1. ORDER This order sHlt dispose of the proceedings initiated through Show Cause Notice beanng No MSW/SMDISE/1(5)20{16/3 dated October 08, .2007 the SCN") Issued tc Maximus Securities (Pvt.)
2. Limited ("the Respondent'), member of the Lahore Stock Exciange (Guarantee) Limited (ISE") by the Securities and Exchange Commission of Pakistan ('the Commission') under Rule 8 of the Brokers and Agents Registrations Rules, 2001 ('the Brokers Rules'') for violation of Rule 12 of the 13rotc.Ers Rules --y?d clause A5 of the Code of Conduct contairiel in the Third Schedule of the Brokers Rules.
3. The brief facts of the case are that the ReSpondent is a member of LSE and is registered with the CommissiOu under the Brokers Rules. An enquiry was initiated by the Commission in exercise of its powers undec Section 21 of the Securities and Exchange Ordinzince, 1969 ('the Ordinance') and rod Rhodes Sidat I-Iyder & Co. ("the Enquiry Officer') was appo.Nled as the Enquiry Officer under the above lilenlionfld Section for the follo....Viisg: lo nnguire into the deaiings_ ousiness or any transaaun by the Respondent durng the period from April 01 2006 to June 15.2006 the Review Period").
4. To identify any and all the acts or omissions constutirg a violation, of the Ordinance and the Riles made thereunder.
5. GerierA Rules and Regulations of LSE, SR:unties and Exchange Rules 1971 (-the 1971 Rules' I and dvecii-As ,..Ssued CorniniSSi011 from I:me to lime.
3. The findings of the Enquiry Officer revealed several instances of potential non compliances with applicable laws and regulations. A copy cf the Enquiry Officer's report was sent to the Respondent on September 07. 2007 which required the Respondent to provide explanatons on the observations :cif the Enquiry Officer together with supporting documents After pausal of the Respordent's repli,L,s. To the above menli vied letter, which did not adequately explain the position in respect of some instances the SON was issued to the Respondent under Rules 8 of the Broker::. Rules stating that the Respondent has prima fa.:.Ie contravened Rote 12 of the Brokers Rules read with Clause A5 of the Code of Conduct contained in t'-.e Third Schedule to the Brokers Rules which are reproduced as under Rule 12. "A broker holding a certificate of registration under these rules shall ab,de by the Code of Conduct of.H:ified in the Third Schedule' Clause A5 of the Code of Conduct- 'A broker shall abide by all the prov sons of the Securities and Exchange Commission of Pakistan Act 1997 ("the Act') and the rues, regulations issued by the Commission and the stock exchange from tiir" may tau applicable to film".
6. On October 08, 2007. The Respondent was called upon to. Show cause in wilting within seven days and appear before the undersigned on October 18. 2007 for a hearing, to be attended either in msoti and/or through an authorized representative.
6. 1 he hearing was attended by Mr. Ad eel Aril Khan, Chief Executive Offices of the Respondent, who argued the case. However, no written reply to the SCN was submitted A sumnialy 01 the contentions and objections that were raised by the Respondent in its written submissions and during the hearing and findings and conclusiorrs of the Commission on the same are as.f011ows: Blank Sales ("Issue No. 1') 8.1 In terms of Regulation 4 of the.Short Se ling Regstations, Blank Sates are not permissible and in terms of Regulation 5 of the Short Selling Regulations. n is provided tr.::tt: "No Member shall make a Short Sale unless: Prior contractual borrowing arrangement has been made The sale is rrtade at an uptick. And The trade is Identified as a Short Sale at the lime of placement of order' 8.2 The finc.Mngs it he Enquiry Officer re.: _-algid instances of Bla. Sales during Urn Review Period.
7. 8.3 The Respondent made the following submissions on the issue: In its e.Ar.Ier wntlert iq)ly dated September 28, 2007 which the Respondent provided coinmeri,t!, Eir i.e,ry Report, Respondent accepted t!.,e execution of Blank Sales riikTitioned in the Ennuily Report Subsequently the Blanl Sales given in the Enquiry Report were made punt of SCN as Annel.Ire - A ."the Annexure'..
8. During the hearing the Respondent with regard to instances given at serial nos. 1-22 and 21641 stated that same belonged 10 its client Mr. Moeen .Qadir who at the time of execution of sad cINed that he had deliveries. In nis CDC, account w,", a broker at (ar-chi Stock Enhangt. (Guarantee)
9. Limited ;"KSE'). However, later on the client squared poston whiCh did not TOquire transfer the shE- cs to the Resrondent. However, no documentary evidence was provided by the Responceni 2.Sablsh that the client had posit,on at KSE.
