Regulations For Monitoring & Compliance of Brokers of The Karachi Stock Exchange Comparative of Existing (System Audit Regulations) & Proposed New Regulations

REGULATIONS FOR MONITORING & COMPLIANCE OF BROKERS OF THE KARACHI STOCK EXCHANGE
COMPARATIVE OF EXISTING [SYSTEM AUDIT REGULATIONS] & PROPOSED NEW REGULATIONS
APROCESS OF AUDIT
REGULATIONS FOR MONITORING & COMPLIANCE OF BROKERS OF THE KSE COMPARATIVE OF EXISTING & PROPOSED REGULATIONS APROCESS OF AUDIT
EXISTING REG. REF 1.
EXISTING REGULATION SHORT TITLE AND COMMENCEMENT a) These regulations may be called the "Regulations Governing System Audit of the Brokers of the Exchanges, 2004". b) They shall come into force with immediate effect.
COMMENTS
PROPOSED REGULATION 1. SHORT TITLE AND COMMENCEMENT These Regulations may be called the "Regulations for Monitoring & Compliance of Brokers of the Karachi Stock Exchange ". They shall come into force with effect from 1 st JULY 2012.
Current title of System Audit leaves the impression of an IT Audit. Hence be appropriately renamed as Regulations for Monitoring & Compliance of Brokers of the Karachi Stock Exchange.
1.1
1.2
2.
DEFINITIONS The terms used in these Regulations shall have the following meanings: a) "Articles" means the Articles of Association of the Exchange. NO CHANGE
2.
DEFINITIONS
2.1. The terms used in these Regulations shall have the following meanings: -
The term Articles is not used in new Regulations. Hence definition not required. NO CHANGE 2.1.1
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 the panel of auditors as per Regulations 4 (a) hereof. d) "Board" means tile governing board of directors of the Exchange. e) "Branch office" means an office, or branch thereof, opened and maintained by a broker within or outside the premises of a stock exchange for conducting the business and trading of securities.
Audit" means the Compliance Audit of Brokers conducted as per these Regulations. "Auditor(s)" means the Auditor(s) selected, in accordance with the criteria approved by the Board as per these Regulations. "Board" means the governing board of directors of the Exchange. -
2.1.2
NO CHANGE
2.1.3
Not required in System Audit Regulations as covered through respective Regulations.
Internal Audit Department
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EXISTING REG. REF EXISTING REGULATION f) Broker means Any member of the Exchange engaged in the business of executing transactions in securities for the account of others and for his own account and is registered with the Commission under the Brokers and Agents Registration Rules, 2001. g) Debt Market shall have the same meaning as ascribed thereto under the National Clearing Company of Pakistan Limited Regulations. h) "Director" means a director of the Board. COMMENTS NO CHANGE PROPOSED REGULATION 2.1.4 Broker means any member of the Exchange engaged in the business of executing transactions in securities for the account of others and for his own account and is registered with the Commission under the Brokers and Agents Registration Rules, 2001. -
Not required as covered in respective Rules/Regulations
The term Director is not used in new Regulations. Hence definition not required. Appropriately worded 2.1.5
i) "Exchange" means a stock exchange formed and registered under the Securities and Exchange Ordinance, 1969. j) "HOIA" means the Head of the Internal Audit of the Exchange. k) "Audit Committee" means the Audit Committee of the Board. l) Leveraged Market shall have the same meaning as ascribed thereto under the Securities (Leveraged Markets and Pledging) Rules, 2011.
"Exchange" means the Karachi Stock Exchange (Guarantee) Limited
This term not used in the new Regulations. NO CHANGE 2.1.6
"Audit Committee" means the Audit Committee of the Board. -
Not required in new Regulations as covered through respective rules.
NEW INSERTION
2.1.7
Commission means the Securities & Exchange Commission of Pakistan. Report means the compliance report submitted by the Auditor under these Regulations.
NEW INSERTION
2.1.8
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EXISTING REG. REF EXISTING REGULATION (2) 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). COMMENTS NO CHANGE. redrafted Appropriately PROPOSED REGULATION 2.1.9 All other words and expressions used but not defined in these Regulations shall, unless there is anything repugnant in the subject or context, have the same meanings as assigned to them in the Articles of Association and Regulations of the Exchange, Securities and Exchange Ordinance, 1969 (XVII of 1969) and the Companies Ordinance, 1984 ((XLVII of 1984) and Rules and Regulations made there-under.
