AMC asked not to charge front-end load from walk-in customers

The Securities and Exchange Commission of Pakistan (SECP) has directed an Asset Management Company (AMC) to eliminate practice of charging front-end load from a walk-in customer, as the sales staff share a portion of the sales load charged to investor as their commission.
According to an order issued by the Commissioner Securities Market Division (SMD) against an AMC, the practice of linking the commission of sales staff with the sales load charged to the investor may induce the sales staff to charge front-end load to increase their remuneration. It is contrary to the objectives of ensuring compliance with the requirements of circular 26 of 2015 of SECP.
The management of the AMC is advised to formulate a policy regarding commission of the sales staff wherein some other suitable criteria may be formed to avoid the inherent conflict between the requirements of the circular 26 of 2015 and the manner to determine the amount of the commission of the sales staff. The SECP believes that it is the domain of the management of the company to form policies to motivate the sales staff for achieving the revenue targets but at the same time such policies should not be, in any way, detrimental to the regulatory compliance, the SECP added.
Considering the fact that the company has taken various initiatives to ensure compliance with the regulatory framework by the sales staff, the SECP is not imposing any penalty this time by taking a lenient view. However, this is subject to the premise that the management of the AMC shall continue its efforts to ensure full compliance with the regulatory requirements.
The order has disposed of the proceedings initiated against an asset management limited (the "company) through show cause notice (the "SCN") bearing No SCD/AD-AMCW/ NAFA/14/38/2017, dated February 27, 2017, under section 282J (1) read with section 282M the Companies Ordinance, 1984 (the "Ordinance").
The brief facts of the case are that Supervision and Enforcement Department (S&ED) of the Securities and Exchange Commission of Pakistan (the "Commission") conducted a snap check of AMC branch at savings centre, located at Gulistan-e-Johar, Karachi on December 7, 2016, wherein it was observed that the NAFA charged front-end load from a walk-in customer in contravention with the requirements of circular 26 of20 15 (the "circular"). Taking cognizance of the matter, SCN dated February 27, 2017 was served on the NAFA through its chief executive officer (CEO). In response to the said SCN, the company submitted a written reply. The main arguments put forth by the company in its written reply are as under:
The company has taken various measures to ensure compliance with the requirements of the circular such as training of the sales team; obtaining a declaration from the sales staff to abide by the SECP rules, regulations, directives and other guidelines and spot checks and mystery shopping by the company itself.
Owing to mystery shopping by the company itself, a member of the sales team was penalised with a penalty of 20 per cent deduction of salary for not complying with the requirements of the said circular. Further, it is also stated that the management has obtained forced resignation from the sales staff responsible in the present matter. It has largest sales team of over 400 staff members. As they share a portion of the sales load charged to investors as their commission therefore some staff members may opt to violate the respective circular. The company in its response declares itself to be vigilant in enforcing the letter and spirit of the subject circular and claims that instance of reported violation is an act of the sales staff involved and not any violation on the part of the company. The SECP has examined the facts of the case, relevant regulatory requirements and the arguments put forth by the respondents in written reply as well as during the course of hearing.
Subsequent to imposition of penalty on the company, vide order dated October 25,2016 for charging of front-end load from a walk-in customer, the company has taken various measures such as training of the staff, requirement of written declaration and mystery shopping, etc, to ensure regulatory compliance.