10. Whereas, with regard to instances given at se...Al nos. .-25 i'.e Respondent stated that the said trades were result of mistake as the client over soic hi.s povion in fan c due to sudden market movement.
11. 8.4 I have considered the contentions of the Respondent and the isses raised therein and the same are a ddressed.Ey me Letow The Respondent's assertion that the c `keen Ondir had position with KSE broker can not be accepted in absence of any documentary proof .1 nay be noted that the Respondent is responsible for each and every trade executed through its terminals and it ls its duly to ensure that each and every trade executed by it comely with the applicable rules and regulations. Therefore, the Respondent should have obtained documentary evidence from its clients that they hril pre-existing interest in the shares being sold by it, Keeping in view the aforementioned and In absence of any dc-;-:umentary evidence the said trades wilt be :onsiderai as Blan,N. Sales.
12. With regard to instance given at the serial nos. 23-25 (t .e Respondent assertion that the Said trades were result of mistake does not.Absolve the Respondent from its obligation to comply with the Short Selling Regulations. It was the responsiblity of the Respondent to put in place proper system and controls in order to ensure that tradits. Executed through its horse comply with aplicable and cep .'.' 8.5 Considering the above facts and the of the Resporrnt, it is cear that 41 Bank Sales have been made in v.Olalion of Regulator, 4 r,,,f the Shoe' Selling Regulations. In semis of Rule 8 of the Brokers Rules, sub rule (ii) where.The Commission is 01 the.. Open on that a broker has inter ilia failed to comply with any requirements of the Act or the Ordinance or of any rules or directions made or give:, thereunder, in terms of sub rule (i.e) has contravened the rotes re-guiations of the exchange and in terms of sub rule (iv) has called to follow any requirement of the Code of CondUCI laid down in the Third Scrtedute, the GQinrinIssion may the interest, take con under 84'a) or (b) of the BTokers Rules.
13. 8.6 In light of the above i.e me facts the Respondent by making Blan:c Sales has vulatect Ole Short SellIno Regulations therr.By anractsno sit rule the Rule 8 of the Brokers Rule and has a;s0 'oiled comply with Clouse A5 of the Ccde of Conduct contain,ed in the Third Schedule to the Brokers RuleS, thiareby.
14. Attracting sub rute (iv) of we. Rule 8 orthe Brokers Rule Accordingly, a penalty of Rs. 25,000 (Rupee,3 twenty ;:lve Thibusind only is lierehy irriposec on the Respondent under Rule. B (I)) of the Brokers Rules 9. Account Opening roma (' issue No. 9.1 In terms of Commission's Directive Na. SMD(SE/2(89) 2003 (lated July.23. 2003 which requires. All the.
15. Members-brokers to maintain Account Opening. Foam (s) t,"the AO9sy) in ciagarrnily with the Standardized Account Operii:i.g Form {tie A0F) :cireserited by the Commission aild subsequent changes made to the SAOF vide leers ND. SMDISE12k 9) 2(03 dater,' November 19, 2003 and January 20, 200d. Subsequently this SAOF was aiso m-ade.Pad of LSE General Rules anc Regulations as Chaptur VIII le said gectives of the Corrmiss;on require tha List isf Tramaction fee. Commission to be charged 1.y. The Broker and other GDC charges to be levied should be attached WI) the A0Fs.
16. Attested copies of clients: CNICs must be attached with the A0Fs.
17. Rikargn io be mainiained by dent rnust be rnerilioriel,1 an AOF= Each field of the ACiF should be filled at the lime of ...Benrri.g of account.
18. 9.2 Findings of the Enquiry Officer revealed [her List al Transaciion fee. Commission to be chargfyj by tile Respondent and other COG charges ti be levied was r.r.::t atlacihed wit!' the AOF Lin-attested copies otCMCs of the were atiacted with AOFs M8niiisS to be maintained by czients were no; weriiici-ied AOFs CNIG numbers of client were nol mentioned on AOF ci.3 Ttte Respondent F1181.18 the following subrimssid:i on this issue: With regard to violation regardifig not atrating, with AOF. List Of iransaclion fee commission to he charged by the Respident acrd oilier CDC charges to he levied, the Respdrident staled Mat list of cliarces are given to clients at tile ttrne of L-peninq of account but the same was no! Being attached wlth the AOFs. After the EnguLry now started to attach the said list with AOEs wgard to remaining violation as Et91dd above the Respondent agreed in the carne., howievul ::=sated that ii has taken ccrrrebtive 3C!i01-15 Eirld '5 now complying will) IhO r.:f It1e SP..0n2 9.4 I have cow3idtiiell the 3sSerrial of the Respondent Eind it is evident Mat the Respondent has acknowledged Above.Mentioned violat!On. However, the Respondent has assured that it has !Taken corrective steps and is currently complying votth theabovementioned directives of the Commission and requirements of SAOF.
