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REGULATIONS GOVERNING MEMBERS EXPOSURE
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ISLAMABAD
STOCK EXCHANGE (GUARANTEE) LIMITED
Regulations
Governing System Audit of Members of the Islamabad Stock Exchange
(Guarantee) Limited
PREAMBLE
Whereas the investor’s confidence in the fair dealings at the
Exchange is the key to the development of the securities market.
And whereas one of the regulatory functions of the Exchange is to
regulate the trading of its members and protect the rights of the
investing public.
And whereas the Board of Directors of the Exchange is empowered to
frame any Regulations under section 34(1) of the Securities and
Exchange Ordinance, 1969 (the Ordinance) not being inconsistent
with the Rules to carry out the purposes of the Ordinance.
Now therefore the Board of Directors of the Exchange, with the
prior approval of the Securities and Exchange Commission of
Pakistan hereby makes the following Regulations namely:-
1.
SHORT TITLE & COMMENCEMENT
a) These Regulations may be called the :Regulations
Governing System Audit of Members of the Islamabad Stock Exchange
(Guarantee) Limited”.
b) These Regulations shall come into force upon the
notification in the Official Gazette of Pakistan and shall replace
all preceding policies/guidelines issued from time to time for the
said purpose.
2.
DEFINITIONS
The terms used in these Regulations shall have
the following meanings:-
a)
“Articles” means the Articles of Association of the Exchange.
b)
“Audit” means the System Audit of Members conducted as per this
Chapter.
c)
“Auditor(s)”
means the auditor(s) selected, every year, by the Management to be
on the panel of auditors as per Regulation 4(a) hereof.
d)
“Board” means the governing board of directors of the Exchange.
e)
“Director” means a director of the Board.
f)
“Exchange” means the Islamabad Stock Exchange (Guarantee) Limited.
g)
“Managing Director” means the Chief Executive Officer of the
Exchange.
h)
“Management” means the Managing Director, the Board or the
Committee of the Exchange appointed for the purpose.
i)
“Member” means a member of the Exchange who has been active at any
time during the previous one year from the date of his election
for the System Audit under this Chapter.
j)
“System Audit” means an audit conducted under these Regulations to
confirm that the Articles, rules and regulations of the Exchange
are being implemented by the Members as regards their transactions
with the investors and the Exchange.
3.
OBJECT
The object of
the Audit at the Exchange is to monitor and promote regulatory
compliance of Articles, rules and regulations of the Exchange. The
Audit shall encourage the Members to exercise due care in
complying with the provisions of the Articles and the said rules
and regulations.
4
PANEL OF AUDITORS
(a)
The Management shall, every year, approve as many auditors firms
as it deems necessary, to be on the panel of auditors of the
Exchange. The Auditors must fulfill the following criteria:-
i.
The Auditors are a firm and all of its partners practicing in
Pakistan are Chartered Accountants within the meaning of the
Chartered Accountants Ordinance, 1961; and
ii.
The firm has not provided any auditing, consulting or tax advisory
services to the Member of the Exchange who is placed under audit
of the said firm. The audit firm appointed for the purpose shall
invariably furnish a certificate to this effect in its system
audit report in respect of every audit.
(b)
The Managing Director shall appoint Auditor(s) from the panel of
auditors to undertake the audit of selected Members.
(c)
No Auditor shall be appointed to conduct the System Audit of a
Member, if that Auditor has conducted the audit or other
assignment of that Member for the past two years.
(d)
The head of Department of Internal Control of the Exchange shall
liaise between the auditor(s) conducting the audit of the Member(s),
the Member(s) and the said Committee.
5.
TYPES OF SYSTEM AUDIT
The System
Audit of the Members shall be of two types:
(a) Annual
System Audit
The Managing
Director shall, during every calendar year, draw a roaster of the
month wise list of the Members to be audited. In this manner all
the functioning Members shall be audited once in a year provided
the Member has been active for the last twelve months.
(b)
Voluntary System Audit
A Member(s) may
volunteer before the Managing Director to be audited. Such a
Member shall not be included in the annual System Audit balloting
process during the same year.
(c)
Investigative System Audit
This system
audit shall be ordered by the Management to look into the
financial and operational matters of a Member upon determination
by the Management that the affairs of the house of the Member need
scrutiny following instructions from the SECP or receipt of a
complaint from investors alleging gross irregularity by a Member.
6.
