereforer it was deemed necessary to conduct enquiries in order to determine if there was any violation of applicable rules and regulations by the members_ Further, it may be noted that Section 21 of the Ordinance allows the Commission to initiate an Enquiry on it own motion, when ever it deems necessary.
12. The Respondent's contention that the Enquiry was a 'fishing and roving exercise" Is unfounded. As stated atinve the Enquiry was commenced lased on the findings of the initial enquiry conducted by the Commission that identified different areas which required further reviewtenquiry, The member% were selected on the basis of trading volume In certain scrips during the review period Further, the Enquiry Officer was given specific tasks that limited its scope to enquiry Into and identifying any violation of the applicable rules, regulations. All the areas covered by the Enquiry Officer were critical and part of the scope of Enquiry assigned to it. It is further stated that the Commission is primarily responsible for regulating the capital markets and protection of investors under the Act and the Ordinance, Further, the Commission is not expected to take a reactionary appcoactl arid wail for compleints to be brought before it after the damage haS already been caused. It is 'T this reeison lhal the Commission has sup. Motto powers as slated above, to initiate an enquiry into the affairs: and dealings in an Exchange or its members.
13. The Respondent's assertion that the Commission has converted the Enquiry Into an Audit is not correct It may be noted that the scope of the Enquiry was limited and covered only specific areas and did not cover the audit of Ihe entire financia!s of the members The Enquiry principally covered compliance of the Securities Market Law; 9, Blank Sales ("Issue No. 1') In terms of Regulation 4 of the Short Selling Regulations, Blank Sales are riot permisstle and in terms of Regulation 5 of the Sheri Selling Regulations, it is provided that: 'No Member shall make a Short Sale unless a) Prior contractual borrowing arrangement has been eiade h) The sale is made al an uptick, and c) The trade is idenlified as a Short Sale at the lime 61 placement of order" 9.2 The findings cif the Enquiry Officer revealed 541 instances of Blank Sales during the Review Period, 9.3 The Respondent made the following submissions on the issue: The Respondent in its written reply dated October 04, 2007 stated that it has never been involved in Blank Selling and the Enquiry Officer has misconstrued the sales given in Annexure - A phe.
14. Annexure") of the SON as Blank Sates, The Respondent staled that the Enquiry Officer failed to accounl for the deliveries available in its 1-11use Account or the clients' Carry over positions while calculating Blank Sales.
15. During the hearing, the Respondent again denied that the sales mentioned in the Annexure are Blank Safes and agreed to provide documentary evidence of pre-existing interest of the clients in this regard, The Respondent vide letter dated November 05; 2007, provided instance wise explanalion arid provided CDC statements for various dates and scrips in support of its claim that it had deliveries available in the Accounts against sales mentioned in Annexure.
16. 9.4 I have considered the contentions of the Respondent and the issues raised therein and the same are addressed by me below: CDC Accounl Balance Reports provided by the Hesponr.!Ent primarily related to F1QUe Account and did nol show deliveries in the CDC SUb-abcourrt of the clients' mentioned in the Annexore The analysis of the said CDC Account Balance Reports sho:Ned Thal the sales mentioned al serial nos. il7D - 519. Were not Blank Sales as the said sales belonged to the Respionden1 and adequate deliveries were available in the Respondent's House Account. However. In case of rest of the instances, the Respondent drd not provide any documerilary evidence to prove lhat the deliveries appearing in the CDC Accouni Balance Repots belonged to the clients mentioned iir the Annexure or lhe clierrls had carry ovel positions. Therefore, in the absence of any documenlary evidence deliveries aopearog in these reports can not be treated as pre-existing interest of the dents. Hence the rest of the sales given' in the Annexure will be treaded as Blank Sales, 9.5 Considering the above fads arid the contentions of the Respondent, i1 is clear that 491 Blank Sale8 have been made in violation of Rogulaiion LI of the Shoo Selling Regutations, in terms of Rule 8 of the Brokers Rules. Sob rule (ii) where the Commission Is of the opinion ilyi; a broker has inter atia failed to comply with any requiiernents 01 ilsc Ad or the Ordinance ot of any or dimdions made or.Given thereunder, in lens of sub iule (iii) has contravened the rules and regulations of the exchange and in terms of sub rule
(iv) has failed to follow any requirement of the Code of Conduct laid down in the Third Schedule, the Cominiesion may in the public interest, take action under Rule 8(a) or (la) of the Brokers Rules.
