|
REGULATIONS FOR SYSTEM AUDIT OF BROKERS OF THE ISLAMABAD STOCK EXCHANGE (G) LTD, 2004 PREAMBLE Whereas it is considered expedient to have Regulations for conducting the System Audit of brokers in order to ensure compliance with the requirements of the Securities and Exchange Ordinance, 1969, Securities and Exchange Rules, 1971, Code of Conduct for Brokers as enshrined in the Third Schedule of the Brokers and Agents Registration Rules, 2001 the Articles, Rules and Regulations of the Exchange and the directives issued by the Commission from time to time <ind thereby promote investor confidence in fair dealings at the Exchange which is one of the key ingredients in the development of the securities markets. NOW THEREFORE, the Securities and Exchange Commission of Pakistan in exercise of the powers conferred under section 34 (1) of the Securities and Exchange Ordinance, 1969, hereby approves the following Regulations with certain amendments: SHORT TITLE AND COMMENCEMENT
a)
These regulations may be called the "Regulations governing
System Audit of b) They shall come into force with immediate effect. I) 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 brokers conducted as per these Regulations.
c)
"Auditor(s)" means the auditor(s) selected, every year, by
the Board to be on d) "Board" means the governing board of directors of the Exchange.
e)
"Branch
office" means an office, or branch thereof, opened and maintained by
a
f)
'"Broker"
means any person engaged in the business of effecting transactions
in g) "Director" means a director of the Board. h) "Exchange" means Islamabad Stock Exchange registered under the Securities and Exchange Ordinance, 1969. i) '"HOIA" means the Head of the Internal Audit of the Exchange, j) "Audit Committee" means the Audit Committee of the Board. II) All other words and expressions used but not defined in these Regulations shall have the same meaning as assigned to them in the Securities and Exchange Ordinance, 1969 (XVII of 1969) and the Companies Ordinance, 1984 ((XLVII of 1984). PANEL OF AUDITORS (a) The Audit Committee shall, every year, recommend to the Board for its approval, a panel of auditors not being less than ten (10) in number, to be on the panel of auditors of the Exchange. The Auditors shall 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 been given a satisfactory rating under the Quality Control Review Programme of the Institute of Chartered Accountants of Pakistan. iii. No broker shall appoint as auditors a firm of auditors which firm or a partner of which firm is non-compliant with the International Federation of Accountants' (IFAC) Guidelines on Code of Ethics, as adopted by the Institute of Chartered Accountants of Pakistan. iv. No broker shall appoint or continue to retain any person as an auditor, who has been found guilty of professional misconduct by the Commission or by a Court of Law, for a period of three years unless a lesser period is determined by the Commission. (b) No Auditor shall be appointed to conduct the System Audit of a broker, if that Auditor has conducted the audit or other assignment of that broker or his associated undertakings, at any time during the past two years. The broker shall appoint an auditor within two weeks of the selection of brokers as specified in clause 4 to conduct the System Audit of a broker from the
panel approved by the Board of Directors. In case the concerned broker fails to appoint an auditor within the time specified, the Managing Director shall appoint the auditor � The HOIA shall liaise between the broker(s) and Auditor(s) conducting the audit of the said broker(s). TYPES OF SYSTEM AUDIT The System Audit of the brokers shall be of two types: (a) Compulsory System Audit The Managing Director shall, after every six months in a calendar year, select a minimum of 25% of the brokers of the Exchange, through random balloting. The selection for the first half of the calendar year shall be made at a date not later than January 31 in each calendar year and the selection for the second half of the calendar year shall be made by a date not later than July 31 in each calendar year. The results of the ballots shall be intimated to the broker(s) by the Managing Director. The brokers selected and placed under Audit, shall be excluded from future balloting until such time, all the brokers of the Exchange have been selected. (b) Voluntary System Audit A broker(s) may volunteer before the Managing Director to be audited. Such a broker(s) shall not be included in the future balloting until such time, all the brokers of the Exchange have been selected. 5 SCOPE OF AUDIT The system audit will be carried out in a manner as specified in Schedule A hereof, to ensure compliance with the requirements of the Securities and Exchange Ordinance, 1969, the Securities and Exchange Rules, 1971, Code of Conduct for Brokers as enshrined in the Third Schedule of the Brokers and Agents Registration Rules, 2001, the Articles, Rules and Regulations of the Exchange and the directives issued by the Commission from time to time. 6 AUDIT REPORT a) The Auditor(s) shall within two months from the date of assignment of the System Audit of a broker(s), for the preceding financial year by the Managing Director, complete the System Audit and prepare a report to be submitted to the Managing Director. The Managing Director of the
exchange shall immediately forward a copy of the Audit Report to the Securities and Exchange Commission of Pakistan. b) After the Auditor(s) have filed a report, in respect of a broker, with the Managing Director and there are no material violations appearing therein, the Auditor shall issue a Certificate of Compliance to the broker. 7. FINES If the Audit Report identifies any default(s) / non-compliance(s) on the part of the broker with the provisions of the Articles, Rules and Regulations of the Exchange, the Exchange may, after giving him an opportunity of hearing, by order direct the broker to : a) pay a fine amounting to not less than Rs. 10,000/- per default but not exceeding Rs. 25,000/- per default. However, in case a broker 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 amount.