3.
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:Presently the BOD approves the criteria instead of the panel. Based on that approved criteria panel is formed. In view of the existing practice It is suggested that regulations be amended to state that BOD approves the criteria [instead of a panel]. Further, instead of requirement of annual review by BOD it is suggested that BOD reviews the criteria when deemed necessary hence the requirement of annual review be deleted.
3. 3.1
PANEL OF AUDITORS The Board on the recommendation of the Audit Committee shall approve, from time to time, the criteria for formation of panel of auditors. The panel would consist of least 10 auditors and also fulfill the following prerequisites:
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
NO CHANGE
3.1.1
The Auditors are a firm of Chartered Accountants within the meaning of the Chartered Accountants Ordinance, 1961; and
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EXISTING REG. REF EXISTING REGULATION ii. The firm has been given a satisfactory rating under the Quality Control Review Program of the Institute of Chartered Accountants of Pakistan. 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. COMMENTS NO CHANGE PROPOSED REGULATION 3.1.2 The firm has been given a satisfactory rating under the Quality Control Review Program of the Institute of Chartered Accountants of Pakistan.
iii.
While giving QCR rating ICAP already verified the criteria iii & iv. Further it is not practically possible for Exchange to verify these criteria. Hence these two [iii & iv] requirements have not been retained in the proposed regulations.
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.
Not retained in proposed New Regulations as there is no value addition of this requirement.
[Refer S.No 7.2 of proposed Regulations for appointment of auditors.]
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EXISTING REG. REF EXISTING REGULATION (c) The HOIA shall liaise between the broker(s) and Auditor(s) conducting the audit of the said broker(s). COMMENTS Not retained in proposed New Regulations as it is not appropriate to specify/fix the designation or head of department in the regulation. It may be MDs discretion to designate the person for liaison. 4. PROPOSED REGULATION -
4.
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. Presently, 25% of active brokers are audited biannually and in 4 ballots [one cycle of 2 years] all active brokers are audited. On completion of a cycle, all brokers become eligible for audit again, therefore members selected in ballot 3 and ballot 4 can be selected again in ballot 1 and ballot 2 of next cycle that sometimes causes continuous audits/ overlapping of audit periods. As per the proposed selection mechanism: All brokers will be audited over 3YRS instead of Existing 2YRS. The brokers selected in last 2 ballots of a cycle will not be included in the initial 2 ballots of next cycle so as to avoid continuous or overlapping audit periods.
SELECTION OF BROKERS AND STATUS OF COMPLIANCE
4.1 The selection of brokers for the audit shall be through random balloting. All eligible brokers shall be audited in a three year period referred to as a cycle through biannual balloting to be held in every calendar year latest by 31st January and 31st July. Each broker will be audited once in a cycle. In order to ensure that number of brokers audited in each ballot does not differ materially, the Exchange at the ballot date shall determine the total number of brokers eligible for audit in the remaining ballots of a cycle. Such number of brokers will be divided by the remaining ballots of the cycle to arrive at the optimum number of brokers to be audited in a ballot. For example, if the total number of eligible brokers at the first ballot of the cycle is 140. These shall be divided by the 6 [number of ballots in 3 years]. Hence, 23 brokers will be selected in one ballot. At the next ballot date, assume that total eligible brokers are reduced to 130. Then the number of brokers selected shall be 21 [130 less 23 audited in previous ballot of a cycle divided by the 5 remaining ballots of a cycle]. The brokers audited in the last two ballots of a cycle shall not be included in the population of initial two ballots of the next cycle. However, these brokers shall be included in the eligible brokers for the purposes of Page 6 of 31
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EXISTING REG. REF EXISTING REGULATION COMMENTS In case of reported noncompliances reported in the Audit Report, the broker shall be required to rectify the same immediately and in addition to the routine audits, the broker in the following year, shall be subjected to a limited scope audit to confirm that the Brokerage house is now compliant of those particular clauses where Auditor found him noncompliant. The limited scope audit may be conducted by KSE itself, which shall not alter or affect the brokers normal selection process or timing through random balloting. The existing practice of arranging review after 2 months after submission of reports is to be abandoned. PROPOSED REGULATION determining the number of brokers to be selected for an audit in the ballot. For example assume that at the first ballot of the Cycle 2 the total eligible brokers are 130 and the brokers audited in the last two ballots of previous cycle 1 were 45. Then the 22 brokers [130 eligible brokers divided by the 6 ballots] shall be selected for audit from the audit population of 85 [13045]. 4.2 If the audit report contains any non-compliances, the broker shall be required to rectify the same immediately and in addition to the audits as per para 4.1 above, the broker in the following year, shall be subjected to a limited scope audit to confirm that the Brokerage house is now compliant of those particular clauses where Auditor found him non-compliant. The limited scope audit may be conducted by KSE itself, which shall not alter or affect the brokers normal selection process or timing through random balloting.
