1. This order shall dispose of the proceedings initiated through Show Cause Notice bearing No. MSVV/SMDILSEil(5)2006159 dared December 06, 2007 ("the SCN") issued to M.R.A Securities (Pvt.)
Limited ("the Respondent"), member of the Lahore Stock Exchange (Guarantee) Limited ("LSE') by the Securities and Exchange Commission of Pakistan ("the Commission") under Rule 8 of the Brokers and Agents Registration Rules, 2001 ("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 of the Brokers Rules.
2. 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 Hadi & Co. ("the Enquiry Officer") was appointed as the Enquiry Officer under the above mentioned Section for the following:
(a) to enquire into the dealings, business or any transaction by the Respondent during the period from Aprit 01, 2006 to June 15, 2006 ('the Review Period").
(b) to identify any and all the acts or omissions constituting a violation of the Ordinance and the Rules made thereunder.
(c) to identify violations of any other applicable laws, including but not limited to the Brokers Rules, Regulations for Short Selling under Ready Market, 2002 ("Short Selling Regulations"), General Rules and Reoulalion5 of LSE, Securilies and Exchange Rules 1971 ("the 1971 Rules") and directives issued by the Commission from time to time.
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 on October 25, 2007 which required the 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 in respect of sonie Instances, the SON was issued to the Respondent under Rule 8 of the Brokers Rules 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 which are reimodurced as under: Rule 12- "A broker holding a certificate of registration ur,cloi those rules sha:1 abide by the Code of Conduct specified in the Third Schedui& Clause A5 of the Code of Conduct- "A broker shall abide by all the provisions of the Securities and Exchange Commission of Pakistan Act, 1997 ("the Act-) and the rules, regulations issued by the .Commission and.the stock exchange from time to lime as may be applicable 10 him".
5. tin December 06, 2007, the Respondent was called upon to show cause in writing within seven days and appear before the undersigned on December 14, 2007 for a tearing, to be attended either in parson and/or through an authorized representative. However, due to official engagement of te Director (SMD) the hearing was re-fixed for December 17, 2007.
6. The hearing was attended by Mc, Muhammad Farhan, Chief Executive Officer and Mr. Karmen Hanif, Settlement In-charge of the Respondent, who argued the case. The Respondent also submitted written reply of the SON to the Commission,
7. A summary of the contentions and objections that were raised by the Respondent in its written submissions and during the hearing and findings and conclusions of the CornmiSsion on the same are as follows:
8. Blank Sales (Issue No. 1"} 8.1 In terms of Regulation 4 of the Shod Selling Regulations, Blank Sales are not pennissible and in terms of Regulation 5 of the Short Selling Regulations. it is provided that: No Member shall make a Short Sate unless: a) Prior contractual borrowing arrangement has been made f) The sale is made at an uptick. arid 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 7254 instances of Bank Sales during the Review Period.
8.3 The Respondent made the following submissions on the issue: The Respondent during the hearing stated that the instances given in the Annexure-A ("the Annexure') of the SON are riot Blank Sales as same belong to its clients who were engaged in arbitrage business. The Respondent further asserted that its clients had corresponding buy positions at Karachi Stock Exchange {Guarantee} Limited {"KSE") against the sales mentioned in the Annexure. The Respondent provided a number of ledger stalements cif its clients for the dates and scrips given in the Annexure showing buy and sate of shares.
6.4 I have considered the contentions of the Respondent and the issues raised therein and the same are addressed by me below: The ledger statements provided by the Respondent and KSE trading data available with the Commission were analyzed and it was observed that the clients mentioned in the Annexure were engaged in arbitrage business and had simultaneous buy positions at KSE against the sales given the Annexure. However, with regard lo instances given at serial nos. 4424, 4425, 4374 and 4375 it was observed that no corresponding buying was done at KSE and these sales were squared up at LSE therefore, the said instances will be treated as Blank Sates. Further, for the instances given at serial nos. 4964, 4965, 3846, 3847 and 3849 of the Annexure ii was observed that corresponding buying was done at KSE after a gap of over 10 minutes, therefore, the said instances will also be treated as Blank Sales.