b)
If a broker fails to co-operate with the Auditor(s), the
Managing Director
c)
Where the Exchange neglects or otherwise fails to take
action under clause COSTS The broker who is being audited shall pay all the fees, charges and costs of the Auditors. The said fees, charges and costs shall be deposited with the Exchange, by the said broker, for onward payment to the Auditor.
Schedule "A" SCOPE OF AUDIT Without limiting the scope of the Audit in any way, the system audit will be carried out to review compliance with the requirements of the Securities and Exchange Ordinance, 1969, the Securities and Exchange Rules, 1971, Code of Conduct for Brokers as enshrined in the Third Schedule of the Brokers and Agents Registration Rules, 2001, the Articles, Rules and Regulations of the Exchange and the directives issued by the Commission from time to time. Standardized Account Opening Form (SAOF) 1. Review compliance with the SAOF as per the directives of the Commission dated November 19 2003 and January 20, 2004. Manner of Transaction of Member's Business 1. Review the compliance of Rule 4 of Securities and Exchange Rules 1971 that stipulates following requirements regarding manner of transaction of member's business:
a)
Rule
4(1) requires that brokerage house should enter all orders
in the
b)
Rule
4{2(a)} and 4{2(b)} restricts members to buy and sell security on
their
c)
Rule 4{2(c)} restricts members to buy security at or
below the limit price on
d)
Rule
4{2(d)} restricts members to sell security at or above the limit
price on Confirmation of Client Order 1. Review that the brokerage house transmits a confirmation within twenty-four hours of execution of an order and contains following information: a) Date on which order is executed; b) Name and number of securities;
c) Nature of transaction (spot, ready, future and also whether bought or sold); d) Prices/rates; e) Commission if the member is acting as broker;
f)
Whether the
order is executed for the member's own account or from the market. Maintenance of Accounts 1. Review that the following requirements are being fulfilled:
a)
A balance
sheet and a statement of income and expense account are being
prepared
b)
In case of a corporate brokerage house, accounts are
audited by an auditor who Maintenance of Books of Accounts 1. Review that all the books of account and other related documents mentioned below are being maintained: I Ride 8(1) of Securities and Exchange Rules 1971}
a)
Journals (or other comparable records), cash books
and any other records of
b)
Ledger (or other comparable records), reflecting asset,
liability, reserve, capital,
c)
Ledger (or other comparable records), reflecting securities
in transfer, borrowed
d)
Record of
all balance of all ledger accounts in the form trial balance to be
prepared
e) Record of transactions with banks;
f)
Duplicates
or counterfoils of memos, of confirmation issued to customers. \) margin deposit book; i) registers of accounts of agents;
j) an agreement with an agent specifying the scope of authority and responsibilities of the member and his agent; k) record of pledging or arranging for the pledging of any security carried for the account of any customer, whether physically held or in the Central Depository System with a commercial bank; 1) record of extension or maintenance of credit or arranging for the extension or maintenance of credit to the customers for the purpose of purchasing or carrying any security; m) record of borrowing on any security or lending or arranging for the lending of any security carried for the account of the customer; n) record of dealing in foreign currencies as a dealer duly authorized by the State Bank of Pakistan within the brokerage house at the stock exchange premises. 2. Further review that above referred books of accounts and documents are preserved for a period of not less than five years. {Rule 8(2) of Securities and Exchange Rules 1971 and Rule 5(6) of Stock Exchange Members (Inspection of Books and Record Rules, 2001} Reporting by Corporate Brokerage Houses 1. Review that the brokerage house (Corporate member) communicates the following to the Exchange:
a)
Annual Accounts (Audited) and Half Yearly Accounts of the
company are being
b)
List of Directors containing names, addresses and number
of shares held by each as
c)