SCOPE OF AUDIT
The Scope of
Audit shall be prescribed by the management from time to time.
However, the current scope of the same is appended at Annexure
“A”.
7.
AUDIT REPORT
(a)
The Auditor(s) shall within one month from the date of assignment
of the System Audit of a Member(s), by the Managing Director,
complete the System Audit and prepare a report to be submitted to
the Managing Director. The said report shall expressly enumerate
the violations of the Member.
(b)
The Auditor(s) may employ any test that it may deem fit in order
to undertake the System Audit of Member (s) and in preparation of
the said report.
(c)
If, as per the report, it appears that the Member is in violation
of the Articles, Rules and Regulations of the Exchange, the said
Member shall be liable to pay a fine amounting to not less than
Rs.5,000/- but not exceeding Rs. 10,000/-. However, if the Member
is found guilty in contravention of any provision or any
provisions of the Securities and Exchange Ordinance, 1969 or the
Securities and Exchange Rules, 1971 or any other statute
applicable for the time being, the said violation shall be taken
up by the Securities and Exchange Commission of Pakistan and the
same shall be dealt with by the Commission in accordance with
their adjudication.
8.
ADVISORY SESSIONS
(a)
After every System Audit the Managing Director shall conduct
advisory sessions and give advice to the Member(s) for
rectification of violations of the Articles, Rules and Regulations
or of any law applicable for the time being committed by him. A
letter detailing the violation shall be issued to the member
concerned for rectification of observed points by the member with
in 30 days
(b)
After one month from the said advisory session, the Managing
Director shall again conduct the review of the System Audit
reforms of the aforesaid Member(s) vis-à-vis the response of the
member. If the said Member(s) is found to be in violation of the
Articles, Rules and Regulations of the Exchange, the Managing
Director shall refer the matter to the Board for initiation of
proceedings under Article 108.
9.
FINES
After the
System Audit, if it appears from the report submitted by the
Auditor(s), that the Member(s) is in violation of the Articles,
Rules and Regulations of the Exchange, the Managing Director shall
impose a fine, as per Regulation 7(c) hereof, on the said Member(s).
However, in case a Member has volunteered to have a System Audit,
then in case of any violations of the Articles, Rules and
Regulations of the Exchange, committed by him, the fine to be
imposed hereunder shall be reduced to half of the aforesaid fine.
10
CERTIFICATE OF COMPLIANCE
The system
audit report prepared by an auditor shall invariably contain a
Certificate of Compliance by a member in case the system audit
proceedings are found to be satisfactory by the auditor to the
Managing Director that there are no violations appearing therein.
11.
FAILURE TO CO-OPERATE
If a Member
fails to co-operate with the Auditor, the Managing Director shall
upon receiving a written complaint from the Auditor, call a
hearing of the Member and the Auditor and may impose a fine of Rs.
50,000/- but not exceeding Rs. 100,000/- on the said Member. If
the Member, subsequent to the imposition of the said fine fails to
cooperate with the auditor or fails to pay the fine, the Managing
Director shall refer the matter to the Board for initiation of
proceedings under Article 108.
12.
COSTS
All the fees,
charges and costs of the Auditors shall be paid by the Member who
is being audited. The said fees, charges and costs shall be
deposited with the Exchange, by the said Member, for onward
payment to the Auditor. For this purpose, the Management may
negotiate a uniform rate of audit services to be provided by an
audit firm appointed for the purpose.
Annexure “A”
SCOPE OF
AUDIT
The Following is
the scope of audit for the audit of the Members as per Regulations
Governing System Audit of Members of the Islamabad Stock
Exchange:-
(A) REGISTRATION CERTIFICATE
1)
Registration certificate from SECP to
act as Broker.
2)
Confirmation of ISE to this affect.
3)
Name and addresses of sub-offices
registered with the Exchange.
(B) ACCOUNT OPENING FORM
1)
Account Opening Form of
client/investors along with photocopies of other related
documents.
2)
Documents relating to opening of the
Sub-account of a customer with CDC.
3)
Written consent of Investor to
maintain his account in Group/Sub Account with CDC.
4)
Documents relating to Zakat status of
a customer.
(C) MARGIN DEPOSITS
1)
Margin Deposits with ISE, NCCPL etc.
2)
Margin Deposits with ISE with respect
to trading in the Ready and Future Contracts.
3)
Margin Deposits of Investors with
Members along with written consent of Investors.