19. 9.5 Considering the above facts and the conten!Ions of the Respondent, it is es'La,..-i.Listed that the Respondeill has frilled to Ocqiiply with CommisSion's directive efiJ General RLIes and Regulations LSE. In lows 1[1 Fide 8 of the Brokers Rules, more particularly suti rule Oh) and sub Rite (v) where the COrnrnission is of the opinion that a broker has in:e a!:2 failed to Damp any requirements of the any directions of the Commission andior has contravened the rules and reoulalions of the Exchange andior has failed to follow any requirement of the Code of Conduct laid down in the. Third Schedule, it may in the public interest, take action under Rule 8(a) or (b) of the Brokers Rules.
20. 9.6 In light of P..e above i.e. The fad the Respor.Dem failed to corn* with Cornrniss.On's directives thereby attracting sub rule rvj of the Rule 8 of the BroRefs Rule. However. Lased on the Respondents statement that it has already to gin corrwlive actions and assured the Commissiorl that such violations will not our in future 1 am inclined, on this occasion, to take a Isiqient view in the matter and will not take any punitive action under Rule 13 Of the Brokers Rules. As such, I believe a 'caulion' ill this ii stele to the Respondent would suffice and I muld further direct the Respondent to ensure that fult cOmpkanCe be made of all rules, fegulaWns and dire-Alves of the Commission fuiure for avoiding any punifiva action under the 10, Order Register {' Issue No 3-)
21. 101 in terms of Rule 4f 1) of the 1971 Rates it is ormtdal that "All orders to by or stilt s.e.Cu:ities which a member may receive shall be er,te,fed, in the chrenolooical order, in a register to be maintained by tin.' in a form which shows the name and address of the person who 'placed the order r2rrte and number 0' the srcurilies to be bought or sold the nature ref Ira1T6a;:tiai and the if any as to otte )1' the or the. Petal for YiNCI) the o.!Del is to be valid,' 10.2 The findings of the Enquiry Officer revealed that the order rester as mentioned above was not maintained by the Respondent during the Review Period.
22. 10.3 The Respondent made the following submission on the aforementioned Issue The Respondent during the hearM7 stated that il has attached a printer with each teminat which minis the detail of al! The ante's placed by it into 11-1,2 system; however, it acknowledged th.:4! II is m I mairitainim_l a separate ,:ler reryster _.He ReF-ponrie.Nt dunng the hearing assured th,rt i.View mainta41 the crdis:1 'equYed.
23. 10.4 I have considered the contentions cf the Respondent and I am o7 the view !Hat pnntout of electronic ledgers ci the Daily Activity Log as mentioned by the 1-?Esponde-it is not a stbsttite for the Order Register as fequired under the Rule'4(1) of the 1971 Rules- The afoei7iertioned Logs only record those. Orders that are placed by the Respondent into LOTS and not all Ile orders which were received from the clients teed entered into LOTS Further, the said onq records the trrne or placen- ien; of orders n' and n%:11 he time of receipt Of orders 10 5 The Cone .s; 1.., also cognizant of the pract,cal 011(411[1es asso:.Ialed with the maintenance of such an Order Register manually, However, :t is noted with orsaopcmtme.Nt that the brox.Eraoe house and LSE were unable 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 Crder Register as rectdired under the Rule 40) of the 1971 Rules 10.6 Considering the., above mentioned fact I am inclined, on this bc,47..-ision to take a foment view in the matter and will not take any punitive action under Rule 8 of the Bra,ers Rules As such, I beieve that a caution in this instance to 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 punitive action under the law.
24. 11 Trade confirmations ("Issue No. 4")
25. 11.1 AND WHEREAS. d(111 of tl'e t9T1 Rums sta:e_s that, "A member executing an Order of a cuslorner shall, with:n twenty four hours of the execution of the order, Transmit to the customer a confirrnatiOn which shale include the following information, namely:- I date on whith the order is oxeculed: it name and mirntlor of he securities; Ili. Nature of transaction (spot ready or forward and a,so whether bought or sold); price; commission, if the member is acting as a broke:; whether the order is executed for the mernbel!.; on amount or from the market " 11.2 AND WHEREAS, the findings of the Enwri Officer revea,ed that. Confirmations as mentioned above were not sent to clients on regular bass, 11.3 The Respondent made the folicvq-ing submission the eoriz-nentior ed fluRe9),Indent asserted that mos! Of its dents are reF id.Ng outs:do Pakistan :o whom it exeartion of their tra es Whereas some of its clients themselves collect trade confirmations from its house.
