1. ORDER 1, This order shall dispose of the proceedings initiated through Show Cause Notice bearing No. MSWISI1ID1t.SEilff)201:16 dated November 06, 2007 ('`the SCN') JSSited to MGM Securities (Put) )
2. Limited (the 'Respondent"). Mr tuber of the Lahore Stock Exchange (Guarantee) Limited (`LSE") by the Securities and Exchange Crrrnmisqon of Pakistan (-the Commission-) under Rule 8 of the Brokers and, Agents Registration Rules, 2001 ('the Urolters Rules') for violation of Rule 12 oi the Brokers Rules and clause A5 of the Code of Coliduct. Or ita Ir,ed n the Third Schedu!e of the Brokers Rules.
2. Rhe brief facts of the case are t,..At the Respondent is a member of LSE and is registered with the Comossion under the Brokers 17ules. An enquiry was initiated by the Commission in exeTdse of its powers under Section 21 of the Se.Surilies and Exchange Ordinance, 1069 {"the Ordinance") and Ford Rhodes Sidhat Hyder & Co. ('the Enquiry Offif.:er') was appointed es the Enquiry Officer under the above menlioned Section' for the following: to t-nquire into the dealings, business or any iransaction by the broker during the period from April 01r 2006 to June 15. 2006 ("the Review Period") to identify any and all the acts of omissions constituting the violation of the Ordinance and the Rutes male thereunder.
3. To identify violations of any other applicable laws, including but not limited to the Brokers Rules, Regulations for Shod Selling under Ready MarXet, 2002 (Short Selling Regulations"), General Rules and Regulations of LSE, Securities and Exchange RJles 1971 'the 9971 Rulesland directives issued by Commission from time to s." Si Ci 'I C:t.)N.IN.11SNION 1)1. PAK'S I AN k H Lirkel 1)orl) -'vt'P4;_Atf BMW 3, The findings of the Enquiry Officer revealed several instances of potential non compliances with applicable laws and regulalion.,. A copy of the.Enquiry Officer's report was sent to the Respondent on October 04, 2007 which required the Pesponden1 to provide explanations on the observations of the Enquiry Officer together with supporting &corner Is_ 4. Alter perusal of the Respondent's replies to the above mentione:'; ..1_ ch did not adequately explain the position in respect 44 some instances. The SON was issued to The Respondent under Rules 8 of the Brokers Rules slating 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 which are reproduced as under Rule 12- " A broke' holding a certificate of registration under these rules shall abide by the Code of Conduct specified in the Thil.i Schedule" Clause A5 of the Code of Conduct- "A broker shall abide by all the provisions' of the Securities and Exchange Commission of Pat.Istan Act, 1997 {"the Act') and the rules, regulations issued by the Commission and the stock exchange from time to time as may be applicable to him".
4. 5, On November 06. 2007. The Respondent was called upon to show cause in writing within seven days and appear before the indersigned on November 16. 2007 for a hearing, to be attended either in person andlor through an authorized representative.
5. The hearing was attended by Syed Hassan Iqbal. Director of the Respondent who argued the case.
6. The Respondent vide its letter dated November 08. 2007 requested that its reply dated October 1S, 2007 may be treated as reply to the SON, A summary of conlentions and objections that were raised by the Respondent In its written submissions and during the hearing itnd findings and conclusion of the Commission un the same Is as follows: 8, Blank Sales ('Issue No, 1")
7. 8,1 In terms of Regula-lion 4 of the Short Selling Regulations, Blank Sales are not permissible and in terms of Regulation 5 of the Short Selling Regulations, it is provided that "No ryttimt..Er shall masse a Short.Sale unless.
8. Prior a ntractual borrowing arrangement has been made The sal': is made al an uptick, and c. The trade is Identified as a Short Sale at the time of placement of order" 8.2 The findings of the Enquiry Officer revealed 52 instances of Blank Sales during the Review Period.
9. 8.3 The Respondent made the following submissions on the issue: SI C111 1111 I's S' IAN GI: .r.)I 1)A [CIS IAN NI;5ri...S Pik kioli) The Respaident, in its reply dated :tuber 11, 2907, 8sserled that its oien'ts had opening positions menlioned in The Annexure -.A ''the Annexurel of the SCN and in some cases the sale!; were made over and above the opening positions by mistake, Whereas against sales mentioned at sc rim no ). 49-51 the Respondent provided borrowir,g agreement The Respe IdelLI during the bear,rig slated that it has not allowed any ci its clients to Short Sell in the marl.Et. Ex .Opt a few clients who had positions rn their Investor .Accounts or with other housesi-kowever, Eller the Enquiry it has.Totalty disallowed the.Clients from Short Selling, The Re9po.:deni further request!Ed that a lenient view may be taken as it has already taken cOrreclive.