8.5 Considering the above facts and the contentions of the Respondent it is clear that nine (9)
Blank Sales have been made in violation of Regulation 4 of the Shari Selling Regulations, In terms of Rule 8 of the 'Brokers Rules, sub rule (ii) where the Commission is of the opinion that a broker has inter alia failed la comply with any requirements of the Act or the Ordinance or or any rules or directions made or given thereunder, in terms or sub rule (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 dawn in th,e Third .Schedule, the Commission may in the public interest. take action under Rule 8(a) or (b) of the Brokers Roles. 8.6 In right of the above facts that the Respondent by making Blank Sales has violated the Short Selling Regulations thereby attracting sub rule (iii) of the Rule 8 of the Brokers Rule and has also failed to comply with Clause AS of the Code of Conduct contained in the Third Schedule to the Brokers Rules, thereby, attracting sub rule (iv) of the Rule '8 of the Brokers Rule. Accordingly, a penalty of Rs. 10,000 (Rupees Ten Thousand only) is hereby imposed on the Respondent under Ru:e 8 (b) of the Brokers Rules.
9. Order Register (issue No. 2")
9.1 In teams of Rule 4(1) of ihe 1971 Rules ir 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. the name and number of the securilies to be boughi or sold, the nature of transaction and the timitatien, if any. as to the price of the s.ecuriiies or the period for which the order is to be valid."
9.2 The findings of the Enquiry Officer revealed that the register ss mentioned above was not maintained by the Respondent during the Review Period.
9.3 The Respondent made the following submission on the aforementioned ESStle: The Respondent in ils written .reply asserted lhat all orders are placed electronically and its software saves the 1pg of orders placed into the system. During ihe hearing the Respondent stated that now-a.days due to high volume and velocity of trading it is practically impassible to rnaintain manual order register.
9.4 I have considered the contentions of the Respondent and I am of the view that electronic ledgers or the Daily Activity Lag as mentioned by the Respondent i8 not a substitute for the Order Register as required under the Rule 4r) or the 1971 RAs. The aforementioned Logs only record those orders that are placed by the Respondent into LOTS and not alt the orders which were received from the clients and not entered into LOTS. Further, the Said Log only records the time of placement of orders into the system and nut ihe time of receipt of orders.
9.5 The Commission is also cognizant of the practical difficulties associated with ihe maintenance of such in Order Register manually. However, it is noted with disappointment that the brokerage house and LSE were riot able to keep pace with evolution in technology and significant increase in trading activities whereby a system should have been developed to enable simuttaneous recording Elf orders received Trout clients and their incorporation in a database to generate ihe Order Register as required under the Rule 441) of the 1971 Rules.
9.6 Considering the above mentioned fact I am inclined. on this occasion, to lake a lenient view in the matter and will not lake any punitive actton under Rule 8 of the Brokers Rules. As such, I believe !hat 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, reg WatIons and directives of the Commission in future for avoiding any punitive action under the taw.
10. Separate hank Account for Orients Funds ("Issue No. 31 10,1 /11 terms of Commission's directive No. SMDISE 2(20)/20G2 dated March 4, 2005 which states that: 'The exchanges are to ensure that brokers follow the practice of segregating clienls' assets From the broker's assets in order xo ensure that clients' assets are not misused.
For this purpose brokers should have one separate hank account vhch includes all the cash deposits of their clients along with recorcl. II:Lreakdown of den! positions,"
10.2 The findings of the Enquiry Officer revealed that the Resporded was n01. Maintaining a separate bank account for clients' funds 10.3 The Respondent made the following submission on the aforementioned issue: account for clients! funds. 'Iowever, the Respondent assured that it will comply with the requirement of the aforementioned Commission's directive.
10.4 I have considered the contentions of the Respondent and am of the view Oat the Respondent has failed to comply with the Commission directive no DISE 2(20)/2002 dated Mardi D4, 2005. The said directive requires the members to maintain one separate bank account in which only clients' funds are placed. The rational behind maintenance of a ara!e account for clients' funds is to stop the member from using clients' funds for own purposes.
10.5 Considering the Responfiehrs assurance ihal it will comply with 1he ramiremeni of aforesaid directive of the Commission, I am inclined on this occasion to take a lenient view in the matter and will not lake any punitive action under Rule 8 of the Brokers Rules. As such. I believe that a caution in this instance to the Respondent would suffice and [ would further direct the Respondent to ensure that full compliance be made of all the laws, regulations and directives of Ihe Commission in future for avoiding any punitive action under the law.
11. As staled above. the Respondent is penalized as follows, b) No punitive action os taken on relation to issue Nos. 2 arid 3 and a simple caution will suffice, the Respondent is directed to 4:16posit the fine with the Commission not later then fifteen (15) days from the receipt of this Order.