26. 11,4 I have considered the Respondent's assen,cns on the rssue and I au' of the view that the R,espp^dent is not fully complying with the requirement of the Rule 4(4) of the 1'971 Rules i'V!,hiciug!-. Respondent is sending trade confirmations to its dents residing abroad, however, giving trade confiemation le local clients is only given when they visit the house of Respondent. The R.:respondent should communicate the trade confirmation every client within 24 hours o' execution of '1,eir trades as required under the above mentional instead d giving trade co.11.Rmations 10 the clients. Only when they visit Respondent's hnus 11.5 Considering the above mentioned fact ; 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 Brolsars Rules AS such, I believe that a caution In this Instance. To the Respondent Would suffice and I wou d further direct the Respondent to ensure that full compliance be made of all the. Laws, regulations a' d difeclives of the Commiss:on in future for avOding aily punitive action under the law, 12 Separate Bank Account for Clients Funds ("Issue No. 5")
27. 121 In terms of Commission's directive Na. SMDZE 2(20)12002 dated %tin 4, 2005 which states that.
28. "The exchanges are to ensure that brokers follow the pta;:t.Ice of segregatIno clients' assets from the broker's assets in order to ensure that clients' asses riot rn,sused For 'his purpose brokers shodo 'lave one separate bank a ..Curt :ncLides cash deposP..3 Gf Mem-clients re.!...0:(istreakdown of chi..!..1 positions " 12.2 The findings of me Enquiry Officer revealef: that the Respondent not maintair rig a sep,ate bank account for clients' funds, 12.3 The Respondent made the following submission on the aforenienlioni.!,J Issue The Respol'dent in its written reply dated September 28. 2007 acknowledged that it is not hiairltalnirip a separate account !:o- cl:ents' funds During ",,.e hearing the Respondent stated that ,t wns 11.1t avo.Kre of Pie requirrient of the maintarmy c1 separate bank account for clients' {nos, howEier. It wIfl now comply .Mi!I said requireilert f the Commission's directive.
29. 12.4 I have considered the assertions of the Respondent and it is dear tome that the Respondent has failed to comply w;th the above mentioned directive of the Commissiar). Respondent's statement that it was not aware of the Commiss'ons' direction on manten,:ince of separate hank account for clients' funds does Pot absolve it from its obNalion to comply with ::ommissien's drective and therefore, can not take as sufficir-yrt explanetienlexc.,;se 12..5 Cons:cieling roe abuve ancrthe contentior,s of tha Respondent, r: is estabirshed that Respondent has tailed to comply MI-, Commission's directive. In rem- of Rule 8 of the Brokers Rules, more particularly sub rule (v) therefore_ where the Commission Is the opinion that a broker has inter aria failed to comply With any requirements of the directions of the Commission it may in the puDliC interest, take action under Rule 8(a) or (b) of the Brokers Rules 12.6 In light of the lbove 1,e: the fact the R'esoondent laded !O COI ,ply with Commission's directive thereby attracting sub lute () of the Rule B of the Brokers Rule Howe., et-, based on the Respondents statement that comply with the requirerrenis of aforementioned direi:11Ve of the Commission and assured the; that such violations wilt net occur in fult:re I am inclined, an in s occasion, to take a lenient view in the matter and wilt not take any punitive action under Rule 8 of trio Brokers Rules As such, I believe a 'caution' In this Instance to the Respondent would suffice and would further direct the Respondent to ensure that full compliance is made of all rules, regJlallons and rit,ectives of the Commission in the future for avoiding any punitive acfjor. Linder the law 13 As staled arivv.?
30. Theliespcitcluntls penalized as follows.
31. As regards ls.Que Nol as staled above, a penai7!, of Rs 25,Q.;31- (Rupees Twenty Five Thousand only) is imposed.
32. No punitive action is taken in relation IC Issue. Ne. 2 3 4 and 5 and a simple caution will suffice.
33. 13,1 The mat-fir r r.No;ilose(t of in Ili above 11.1rneY and the ReSpor( en1 is directed to deposit the fine with the Commission r of later than 'ifteen (15) days from the receipt ol INs Order