10. Actifins aftE.r detection of the rnd.akeS 8.4 I have considered the contentions or the Respondent and the Issues raised therein and the same are addressed by me be low; The Respc.Rtdents assertion that the clients had .Prtcr positions against the sales mentioned in the Annexure is not correct. Scrutiny of the trading data stows that the said sales were mode over and abOve the opening bearice8 of the dents Therefore. The clients did not have adequ.A positions ogo,rist the. Sales mentioned in the Annexure. Further, the Respondent assertion that some of the Blank Sali.s given in the Annexure are result of typographical errors does not absolve it from it of Nalion lo comply with the Short Selling Regulations 11 may he no that Respondent is resnonsibir!
11. For.Each and every order which is placed through its lerminels and further, the Code o.1 Conduct forth under the 13mkers Rules requires every FT;EIFRID9f to exercise due care, skill and diligence in the conduce of his bu5ine,98. Further, it is the responsibility of the Respondent to put in place proper systems and controls lo ensure that each order executed through his house Wills the reqiiirements of raw, However. The execution of banks sales 88 given in the Annexureshows that the Respandeill has violated Short Wing Regulations and the Respondents abuse tracks proper systems and contrti:s In place to prevent execution of such trades.
12. Further, In respell of the sales mentioned at the serial nos. 49-51 it may be noted that Short Selling Ret:utatloris require that Short Safes can ortly be executed after fulfilling pre-reQuisites given in Reputatior,s 5 of Short Selling Regulations The Regulation 5 states that Short Sales should be idei Short Sales at the time of placement of order and for this moose the LSE trading system has provided a separate window for placement of .Short sales. Since the Respondent did not identify the said t+ odes as Short Sales at the time.Of placement of orders, the trades i^ question can not treated as 3 horl Sales Further, tt.o Respondents assertion that it only allowed some of its clients to execute Short Sales, merely an the basis that they usually had positions irr their CD c Iivestoc Accounts or with other houses. Does not prove thai the tIlents had pre-existing interest before sales.
13. The Respondent should 3 IIII. IA( I 1.YqUi C.()NIN117`)Si()N PAKP.; LAN Cilrlo21 'I have obtained sufficient documentary evidence. From it's clients, for their pre-existing interest before placement or order in the system, la ensure that appticable rules and regulations are not violated 8.5 Considering lie abt we Facts and the contentions of the Respondent, it is estab.List-sed that 52 Blank Sales have been made hi viol- onof Regulation 4 of the Shoff Selling Regulations. In erms of Rule 8. Or the Brokers Rules, sub riie (ii) v.'tere the Commission is cif the opinion that a broker has Inver alia failed to comply with any requitements of the Act or the Ofdinac.,ce or of any rules or directions made or g:ven thereunder, in terms of sub rule (i.e) has cog.Travened the rules and regulallons of the exchange and in terms of sub rule {iv) has failed to follow any retluirvinent or the Code of Conduct laid down in the Third Schedule, the Commission may in the public interest, take. Action under Rule 8(a) or (b) of the Brokers Rules.
14. 8.6 fr: light of the abo..e i.e. The fact the Respondent by making Blank Sales has vdaied the Short Selling Regulations Ihereip attracting sub rule {Hi) of the Rule 8 of the .8rokers Rule and has also failed to comply with Clause A5 of the C-...De of C.Oncluct contained In the Third Schedule to the BrokeIs Rules, thereby, attracting sub rule (iv) of the Rule 8 of the Brokers Rule. Accordiqiy, a penalty of Re. 25:000 (Rupees Twenty Five Thousand only ish:reby imposed on the Respondent under Rule 8
(b) of the Brokers Rules.
8. Account Opening 1:orrns (Issue No. 2") 9.1 In terms or Cornm.Ssiob's Directive No. SN1D/SE/2(89)
15. 2003 dated July 23, 2003 wrictt requires all the members-brc.Kers hi maintain Account OpenEng Forrn(s) ("the AOF(s)n) ;rr conformity with the Standardized Account Opening Form ("the SAOF") prescribed by the Commission and subsequent changes made. To the SAOF vide itters tro.