(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.
Not retained in proposed New Regulations as timing of audit should not be decided by the Broker.
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EXISTING REG. REF 5. EXISTING REGULATION 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. The existing Regulations specify the Audit Period as preceding Financial year which is not relevant for compliance audit It is practically not possible to send the report immediately as report is first reviewed by Exchange and usually require clarifications/revisions due to errors by auditors. It is therefore suggested not to retain the requirement of immediate sending in the new regulation. Further, the reports be forwarded as a complete batch. 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. Not retained in proposed New Regulations as no value addition. The Audit Period is suggested as preceding 12 months [Refer S.No 6.1 of the proposed regulation ] NO CHANGE. Appropriately redrafted COMMENTS PROPOSED REGULATION 5. SCOPE OF AUDIT
5.1 The Scope of Audit shall be as mentioned in Schedule A to these Regulations.
Please refer S.No 7.5 of the proposed regulation
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EXISTING REG. REF EXISTING REGULATION COMMENTS PROPOSED REGULATION 6. Refer 6(a) of existing regulation. AUDIT PERIOD
6.1 The Audit period shall be preceding twelve months as specified by the Exchange. 7. AUDIT PROCESS
New insertion
7.1 The Exchange shall intimate, by every 31JANUARY and 31JULY each year to the Eligible Broker whose Audit is to be conducted as per these Regulations. 7.2 Within 30 days of intimation thereof, Such Broker shall appoint an Auditor from the approved panel and in accordance with any other criteria approved by the Board Existing Regulations do specify responsibilities Auditors. not of and submit the Auditors declaration to the Exchange in the format prescribed by the Exchange from time to time.
Refer 3(b) of Existing Regulation
The Exchange however for the last few ballots obtain the Auditors declaration. This practice needs to included in new regulations. be
NEW INSERTION
7.3 The concerned Broker shall be required to provide timely access to the information needed for the Audit and co-operate with the Auditor for timely and smooth completion of the Audit
NEW INSERTION
7.4 Such Broker shall arrange for submission of Auditors Report directly to the Managing Director, in the format prescribed by the Exchange, within two months from the date of assignment of the Audit.
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EXISTING REG. REF EXISTING REGULATION Refer 6(a) of existing regulation COMMENTS PROPOSED REGULATION 7.5 The Exchange shall forward to the Commission copies of the audit reports of the brokers audited in the batch. 8. The word default does not appear appropriate and hence the wording of the relevant clause is appropriately amended. Further, the existing range of fine Rs.10,000 to Rs. 25,000 is suggested to be revised as Rs.10,000 to Rs.100,000. ENFORCEMENT ACTIONS
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.
8.1 If the Audit Report identifies any non-compliance(s) the Exchange may, after giving broker an opportunity of being heard and considering the severity of noncompliances take appropriate enforcement action including issuing warnings, imposing fines etc. The Exchange may by order direct the broker to: 8.1.1 Pay a fine amounting to not less than Rs.10,000/ but not exceeding Rs. 100,000/ -.
b) If a broker fails to co-operate with the Auditor(s), the Managing Director shall upon receiving a written complaint from the Auditor, call a hearing of the broker and the Auditor and may impose a fine of not less than Rs. 25,000/- but not exceeding Rs. 100,000/- on the said broker. If the broker, 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 disciplinary proceedings under the Articles of the Exchange.
NO CHANGE
8.1.2 If a broker fails to co-operate with the Auditor, the Managing Director shall upon receiving a written complaint from the Auditor, call a hearing of the broker and the Auditor and may issue a warning letter or may impose a fine not exceeding Rs. 100,000/ - on the said broker. If the broker, 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 disciplinary proceedings.
