(i) ORDER
1. This Order shall dispose of the proceedings initiated through Show Cause Notice bearing No. 1(41)
SMD/MSRD/C&IW/2014 dated December 26, 2014 ("SCN") served to Topline Securities (Private)
Limited ("Respondent"), Trading Right Entitlement Certificate Holder/Broker of the Karachi Stock Exchange Limited ("KSE") by the Securities and Exchange Commission of Pakistan. ("Commission") under Section 22 of the Securities and Exchange Ordinance, 1969 ("Ordinance") read with Rule 8 of the Brokers and Agents Registration Rules, 2001 ("Brokers Rules").
2. Brief facts of the case are that the Commission in exercise of its powers under Subsection (1) of Section 6 of the Ordinance read with Rule 3 and Rule 4 of the Stock Exchange Members (Inspection of Books and Record) Rules, 2001 ("Inspection Rules") ordered an inspection of the books and record required to be maintained by the Respondent. The following officers of the Commission were appointed as inspectors ("Inspection Team") for the purpose vide order dated August 7, 2014: a) Mr. Kashif All b) Mr. iy114 Muhammad Imran Deputy Director Deputy Director
3. The Inspection Team submitted the report ("Inspection Report") on October 17, 2014 which was shared with the Respondent in accordance with Rule 7 of the Inspection Rules. The response of the Respondent in the context was received vide letter dated November 4, 2014. Upon evaluation of the Inspection Report, irregularities in calculation of Net Capital Balance ("NCB") as on December 31, 2013 were observed and it appeared that NCB certificate was not in accordance with the Third Schedule of the Securities and Exchange Rules, 1971 ("Rules 1971"). The Inspection Report further highlighted that the Respondent failed to maintain proper segregation of clients' assets and books of accounts; did not have collateral account and duly approved Know Your Customer ("KYC") & Customer Due Diligence ("CDD") policy; was imposing late payment charges to its clients and failed to comply with the requirements as specified in Circular 34 of 2009 issued by the Commission.
4. In light of the Inspection Report and the comments received from the Respondent, the Commission served a SCN to the Respondent under Section 22 of the Ordinance and Rule 8 of the Brokers Rules. Hearing in the matter of aforesaid SCN was scheduled for January 12, 2015 at the Commission's Head Office in Islamabad. However, upon the request of the Respondent made vide letter dated January 6, 2015, hearing was rescheduled for. January 20, 2015 at the Commission's Karachi office.
5. The arguments put forward by the Respondent in its written response to the SCN submitted vide letter dated January 23, 2015 are reproduced below: a) Improper calculation of NCB: "With reference to point 3(i) of the said letter we want to clarify that we have no intention to overstate net capital balance as our net capital balance is adequate for our business.
NCB was computed as per our understanding of regulations and same was also certified by Chartered Accountant Firm (SBP A Category Firm). On September 23, 2013 Karachi Stock Exchange issued a notice Ref No KSE/N-5049 which states that Commission receivable that was previously disallowed by the SECP guidelines issued on July 03, 2013 has now been allowed.
The guideline issued by the SECP did not mention aging of Commission receivables. Further, this is normal practice that broker receive commission after few weeks from institutions.., Regarding Point No. 3 (ii), we thought that "Exposure list" and "margin eligible security" as defined in the KSE regulations governing risk management are two differents.
Further, NIT Government Bond Fund is less risky than shares and this fund can be redeem in same day (T+0) so we considered this in NCB calculations." b) Imposing late payment charges: "Regarding point No. 4 of your said letter for charging late payments to our client, we have abolished this practice from July 01, 2014 and are focusing on available products for leverage.
Documents supporting this are enclosed." c) Collateral Account: "Collateral account has been opened. Supporting documents are enclosed." d) KYC and CDD Policy: "In response to Point No.8 we are enclosing extract of B OD approval." e) Segregation of clients assets: "As explained to Inspection Team and clarified during hearing on January 20, 2015 we did not consider Rs. 10 million un-credited cheques due to which balance was higher. Moreover there are few operational issues due to which matching exact amount is impossible. For instance few clients requested to issue cheques from their banks for getting instant payments through online banking.
Due to this we need to have extra balance a times" f) Telephone recording: "We have provided 22 recordings out of 36 to the Inspection Team. We do recordings of our office telephones and maintain all records of those recording. However in few cases clients come to our office and give orders to traders, few clients email us the orders and few clients call traders at their cell or house phone after office hours and give orders. However, if the Commission desired, we can provide written instruction of our client that they have placed those orders." h) Certification from Institute of Capital Markets ("ICM"): "We are enclosing evidence of new registration with ICM of 5 staff members engaged in activities mentioned in SECP circular No. 34 of 2009."
6. Mr. Muhammad Sohail, Chief Executive Officer and Mr. Khalid Mehmood, Compliance Officer ("Representatives") attended the hearing on January 20, 2015. The arguments put forth by the Representatives of the Respondent during the course of hearing are summarized below: a) With regard to improper calculation of NCB, the Representatives stated that the difference was because of non-inclusion of commission receivable and the auditor at that time--also did not point out anything in this context. The Representatives communicated that the -auditor who certified the NCB was category As NIC Building, 63-Jinnah Avenue, Blue Area, Islamabad.
PABX: 051-9217091-94, Fax No. 051-9100440, Website: www.seco specified in the list of State Bank of Pakistan. The Representatives assured that the Respondent shall prepare the NCB in accordance with the regulatory requirements. With regard to inclusion of NIT units in NCB calculation, the Representatives stated that the Respondent considered NIT as less risky investment and thought that it was allowed to be included. The Representatives communicated that it is now clear that investment in NIT units is not allowed as per the guidelines issued by the Commission, the Respondent shall not account it for in future for calculation of NCB. Moreover, the Respondent in its written response stated that it never had any negative intention to overstate the NCB and that the Respondent always had sufficient funds available with it. b) The Representatives communicated that since imposing late payment charges to clients was a business practice, the Respondent was also doing that. The Representatives informed that during last year the Respondent decided to completely discontinue the practice; accordingly it has stopped imposing it from June 30, 2014. The Representatives agreed to provide copy of trial balance and relevant ledgers to substantiate their stance of discontinuance of late payment charges from June 30, 2014. c) The Representatives apprised that the Respondent has now opened collateral account and evidence of the same shall be provided to the Commission. d) With reference to recording of late payment charges of all the clients in a single clients' ledger, the Representatives explained that miscellaneous expenses were recorded in the referred clients' ledger accountpowever, the said practice has now been stopped. The Representatives agreed to provide copy of the referred ledger to the Commission to substantiate their stance. e) While explaining compliance with the regulatory requirements regarding segregation of clients' funds, the Representatives communicated that specific reconciliation in the context as of December 31, 2013 and June 30, 2014 shall be provided to the Commission. The Representatives informed that in case of non-payment on due date, the Respondent transfer funds from its own account to make settlements. The Representatives further assured future compliance of the regulatory requirements in letter and spirit.
11. The matter is disposed of in the above manner and the Respondent is directed to deposit the fine in the account of the Commission being maintained in the designated branches of MCB Bank Limited not later than thirty (30) days from the date of this Order and furnish a copy of the deposit challan to the undersigned.
12. This Order is issued without prejudice to any other action that the Commission may initiate against the Respondent in accordance with the law on matter subsequently investigated or otherwise brought to the knowledge of the Commission.