2008 PLP 280 (CLD)

ZAFAR ABDULLAH, EXECUTIVE DIRECTOR (SECURITIES MARKET DIVISION).

This order shall dispose of the proceedings initiated through Show-Cause Notice SMD -SOUTH/SCN/97/07 dated August 01, 2007 ("Show-Cause Notice") issued to A.H.K.D. Securities (Pvt.) Limited (the "Respondent") by the Securities and Exchange Commission of Pakistan (the "Commission") under Rule 8 of 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 to the Brokers Rules and under section 28 of the CDC Act.

2. Basic facts of the case are that the respondent is a member of the Karachi Stock Exchange (Guarantee) Limited (the "Exchange/KSE") 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 ("1969 Ordinance") and A. F. Ferguson & Co. ("the Enquiry Officer') was appointed as the Enquiry Officer under the above mentioned section inter alia: -- (a) to enquire into the dealings business or any transaction by the respondent during the period from April 1, 2006 to June 15, 2006 ("the Review Period"); (b) to identify any and all the acts or omissions constituting the violation of the 1969 Ordinance and the Rules made thereunder: and (c) to identify violations of any other applicable laws, including but not limited to the Brokers Rules and Regulations for Short Selling under Ready Market, 2002 ("2002 Regulations") and The Central Depository Company of Pakistan Limited Regulations ("CDC Regulations") read with the CDC; Act.

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 under cover of a letter dated April 30, 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, a show-cause notice was issued to the respondent under Rule 8 of the Brokers Rules and under section 28 of the CDC Act, 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 and requirements of the CDC Regulations. 'Rule 12 of the Brokers Rule and clause A5 of the Code of Conduct are reproduced as under:-- Rule 12.--"A broker holding a certificate of registration under this rules shall abide by the code of conduct specified in the Third Schedule". Clause A5 of the Code of Conduct.--A broker shall abide by all the previsions of the Act and the rules, regulations issued by the Commission and the stock exchange from time to time as may be applicable to them".

5. The respondent was called upon to show-cause in writing within seven days and appear before the Executive Director (SMD-South) on September 12, 2007 for a hearing, to be attended either in person and/or through an authorized representative.

6. The hearing was held on September 12, 2007 which was attended by Mr. M. Raheel, the Representative of the respondent, who submitted a written reply and argued the case.

7. A summary of the contentions that were raised by the respondent in the written reply / and during the hearing and findings and conclusion of the Commission on the same are as follows: --

8. Blank Sales 8.1. In terms of Regulation 4 of the 2002 Regulations, blank sales are not permissible. The findings of the Enquiry Officer revealed 785 instances of blank sales during the Review Period. 8.2. The respondent made the following submissions on this Issue ("Issue No. 1"): * The respondent claimed that majority of these instances were in fact not blank sales and proper evidences were submitted to the Enquiry Officer to verify same. * The respondent, upon the direction of the Commission, submitted evidences in support of its claim, perusal of which transpired that 122 out of 785 instances were indeed not blank sales and pre-existing interest existed at the time of the sale. However, satisfactory evidences were not provided in respect of remaining 663 instances. 8.3. Considering the above facts and the contentions of the respondent, it is established that on 663 occasions blank sales have been made in violation of Regulation 4 A of the 2002 Regulations. In terms of Rule 8 of the Brokers Rules, more particularly sub-rule (ii), sub-rule (iii) and sub-rule (iv) thereof, where the Commission is. of the opinion that a broker has inter alia failed to comply with any requirements of the 1997 Act or the 1969 Ordinance or of any -rules or direction made or given thereunder 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, take action under Rule 8(a) or (b) of the Brokers Rules. 8.4. In light of the above i.e. the fact that the respondent made blank sales, the respondent has violated the 2002 Regulations thereby-attracting sub-rule (iii) of Rule 8 of the Brokers Rule and has also failed to comply with Clause A5 of the Code of Conduct contained in the Third Schedule to the Brokers Rules, thereby attracting sub-rule (iv) of Rule 8 of the Brokers Rule. Accordingly, a penalty of Rs.75,000 (Rupees Seventy Five Thousand) is hereby imposed on the respondent under Rule 8 (b) of the Broker Rules.

9. Change in Trades 9.1. In terms of Clause Al and A2 of the Code of Conduct contained in the Third Schedule read with Rule ,12 of the Brokers Rules, it is provided that:-- A1.--"A broker shall maintain high standards of integrity, promptitude and fairness in the conduct of all his business." A2.--"A broker shall act with due skill, care and diligence in the conduct of all his business." 9.2. Findings of the Enquiry Officer revealed' various instances where trades entered into KATS on account of a client were subsequently assigned to another client in the Back Office record. 9.3. The respondent made the following submission on this Issue ("Issue No.2"):-- * The respondent contended that the above mentioned instances were a result of errors by the KATS operator which were immediately rectified in the Back Office record. 9.4. I have considered the 'contention of the respondent and am of the view that in order to ensure the practice of fair trade and due skill, care and diligence in conduct of business, the respondent should have entered correct KATS ID for its clients. Subsequent modification of trades and their allocation to another customer creates opportunities to disguise any violation of laws and regulations that might have occurred. 9.5. In light of the above the respondent has failed to comply with Clause A1 and A2 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 Rules. Accordingly, a penalty of Rs.1,000 (Rupees One Thousands) is hereby imposed on the Respondent under Rule 8 (b) of the Brokers Rules.

10. CDC Balance Statements 10.1. In terms of Regulation 6.2-A.1 of the CDC Regulations, it is provided that:-- "Every Participant shall send by the 10th day of every month to all Sub-Account. Holders maintaining Sub-Accounts under the control of such Participant Holding Balance statements showing the number of every Book-entry Security entered in every such Sub Account as of the end of the preceding month. Such Holding Balance statements shall be generated from the CDS and shall be sent to the Sub-Account Holders in the manner set out in Regulation 2.6 4." 10.2. Findings of the Enquiry Officer revealed that the respondent did not have a practice to send the CDC Balance statements to all of its customers by the 10th of each month as required under the CDC Regulations and where the CDC Balance statements were sent, the same were not generated from the CDS, instead the statement was sent on the respondent's-own format. 10.3. The respondent made the following submission on this Issue ("Issue No.3"):-- * The respondent contended that its clientele is mainly comprised of retail clients who obtain their CDC balance statements and other details by hand on a daily basis and record of provision of CDC Balance Statements to the clients Ts not maintained' due to the large number of clients. 10.4. Considering the above mentioned fact, I will not take any punitive action under section 28 of the CDC Act. As such, I believe a 'caution' in this instance to the respondent would suffice and I would further direct the respondent to take measures to obtain acknowledg ments of its clients to demonstrate the compliance with the CDC Regulations.

11. In view of what has been discussed above, I am of the considered view that no punitive action is necessary in relation to Issue No. 3 and a simple caution will suffice in relation. As regards Issues Nos. 1 and 2, as stated above, penalties of Rs.75,000 (Rupees Seventy Five Thousand) and Rs.1,000 (Rupees One Thousand) respectively are imposed, which should be deposited with the Commission not later than fifteen (15) days from the date of receipt of this Order. H.B.T. /60/SEC Order accordingly.