List of shareholders containing names, addresses and
number of shares held by
d)
All changes in the management of the company including
directorship are being (As per the Memorandum & Articles of Association of the exchanges} Details to be Printed on Member's Correspondence and Contracts 1. Review that the Member's correspondence/contract notes relating to the transactions of business contain the clause "subject to Rules of the Exchange" and bear the name of the member along with address of principal place of business. {As per the Memorandum & Articles of Association of the exchanges}
Registration of Brokers 1. Review that the brokerage house has obtained a certificate of Registration from SECP to act as a Broker and such certificate is being renewed every year. {Rule 5 & 7 of Broker and Agents Rules, 2001} Registration of Agents 1. Review that the persons working as an agent of the brokerage house have obtained certificate of Registration from SECP and such Certificate of Registration is being renewed every year. (Rule 14 & 16 of Broker and Agents Rules, 2001} Agent Dealings 1. Obtain representation that the agent does not deal with his clients in his own name. Dealing with clients includes receiving cash or cheque from the client in the agent's own name and issuing cash memos, receipts, delivery notes or any other document in his name. All the transactions are made in the name of his member or broker and settled with broker or member only. {Rule 17(1) of Broker and Agents Rules, 2001} Regulations Governing Future Contracts 1. In respect of trading under Future Contract, Review that the brokerage house:
a)
takes margin from its clients in accordance with the rates
prescribed by the
b)
has proper procedures for identification of
clients for effective risk Regulations Governing Short Selling under Ready Market 1. Review that member has not made short sale unless: Prior contractual borrowing arrangement has been made; The sale is made at an up tick; and The trade is identified as a short sale at the time of placement of order (Regulation 5) a) Further review following: No short sale has been carried over (Regulation 9);
No COT financed securities has been lent to a short seller (Regulation 10); Short sale has been made only in eligible securities identified for short sale (Regulation 8). Regulations Governing Members Branch Offices 1. In case the brokerage house has its any branch office for conducting the business and trading of shares and securities within and outside premises of the Exchange, review that:
a)
brokerage house has obtained a Certificate of
Registration from the b) maintained all client related record/information at the Head Office;
c)
confirmation/contract/cash memo/other documents are
issued on only
d)
name of Stock Exchange Member is prominently displayed
outside the e) registration Certificate is prominently displayed at the branch ;
f)
status of the person authorized to manage the branch
office whether as an
g)
authority
given to the agent or employee to perform all acts on behalf of the h) Proof of following: business being done at the branch office in the name of the member; maintenance of the branch offices bank accounts in the name of the member; proper maintenance of accounts of the customers at the branch offices. i) any other documents and records required to be maintained under regulations made by the stock exchange Capital Adequacy Requirement 1. Review that the Certificate of Net Capital Balance as per the prescribed format certified by any practicing Chartered Accountant is being submitted with the Exchange on biannually basis.
2. Review that the Net Capital Balance have been computed in accordance with Rule 2(d) of, and third schedule to, the Securities and Exchange Rules, 1971. Margin Deposits 1. Review the following: a) Margin Deposits with the Exchange, NCCPL etc. b) Margin Deposits with the Exchange with respect to trading in Future Contracts.
c)
Margin Deposits of Investors with Members along with
written consent of Segregation of Client Funds and Securities 1. Review the following as required under the regulations: a) Clear segregation and maintenance of separate bank account of client's and the broker's money. b) Maintenance of necessary records and books of accounts to distinguish client's cash and securities from member/broker's cash and securities.
|