16. AIME/2(89) 21)03, dated November 19 2033 and January 20, 2004. Subsequently this SAOF was als( made part of LSE General Rules and Regulations as Chapter VIII. The said directives of the Commission require that Litt of Transaction fee, commission to be charged by the broker and other CDC charges to bel levied shoiltd be enclosed with the ADFs.
17. A.-_117s should he signed by the witnesses.
18. 9.2 The findings of the inquiry Officer reveVed that: Li3t of Transaction fee, commission to be charged by the broker and other CDC charges to Pr!
19. Levied was not enclosed with the AOEs A )Fs were not signed by the witnesses, 9.3 The Respondent nhide the followirrg submission on these issues' With regarit to not attt [ling the list of transaction fee with the AOFs, the Respondent slated that trade Conlinnalk :1/account SI8ternent CO rii4ns the amount and rate of Ccrnnlission being charged. r. s u.s (.:()N1M1c.SION 1)1 liAklc, I \N raegri 411 (St:cur:lice !Market einrei tNiei regards to I to missing signatures of writries8M en the A0Fs,The Respondent asserted that it '.Vas not awere of any such requirement and further Ibis violation was not pointed by the auditors during preqious ..Ystem Audits.
20. 9.4 I have considered the contentions of the Respondent and the issues raised therein and the same are addressed I. y eie How: I h; eve coy sidered the contentions of the Respondent regarding missing list of charges with AOFs and do no agree with the Respondent that giving commission rates on 'he account statemeniitrade corfirmalien suffices the requirement of attaching the list of charges with the AOF.
21. It may be noted that enclo;ing the list of charges with the AOF makes it part of the AOF which is the basic agreement between he broker and its clients. Incase any dispute arises between them all the matters are res :lived en the basis of clauses of the AOF. Therefore, by not attaching the said list with the AOF the Reeporidc it has failed to comply with the directives of the Commission.
22. With regards to to the Respondents assertion regarding missing signatures of witnesses on the AOFs it was pointed out to the Respondent during the hearing that it is the requirement of the SAOF that eadi AOF shot al be signed by the witnesses, Further, failure to highlight such vielalions during.
23. The System Audit, conducted under Regulations Governing System Audit of the Brokers of the Exchanges, 2004, does not absolve the Respondent from its obligation to comply with the requirements of the Commissi.)n's directives, The Respondent should have been vigilant and should have put in [Mae proper sr.Iems and controls to ensure compliance with applicable rules and regulations.
24. 9.5 Considering the at above facts and the contentions of the Respondent, it is established that 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 RulE. , more particularly sub rule R. And sub rule (v) therefore, where the Commission is of the opinion that a broker has Inter alia failed to comply with requirements of the any directions of the Commission andio has contravened the rules and regulations of the Exchange and/or has failed to follow any requirement of the i;ode of Conduct laid.Down in the Third Schedule. It may in the public interest, take action under Rule 1 :(a) or h) of the Brokers Rules.
25. 9.6 in light of the above. t e, the fact the Respondent failed to comply with Commission's directive thereby attracting sub rule (v) of the Rule 8 of the BrokerS Rule. However. Based on the Respondents statement that he has already taken corrective actions and assured that such violations will not occur in future I am inclined, on this occasion, to take a lenient view in the matter and will riot take any punitive action under Rule B of the Brokers Rules. As such, I I.Elieve a 'caution' in this instance to the Respondent would suffice and I would further direct the Reseal Jere te ensure that full Compliance be made of all rules, regulations and directives of the Commission in the 'uture for avoiding any punitive action under the law.
10. As stated at over tle2 Respondent is penalized as follows: 6 1 d (9()NINLISSIc )N 1 )1 1/AK IS LAN 11",'1,:.L.1.11!, I 1:1T1.....`1 I )1% I.-11,11 I As re. Lards Issue Not. As stated above, a penalty of Rs. 25.0001- (Rupees Twen!y Five Thousand griFy) 's imposed.
26. No pi nitive action is taken In relation to Issue No. 2 and a simple caution will suffice.
27. 10.1 The mailiQr .s thsp 'sect of in the above manlier and the Respondent is directed lo depos: the fine wItn the ricl lay r than fifteen (15) days horn the receipl of 11)is.Orde.