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EXISTING REG. REF EXISTING REGULATION c) Where the Exchange neglects or otherwise fails to take action under clause 7 of these Regulations, the Commission may suo moto or on receiving any complaint after giving due opportunity of hearing impose such penalty as provided under clause 7 and take such other necessary action as deemed fit by the Commission. 8. 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. NO CHANGE COMMENTS NO CHANGE PROPOSED REGULATION 8.1.3 Where the Exchange neglects or otherwise fails to take necessary action, the Commission may suo moto or on receiving any complaint after giving due opportunity of hearing impose penalty as provided under this clause and take such other necessary action as deemed fit by the Commission. 9. COSTS 9.1 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. 10. ELIGIBILITY FOR AUDIT Existing Regulations do not specify the criteria for inclusion of brokers for the audit. An eligibility criteria is suggested to be included in the new regulations. 11. SPECIAL AUDITS / INVESTIGATIONS Presently, System Audits are conducted only of members selected through the ballot process. There is no provision to authorize KSE to conduct Special Audit/investigations of member(s) against whom there may be complaints or information of non-compliances. 11.1 The Exchange in addition to the routine audit conducted under these regulations, may at any time, have a broker audited/inspected or investigated with expanded, restricted or different scope or period of audit given in the Regulations. 10.1 The Audit shall be conducted of eligible brokers. An eligible broker means the broker who has operational track record of at-least one year.
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EXISTING REG. REF EXISTING REGULATION COMMENTS PROPOSED REGULATION 12. REPEALED
12.1 The existing Regulations Governing System Audit of the Brokers of the Exchanges, 2004 shall stand repealed on coming into force of these Regulations.
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BSCOPE OF AUDIT
REGULATIONS FOR MONITORING & COMPLIANCE OF BROKERS OF THE KSE COMPARATIVE OF EXISTING & PROPOSED REGULATIONS BSCOPE OF AUDIT
EXISTING REG. REF
EXISTING SCOPE
COMMENTS
PROPOSED SCOPE 1. Client level compliance
A new clause is proposed to be included in the scope. Various clauses that were already in the scope are combined in a meaningful manner to improve the effectiveness of the compliance audit. In addition some other aspects that were considered necessary for effective audits are also included in this clause.
1.1
Check the complete trail of following for randomly selected clients: 1.1.1 Clients SAOF is as per the Form 1 of General Regulations and is in compliance with the requirements of General Regulations. 1.1.2 Obtain the understanding of Brokers Client Order mechanism. If the order for sale or purchase of securities is taken verbally by the broker then check from SAOF that Broker is authorized to take verbal orders or otherwise written instructions for order for sale or purchase of securities to the broker are available. For telephonic orders match the telephonic recording with order placed. 1.1.3 Broker has mandatorily taken margins from his clients in accordance with the Regulations Governing Risk Management of the Exchange. Applicable margins were available in the clients account and reflected in books of accounts in identifiable and verifiable manner. 1.1.4 Confirmations were transmitted within twentyfour hours of execution of client order and such confirmations complied with the requirements mentioned in General Regulations of the Exchange.
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EXISTING REG. REF EXISTING SCOPE COMMENTS PROPOSED SCOPE Duplicates or counterfoils of memos / confirmation issued to customers are preserved for a period of not less than five years.
1.1.5 Check that movements from clients Subaccounts are made after obtaining due authorization from clients.
1.1.6 Check that broker has not pledged or deposited any security on account of a client as collateral except as allowed under Rules & Regulations.
1.1.7 Check that all above selected client transactions for margins, sale, purchase, payment, receipts, payable and receivable are recorded in records and books of accounts [manually or electronically] in timely, adequate, proper, identifiable and in manner verifiable on UIN / Client Code basis.
1.1.8 The minimum suggested sample size for client level compliance is: 50% or 25 clients whichever is less, out of which there must be 50% new clients (client registered in last 12 months); and minimum 5 random orders at 5 different dates of each selected client are checked.
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EXISTING REG. REF EXISTING SCOPE COMMENTS PROPOSED SCOPE 2. Telephonic order 2.1 Check the following: 2.1.1 Clients orders received and/ or confirmed via telephonic [landline] communications must be recorded on tape recording system. the the
NEW INSERTION
Operations would make necessary changes in relevant Regulation.
2.1.2 Where orders are received by mobile phones, a reliable record of the time of receipt and order details are being maintained.