(D) BOOKING AND
CONFIRMING AN ORDER
1)
Register of orders received by a
member to buy and sell securities.
2)
Confirmation of order executed by a
Member to the Investor (within 24 hours of such confirmation)
3)
Record of queries raised / mistakes
pointed out by the Investor in an order and response of the
Member.
(E) CDC TRANSACTIONS
1)
Records/documents relating to
maintenance of Main account, House account Sub accounts and Group
account.
2)
Record of Investor wise movement of
stock and stock in hand existing in Group accounts.
3)
Record of transfer under CDC book
entry system (Interparticipant free delivery).
4)
Record of transfer to/ from Main
account from / to House account, Group account and Sub-accounts.
5)
Investor wise activity reports and
their stock positions.
(F) BOOKS AND OTHER DOCUMENTS
1)
Journal (or any other comparable
record), cash book, and any other books of original entries that
contain a daily record of all orders for purchase or sale of
securities and their actual sales and purchases.
2)
Record of daily delivery / receipt of
stock
3)
Record of billing to Investors
4)
Stock position of Broker and
Investors.
5)
Record of transactions with banks
including bank statements and reconciliations.
6)
Ledgers reflecting assets,
liabilities, reserve, capital, income and expenses
7)
Trial balance
8)
Contract books showing details of
contracts entered into with other members or counterfoils or memos
of confirmation issued to other members
9)
Duplicate or Counterfoils of memos of
confirmation issued to Investors.
(G) FINANCING TRANSACTIONS
1)
Record of pledging or arranging to
pledge any securities of any Investor, whether physically held or
in CDC, with a commercial bank or the Exchange.
2)
Record of borrowing on any security
or lending of any security for the account of the Investor.
3)
In case of financing transactions
(mentioned above) involving Sub accounts or Group account, written
authorization from the Investor shall be checked.
4)
Ledgers (or some other records)
reflecting securities in transfer, securities borrowed, securities
loaned and securities bought or sold of which delivery is delayed.
(H) NET CAPITAL BALANCE CERTIFICATE
1)
Net Capital Balance Requirement
Certificate on quarterly basis in accordance with the regulations
as approved by the Board of Directors. Half yearly and annual
certificates should be audited and submitted in line with the
approved format and members may issue 1st and 3rd
quarterly certificates on their letterheads.
2)
Verification of assets and
liabilities appearing in certificate in accordance with the
requirements of Rule 2(d) and 3rd schedule of the
Securities and Exchange Rules, 1971.
3)
Ageing reports of Account Receivables
along with credit limits extended to an Investor.
(I) FINANCIAL STATEMENTS
1)
Annual balance sheet and statement of
income and expenditure duly audited by a Chartered Accountant.
2)
In case of Corporate Members, list of
Directors and shareholders, stating their addresses and number of
shares held, on bi-annual basis.
3)
Changes in management of Corporate
Members.
(J) AGENTS
1)
List of authorized agents.
2)
Certificate of registration with SECP
to act as agent.
3)
Agreement with agent specifying scope
of authority and responsibilities.
4)
Records of branch offices within or
outside the LSE premises required to be maintained by the agent.
(K) CARRY OVER
TRANSACTIONS
1)
Confirmation that only following
shares are being offered for sale in Carry Over market:
a)
Shares in House Account
b)
Shares of Investor with his
authorization.
2)
Confirmations that regulations
regarding carry over transactions are being followed.
(L) SHORT / BLANK SALES
1) Confirmation
that no blank sales are being made.
2) Confirmations
that all short sales are made according to the regulations of ISE.
(M) FUTURES CONTRACTS
1) Confirmation
that timely payment / Securities (for deliveries) are being made
available to the
ISE.
2) Verify that
trading is being carried out subject to the Regulations governing
Futures Contracts.
(N) LOTS
1)
Confirmation about number of
connections issued by ISE MIS.
2)
Records of ‘Best Orders’, ‘Limit
Orders’, ‘Special Term Orders’ and their manner of executions.
3)
Record of cross trade entries.
4)
Record of negotiated deals.
(O) GENERAL
1)
Implementation of ISE Rules and
Regulations.
2)
Timely payment of all dues to the
ISE.
3)
Timely delivery of shares and
issuance of cheques subject to the regulations governing Clearing
House.
4)
Status of room occupancy in
accordance with the regulations of the Exchange.
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