17. 9.6 in light of the above fads that tbe Respondent by making Blank Sales has violated lhe Shod Selling Regulations. Thereby altrecting su:2 rule NO of the Rule 8 cif the Brokers Rule and has also failed to comply with Clause A5 of the Cade of Conducl contained in the Third Schedule to the Brokers Roles, thereby, attracting sub rule (iv) of the Rule 8 of the Brokers Rule. Accordingly, a penalty of R5. 75.000 (Rupees Seventy Five Thousand only} Is hereby imposed on the Respondent under Rule 8 (b) of the Brokers Riles.
18. Account Opening Forms (Issue No. 2") 10.1 In terms of Commission's Directive No. SNID/SE/2(89)
19. 2003 dated July 3, 2003 which requires all the members-brokers to maintain Account Opening Fermis) ("the AOF(sY) in conformity Wilh the Standardized .Account Opening Fbrrrt (-the SAOF") plescrihed by the Commission and subsequent changes made to the SAOF vide letters No SMD/SE/2{$9} 201:13. Doled November 19. 2003 and January 20, 2004. Subsequently this SAOF was also made part of LSE General Rules and Regulations 85 Chapter-VI/I. The said directives of the Commission require !Hat, i) List of Transaction fee, commission to be charged by the Broker and other CDC charges to he levied should he attached with the Aors.
20. Li Attested copy of CNICof lire clients siFou/d be '31.12c...1)ed wlhihe ACT Name of nominees simuld be mentioned on the AOFs Each page of AOFs should he duly signed by the Broke? Or his authorized representative_ 10.2 Findings of the Enquiry. Officer revealed lhat: i) List of Transaction fee, commission to be charged by the Respondent and other CDC charges to be levied were not attached with the A.C.Fs. . .
21. CN1C's of the clients enclosed with AOrs were nol attesle.l ill) Name of nominees were not mentioned on AOFs Iv) Each page of Affs was not.Signed by the Respondent or ils authorized representative, 103 The Respondenl made the following sobrniss]on on Mese issues.
22. With reference to the omission of not attaching list.Of charges with lhe AOFs, the Respondent asserted that commission slabs and transaction charges are given by the Respondent to its. dre1113 through Trade Confirmations whichIresenl daily and throi.Ogh LedgerAccount Slaleinent which is sell weekly The Respondent fort ter slated Mal it is in process of rectifying this error, With reference to violation of unattested copies of client's CNICs lite Respondent stated lhat the said violation has already been 'Anted out by the auditors during System Audit conducted during 2006 and it has already paid a fine on ihe same, The Respondent further asserted that ft has already corrected the said omission and also provided attested copies of clients' CMGs In support of its claim.
23. With regard to the missing names of holninees Cili AOFs_ the Respondent asserted that same are mentioned only in those cases where the clieits provided such inforrnalion In most of the cases the clients themselves do not mention the {came of rioininee On AIDES, With regard 10 Violation of missing signatures of the Respondent on AOFs, the Respondent In its written reply stated that it is in the process of getting new AOFs executed to clear SUC11 trivia! Lapses.
24. I have considered the contentions of the Respondent regarding missing list of charges with AOFs and do not agree with the Respondent Vial giving commission rates on the account statements/trade confirmations suffices the requisument of attaching the list of charges with the AOFs Therefore, by not attaching the said list with the AOFs, the Respondent has failed to comply with the directives of the Comrnission Ii may be noted that enclosing the list of charges with the AOF makes it a part of the AOF which is the basic agreement between the broker arid his clients. In case of any dispute arises between them all the matters are resolved on the basis of clauSes of the AOF, With regard to Res.Ponilent's assertion on violation oF un-atiested copies of client's CNICs it is clear that the Respondent failed to comply with the drrectivessof the Commission. However. The Respondent stated that it has already been nenalized by LSE for the said violation pointed out during the System Audit With regard to Respondent's statement about the missing names of nominees on AOFs, it may be noted that SAOF requires that name of nominee should be mentioned on the AOFs Further, the SAOF also requites that each and every field of the AOFs should be duly tilled in Therefore, by nut mentioning the name of nominee en the AOFs the Respondent has violated the abovement toned directive of the Commission.
25. With regard to the Respondent's submission about its missing signatures on the AOF, it is clear that the Respondent has failed to comply with me directives of the Commission It may be noted that SAOF requires that each and every page of the AQFs should be signed by the broker and its clients.
26. 10.5 Considering the above facts and the contentions of the Respondent. It is established Thai the Respondent has failed to comply with Commission's directive and General Rules and Regulations of the LSE. In terms of Rule 8 of the Brokers Rules, more particularly sub rule (10, (vi) and sub rule (v) therefore, where the Commission is of the opinion that a broker has inter atia failed to comply with requirements of any directions of the Commission and/or has contravened the rules and regulations of the Exchange and/or has failed to follow any requirement of the Code of Conduct laid down In the Third Schedule, it may in the public interest, to take action tinder Rule Eifa) or (b) of the Brokers Rules.
