The Securities and Exchange Commission of Pakistan (SECP) has imposed a penalty of Rs 200,000 on Managing Director Karachi Stock Exchange (KSE) and Rs 500,000 on his deputy for not properly following system audit regulations and not taking timely enforcement actions against non-compliant brokers. In this regard, the SECP issued two orders here on Monday.
Through another order in the same context, the SECP has imposed a penalty of Rs 1 million on Karachi Stock Exchange (KSE) for deviating from the requirements as laid down in the System Audit Regulations and is negligent in the discharge of its duties and obligations.
The SECP order against the KSE added that the KSE failed to take appropriate enforcement actions against non-compliant brokers as required under the regulatory framework. It is very important that a stock exchange must function in an objective and just manner as it has to set an example for the intermediaries related to its business, enhance the confidence of investing public and promote healthy development of the securities market, the SECP order added.
According to the order issued against the MD and Deputy MD KSE, the Regulations Governing System Audit [Regulatory Compliance] (System Audit Regulations) were promulgated under Sub-Section 1 of Section 34 of the Securities and Exchange Ordinance 1969 (Ordinance) for conducting System Audit of the Brokers in order to ensure compliance with the requirements of the Ordinance; Securities and Exchange Rules, 1971; Brokers and Agents Registration Rules, 2001; Regulations of the Karachi Stock Exchange Limited ("KSE") and the directives issued by the SECP from time to time.
The MD and Deputy MD KSE were responsible for ensuring that System Audit Regulations are efficiently and effectively enforced. The SECP was of the view that regulations are rendered ineffective if not followed in letter and spirit. The KSE being the frontline regulator, is required to vigilantly monitor and oversee the process of system audit of brokers by auditors, properly follow the regulations and enforce it firmly for the protection of investors' interest and to ensure the safety and fairness of the market. The System Audit Regulations if properly enforced, shall increase the compliance level among the brokers, in particular aspect of the risk management which cover the capital adequacy requirements and segregation of clients' assets. The enforceability of the segregation of clients' assets is the need of the hour and would be of greater value to protect assets of the investors and strengthening of the capital markets' integrity and credibility.
After a detailed and thorough perusal of facts, evidence/information available on record, contentions and averments made by the respondents (MD and Deputy MD KSE) during the course of the hearing, it is evident that with regard to the instances highlighted in the show cause notice, the respondents failed to ensure that appropriate enforcement actions were initiated by KSE in a timely manner against non-complaint brokers as required under the regulatory framework. The MD KSE in written comments and during the course of hearing communicated that although he was not personally involved in the process of System Audit other than the computerised balloting but he takes the compliance function very seriously. However, being the Managing Director of KSE, it is his responsibility to ensure that the KSE is performing its fiduciary duty for the protection of interest of investing community. By virtue of being the Managing Director of the KSE, the duty to exercise reasonable care, skill and diligence in case of the MD KSE is heightened; it is noted with deep concern that the MD KSE failed to ensure the placement of mechanisms and resources necessary to ensure effective compliance of the regulatory framework.
The second respondent being the Deputy Managing Director was assigned the primary responsibility of compliance and enforcement of the System Audit function of the KSE. The SECP observed that the MD and Deputy MD KSE have failed to perform their responsibilities as envisaged to them and are negligent in the discharge of their duties and obligations, SECP order added.