2.1.3 Effective procedures are in place to ensure the integrity, reliability and security of the tape recording system and timely detection of any malfunctioning. 2.1.4 Adequate compliance monitoring is exercised over the office staffs that are responsible for recording the telephone order instructions. 2.1.5 Telephone Recordings are being retained for a minimum period of six months. Standard 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 DELETED from here; essence of this clause is covered through insertion of new clause Client level compliance [Refer S.No 1.1.1]
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EXISTING REG. REF EXISTING SCOPE Manner of transaction of Member's Business 1. Review compliance of Rule 4 of Securities and Exchange Rules 1971 that stipulates following regarding manner of transaction of member's business. COMMENTS PROPOSED SCOPE
a)
Rule 4(1) requires that brokerage house should enter all orders in the chronological order, in a register maintained in a form which should identify the person who placed the order, name and number of the securities, nature of transaction and the limitation, if any, as to the price of the securities or the period for which the order is to be valid. Rule 4{2(a)} and 4{2(b)} restricts members to buy and sell security on their own account where client's "best order" to buy and sell the same security respectively, remains unexecuted. Rule 4{2(c)} restricts members to buy security at or below the limit price on their own account where client's "limited order" to buy the same security remains unexecuted. Rule 4{2(d)} restricts members to sell security at or above the limit price on their own account where client's "limited order" to sell the same security remains unexecuted.
DELETED Telephone recording which is part of scope suffice the purpose. Moreover activity log exists with the brokers and the Exchange maintains the log of all orders and trades.
b)
DELETED
c)
DELETED
d)
DELETED
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EXISTING REG. REF EXISTING SCOPE Confirmation of Clients Order 1. Review that the brokerage house transmits a confirmation within twenty-four hours of execution of an order and contains following information: Date on which order is executed: Name and number of securities; Nature of transaction (spot, ready, future and also whether bought or sold) Prices/rates Commission if the member is acting as broker 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 balance sheet and a statement of income and expense account are being prepared once in a year; U/R 5(l) of Securities and Exchange Rules 1971 b) In case of a corporate brokerage house, accounts are audited by an auditor who must be a Chartered Accountant. U/R 5(2) of Securities and Exchange Rules 1971 DELETED For Corporate members, the Exchange monitors on regular basis. For Individual brokers who are very fewer in number, it is suggested that this requirement be included in relevant Regulations. DELETED from here but covered through insertion of new clause Client level compliance [Refer S.No 1.1.4] DELETED DELETED DELETED DELETED DELETED DELETED COMMENTS PROPOSED SCOPE
a) b) c) d) e) f)
a)
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EXISTING REG. REF EXISTING SCOPE Maintenance of Books of Accounts 1. Review that all the books of account and other related documents mentioned below are being maintained: Rule 8(1) of Securities and Exchange Rules, 1971 a) Journals (or other comparable records), cash books and any other records of original entry forming the basis of entries into any ledger, the books of original entry being such as contain a daily record of all orders for purchase or sale of securities, all purchases and sales of securities, all receipts and deliveries of securities and all other debits and credits; Ledger (or other comparable records), reflecting asset, liability, reserve, capital, income and expense account; Ledger (or other comparable records), reflecting securities in transfer, borrowed and lent and securities bought or sold of which the delivery is delayed; Record of all balance of all ledger accounts in the form trial balance to be prepared at least at the end of six month; Record of transactions with banks; Duplicates or counterfoils of confirmation issued to customers. memos, of DELETED As maintenance of books of accounts are checked by External Auditors. COMMENTS PROPOSED SCOPE
b)
DELETED
c)
DELETED
d)
DELETED
e) f)
DELETED DELETED but covered through insertion of new clause Client level compliance [Refer S.No 1.1.4]
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EXISTING REG. REF g) EXISTING SCOPE margin deposit book; COMMENTS DELETED from here; but covered through insertion of new clause Client level compliance [Refer S.No 1.1.7] where it is mentioned that Auditor will review recording of transactions of sale, purchase, Margins. DELETED from here but covered in Branch Office [Refer S.no. 3.7(a) of proposed Scope] DELETED from here but covered in Branch Office [Refer S.no. 3.8 of proposed scope] DELETED from here; essence of this clause has been covered through insertion of a new clause Illegal Financing [Ref S.No. 6]. Records are maintained and monitored by CDC and further Physical shares now, are not acceptable for pledging. PROPOSED SCOPE
h)
registers of accounts of agents;
i)
an agreement with an agent specifying the scope of authority and responsibilities of the member and his agent; 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;
j)
k)
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;
DELETED from here; essence of this clause is covered through inclusion of a new clause Illegal financing [Ref S.No. 6 of proposed scope]
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EXISTING REG. REF l) EXISTING SCOPE record of borrowing on any security or lending or arranging for the lending of any security carried for the account of the customer; COMMENTS DELETED from here; essence of this clause has been covered through verification of Leverage Market requirements [Refer S.no. 8.5 of proposed scope] DELETED As this is not allowed legally PROPOSED SCOPE
m)
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. 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 Records) Rules, 2001 Reporting by Corporate Brokerage Houses
2.