27. 10,6 In light of the above I e. The fact the Respondent failed to comply with Commission's directive thereby attracting sub rule (v) of the Rule B of the Brokers Rule. However, based on the Respondents statement that it has already taken corrective actions I am inclined, on this occasion, to take a lenient view in the matter and will not take any punitive action under Role 8 of the Brokers Rules. As such, I believe a 'caution' in these instances to the Respondent would suffice and I would further direct the Respondent to ensure that full compliance is made of ail ruEes, regulations and directives of the Commission in the future for avoiding any punitive action under the law.
11. Order Register ('Issue No 3") 11.1 In terrns of Rule 4( I) of Ihe 1971 Rules it is pruvided All orders to buy or self securities which a member may receive shall be entered, in the chronological 'Order, in a register to be meintaincA by iiim in a form which shOws the name and address of the person who placed 1he order, the name and number of the securities to be boughs Dr sold, the nature of trans8cton aid the limilation, it any, as to the price of the secuOies or 1he penal fur which the order is Yi be vatid 11.2 The findings of 11-se Enquiry Officer revealed that the register es mentio;Ind above was rsot maintained by the Respondent during the Review Peri0d.
28. 11.3 The Respondent made the folfowing.Submission 0n trig aforementioned issue: The Respondent in its written reply asserted that electronic ledger as maintained today by the Lahore Stock Syslem (.Lhe LSS") fulfills the reouirrnent of ai)Ovementioned Rule.
29. During the hearing the Respondent stated Viet now-a-days.Due to high volume and velocity of trading it is practically impossible to maintain mani of order register.
30. 11.4 I have considered the contentions of the Respondent and I arrr of the view that electronic ledgers or the Daily Activity Log as mentioned by the Respondent is not a substitute for the Order Register as required under the Rule 40) of the 1971 Rules The aforementioned Logs only record those orders 1ha1 are placed by the Respondent info LOTS and not all Lh orders which v+ere ieceived from.Lhe clients and not entered into LOTS. Further, the.Said Lorg ally fecords tir Lime. Of placement of orders into the system and not the time ref recelpt of urders 11.5 The Commission is also cognizari1 of the practical difficulties associated with the maintenance of such an Order Register manually, However, it is -noted with disappointment that the brokerage house and LSE were not able to keep pace with evolution In technology and signiflcaM increase in trading activities whereby a system should have been deVetoped to enable simultaneous .Recofding of orders received from clients and their incorporation in a database to generate the Order Register as required under the Rule 4(1) of the 1971 Rules.
31. 11:6 Considering the above mentioned fact I am inclined, on this occasion, to lake.. a lenient view in the matler and will riot take any punitive action under Rule 8 of the Brokers Rules, As such, I believe that a caution In this instance 10 the Respondent would suffice and I would further direct the Respondent to ensure that full compliance be made of all the laws, regulations and directives of the Commission 'in future for avoiding any pimitive aclion under the raw. l2. Separate Bank Account for Clients Funds ("Issue No. 4") 12.1 In terms of Commission's directive No. SMD/SE 2(20)/2002 dated March 4, 2005 which states that 'The exchanges are to ensure that brokers follow the practice of segregating clients' assets from the broker's assets in order to ensure that clients' assets are not misused.
32. For this purpose brol,,ers should have one separate bank account which includes all the cash deposits of their clients along-with Tecordstreal,down of client poSilions.' 12.2 The findings of the Enquiry Officer revealed that the Respondent v:as not maintaining a separate bank account for clients' funds.
33. 12.3 The Respondent made the following submission on the aforementioned issue: The Respondent in its written reply dated October 04, 2007 stated that the said violation was pointed out during the system Audit conducted during 20M and based on that it has already Opened a separate bank account for clients' funds.
34. 12,4 I have considered the contentions of the Respondent and I am of the view that the Respondent has compiled with the Commission's directive No. SMDJSE 2(20)/2002 dated March 4, 2005. Therefore, no punitive action will be taken against the issue no. 4,
13. As stated above, the Respondent is penalized as follows: As regards Issue No 1. As stated above, a penally of Rs. 75,0001- (Rupees Seventy Five Thousand only) is imposed No punitive action is taken in 'elation to Issue Nos. 2. 3 and 4 and a simple caution will suffice.
35. 13,1 The matter is disposed of in the above manner and the Respondent is directed to deposit the fine with the Commission riot later than fifteen (15) days from the receipt of this Order,