Directive issued for strengthening stock brokers' conduct

KARACHI (February 08 2003) : The Securities and Exchange Commission of Pakistan (SECP) has issued a directive to the managements of all three stock exchanges for strengthening brokers' conduct of business in order to safeguard public interest, prohibit unfair trade practices, and inculcate good governance in business.

The SECP, to ensure that a broker does not engage in certain types of conduct in the securities market that are against the interests of an investor, the Commission, in exercise of powers conferred upon it under clause (d) of sub section (4) and of section 20 and clause (g) of sub-section (4) of section 20 of the SEC, Act 1997, read with sub-section (1) of section 20 of the Act, has directed as under:-

“A broker shall provide brokerage services to an investor only after ensuring that an account has been opened in the investor's name, using an account opening form that is to be developed by the stock exchanges and approved by the SECP.

“A broker shall not recommend to an investor the purchase or sale of security that is unsuitable, given the investor's age, financial situation, investment objective and investment experience.

Investment in a particular type of security may be unsuitable, or the amount or frequency of transactions may be excessive and therefore unsuitable for a given investor.

“A broker shall not guarantee investors that they will not lose money on particular securities' transaction, making specific price predictions, or agreeing to share in any losses in the investors' account.

“A broker shall not purchase or sell securities in an investor's account without the investors' approval, unless the investor has given written discretionary authority to effect transactions in the account.

“A broker shall not trade on his own behalf or on behalf of his brokerage firm in preference to an investor by trading ahead of a limit order from an investor.

“A broker shall not remove funds, or securities, from an investor's account without the investor's prior authorisation.

“A broker shall not purchase or sell a security while in possession of material, non-public information regarding an issuer.

“A broker shall not misrepresent material facts concerning an investment. Examples of information that may be considered material and that should be accurately presented to an investor include: the risks of investing in a particular security; the charges or fees involved; company financial information; or any other material information.”

The above directive will also provide support to SECP's conscious efforts towards strengthening institutional framework for minimising the potential of money laundering in the capital market.

For this purpose, an anti-money-laundering unit has been set up in the SECP, under the technical assistance of World Bank, for conducting research and making recommendations to the Commission for necessary regulatory changes in this direction for enhancing investor confidence in the capital market.

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