DELETED Checked by External Auditors.
1.
Review that the brokerage house (Corporate member) communicates the following to the Exchange: As per the Memorandum Association of the Exchanges & Articles of
a)
Annual Accounts (Audited) and Half Yearly Accounts of the company are being submitted within the specified time; List of Directors containing names, addresses and number of shares held by each as at 30th June and 31st December is being submitted within thirty days;
DELETED Monitored by the Exchange on regular basis.
b)
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EXISTING REG. REF c) EXISTING SCOPE List of shareholders containing names, addresses and number of shares held by each as at 30th June and 31st December is being submitted; All changes in the management of the company including directorship are being submitted immediately. COMMENTS DELETED Monitored by the Exchange on regular basis. PROPOSED SCOPE
d)
Details to be Printed on Correspondence and Contracts 1.
Member's
Review that the Members 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 Association of the Exchanges & Articles of
DELETED There is no such requirement in any rules / Regulations.
DELETED from here; essence of this clause has been covered in Branch Office [S.No. 3.2 of proposed scope]
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 DELETED Monitored by the Exchange.
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EXISTING REG. REF EXISTING SCOPE 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 DELETED from here; but covered in Branch Office [S.No. 3.7(c) of proposed scope]. COMMENTS PROPOSED SCOPE
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 DELETED from here; but covered in Branch Office [S.No. 3.7(d) of proposed scope].
Regulations Contracts
Governing
Deliverable
Future
In respect of trading under Deliverable Futures Contract, review that the brokerage house has complied with Regulation No. 6 of the said Regulations with respect to Blank Selling.
DELETED Monitored by regular basis. Exchange on
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EXISTING REG. REF EXISTING SCOPE Regulations Governing Ready Market Short Selling under COMMENTS PROPOSED SCOPE
To check the compliance of the following: (1) Brokerage house is not involved in Blank Sales, which are not permissible. (Regulation 4) Member on his Proprietary Account or Clients Account has not made a Short Sale unless: Prior contractual borrowing arrangement has been made; The sale is made at an Uptick or Zero-Plus Tick; The trade is declared as a Short Sale at the time of placement of order through KATS in a special Short Sale Order Window designated in the system for the Purpose; and The sale has been made only in the securities eligible for short-selling as prescribed by the Exchange with prior approval of the Commission, based on the criteria laid down in the Regulations governing Short Selling under Ready Market. DELETED Monitored by regular basis. DELETED DELETED DELETED DELETED Exchange on
(2) (a) (b) (c)
(d)
DELETED
Regulations Offices
Governing
Members
Branch
3. Branch Offices & Agents
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:
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EXISTING REG. REF a) EXISTING SCOPE brokerage house has obtained a Certificate of Registration from the Exchange; maintained all client related record/information at the Head Office; COMMENTS DELETED Monitored by the Exchange. NO CHANGE 3.1 Check the Broker has kept & maintained all the client related record/information of the Office/Branch Office at the Head Office. PROPOSED SCOPE
b)
c)
confirmation/contract/cash memo/other documents are issued on only printed stationery on which addresses of all branches are clearly stated;
NO CHANGE
3.2
Check that the Broker has ensured that all stationery, i.e. confirmation / contract / cash memo / any other document is issued only in the broker name along with address of principal place of business. Check that addresses of all offices / branches are clearly stated on such printed stationery. Check that name of broker is prominently displayed outside the branch. Check that Registration Certificate of Office / Branch Office is prominently displayed at the Office(s) / Branch Office(s).
d)
name of Stock Exchange Member prominently displayed outside the branch
is
NO CHANGE
3.3
e)
Registration Certificate is prominently displayed at the branch;
NO CHANGE
3.4
NEW INSERTION
3.5
Check that the Certificate of Registration of Manager as Agent with the SECP except in case of Members Main Office is displayed.
NEW INSERTION
3.6
Check that a board at a conspicuous place at the reception/front office is displayed which contains the requirements as mentioned in Regulations governing KSE members Offices / Branch Offices.
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EXISTING REG. REF EXISTING SCOPE COMMENTS NEW INSERTION PROPOSED SCOPE 3.7 a) Obtain list of Agents from the back Office system of the Broker and check that broker properly maintains the register [manual or electronic form] of accounts of all agents. b) Check that list of agents is matched with list of registered agents appearing in KSE records / website. c) 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. d) Check 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. f) status of the person authorized to manage the branch office whether as an authorized agent or an employee as per the Stock Exchange Regulations. Rule 5 {1(iii)} of Stock Exchange Members (Inspection of Books and Record) Rules, 2001 DELETED As it covered in clause 3.7(c) of proposed scope.
g)
authority given to the agent or employee to perform all acts on behalf of the member. Rule 5[1(v) of Stock Exchange Members (Inspection of Books and Record) Rules, 2001
NO CHANGE
3.8
Review the authority given to the agent or employee to perform all acts on behalf of the member. Review the agreement with the agent specifying the scope of authority and responsibilities of the member and his agent.
In existing Regulations, this is covered under heading Maintenance of Books of accounts (Refer Page 20)
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EXISTING REG. REF h) EXISTING SCOPE 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. NO CHANGE DELETED from here but essence of this clause is covered in 3.10 & 3.11 of proposed scope. COMMENTS PROPOSED SCOPE 3.9 Check that the business being done at the branch office is in the name of the member.
3.10 Check that branch offices bank accounts are maintained in the name of the broker. 3.11 Check that customer accounts maintained at the branch offices. i) any other documents and records required to be maintained under regulations made by the stock exchange. DELETED Not specific, hence cannot be audited. are properly
Capital Adequacy 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. 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. DELETED Monitored by the Exchange on regular basis.
2.
DELETED Rule 2(d) is being certified by Chartered Accountant Firms
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EXISTING REG. REF EXISTING SCOPE Margin Deposits Review the following: a) Margins have been deposited with the Exchange by the Member in accordance with Regulations Governing Risk Management of the Exchange. Member has mandatorily taken margins from his clients in accordance with Regulation 9.4 of the Regulations Governing Risk Management of the Exchange. Segregation of Client Funds and Securities Review the following as required in the General Regulations: (a) (b) Clear segregation of clients assets from the Brokers assets. Maintenance of necessary records and books of accounts to distinguish clients funds and securities from brokers funds and securities including maintenance of a separate bank account which will include all the funds deposits of their clients along with record / breakdown of client position. Margins deposited by the clients of a broker in the form of securities, are maintained in the respective sub-accounts of such clients at CDC. DELETED It is monitored by the Exchange on regular basis. DELETED but covered through new clause Client Level Compliance [Refer S.No. 1.1.3] COMMENTS PROPOSED SCOPE
b)
4.
Segregation of Client Funds and Securities
4.1 Check that broker has complied with the requirements of segregation of client funds and securities as required in the General Regulations. NO CHANGE. Only appropriately re-worded.
(c)
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EXISTING REG. REF (d) EXISTING SCOPE COMMENTS PROPOSED SCOPE
The clients funds and securities are not used by the Broker for any purpose other than as authorized by the client in writing. The Broker has moved securities from SubAccount of his Client to Collateral Account only after following the regulatory requirement mentioned in this Regulation. Trading by employees of brokerage houses Review that the provisions relating to trading by employees of brokerage houses have been followed as required under the Regulations of the Exchange.
NO CHANGE. Only appropriately re-worded.
(e)
5.
Trading by employees of brokerage houses
5.1 Check that employees of the brokerage house who wish to trade have obtained prior written authorization from Brokerage House. 5.2 Check the Members have registered their all employees into the UIN database with all registration details including their respective designations and do update / modify the registration details whenever any change occurs. 5.3 Check that Employees (who are trading) have submitted to the Brokerage house a written undertaking of their understanding and willingness to strictly abide by all the relevant rules, regulations, codes and procedures as prescribed by SECP, KSE, CDC and NCCPL. 5.4 Check that any mechanism is in place by the Brokerage house to monitor their employees trades regularly. 5.5 Check Internal Audit Department of the Brokerage House ensures compliance of Rules & Regulations and any violation communicated to Audit Committee / Chief Executive Officer of the brokerage house.
NO CHANGE. Only appropriately re-drafted.
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EXISTING REG. REF EXISTING SCOPE Prohibition on in-house badla financing Review that the Broker has not provided any sort of illegal financing/funding including inhouse funding / financing to any other Broker, its clients or any other person, whosoever. DELETED from here but essence of this clause has been covered through insertion of a new clause Illegal Financing so as to make it more specific and with reference to SECP rules. COMMENTS PROPOSED SCOPE 6. Illegal Financing
6.1 Check that broker has not carried on any financing, borrowing, lending & pledging activity which is in contravention of applicable rules or regulations.
UIN verification Review that the provisions relating to UIN have been strictly followed in letter and spirit by the brokerage house in accordance with the Regulations of the Exchange and to ensure that the usage of UIN has not resulted in any undesirable practice which may defeat the purpose of introduction of UIN such as (a) concealing the traceability of the trades of the beneficial owners, (b) reduction of impact on client level netting regime, (c) concealing of short selling, etc. DELETED Automation in process by NCCPL settlement
Monitoring of OFF-Market transactions by CDC
Compliance with Internet Trading Guidelines Review that the brokerage house has fully complied with the Internet Trading Guidelines issued by the SECP from time to time.
7.
Internet Trading
Auditor will check only auditable clauses as mentioned in proposed scope
7.1 If the brokerage house is providing Internet Trading services, check that the brokerage house has fully complied with the following: 7.1.1 Service Requirements are as per given in the applicable Rules, Regulations and Guidelines; 7.1.2 Security Measures are as per applicable Rules, Regulations and Guidelines.
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EXISTING REG. REF EXISTING SCOPE General Obligation of Brokers/Members Relating to Leveraged Markets 1. Review that the brokerage house comply with the requirements of the Securities (Leveraged Market and Pledging) Rules, 2011 and regulation 42A of the General Regulations. Auditor will check only auditable clauses as mentioned in proposed scope 8.2 COMMENTS PROPOSED SCOPE 8. 8.1 Leveraged Trading Check that no transaction is executed by the Broker on behalf of a client in the Leveraged Market unless an appropriate agreement has been executed between the broker and such client. Check broker has fully disclosed all risks involved in the relevant transactions and has obtained a written confirmation from the client that they have understood & have the ability to bear the risks in such transactions. Check that the broker has fully disclosed & explained the options available to a client in respect of various financing facilities in the securities markets. Check the broker has evaluated the credit worthiness of the clients through a proper credit risk assessment methodology. Also check that credit limits are assigned to each client beyond which the client shall not be allowed to take a position in the Leveraged Market. Check that adequate records are maintained by the broker, evidencing compliance with the obligations of the clause 42A of General Regulations. Minimum suggested sample size is 25 leveraged clients or 10% of leveraged clients whichever is less.
8.3
8.4
8.5
8.6
9. Sample size 9.1 The minimum sample sizes are suggested in the scope wherever necessary. However, wherever the sampling is used for the verification, Auditor is advised to use random sampling technique to ensure that selected sample is the true representative of population and its result can reasonably be used to draw conclusion for whole population.
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Regulations For Monitoring & Compliance of Brokers of The Karachi Stock Exchange Comparative of Existing (System Audit Regulations) & Proposed New Regulations

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Regulations For Monitoring & Compliance of Brokers of The Karachi Stock Exchange Comparative of Existing (System Audit Regulations) & Proposed New Regulations

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REGULATIONS FOR MONITORING & COMPLIANCE OF BROKERS OF THE KARACHI STOCK EXCHANGE

COMPARATIVE OF EXISTING [SYSTEM AUDIT REGULATIONS] & PROPOSED NEW REGULATIONS

EXISTING REG. REF 1.

Not required in System Audit Regulations as covered through respective Regulations.

Internal Audit Department

Not required as covered in respective Rules/Regulations

"Exchange" means the Karachi Stock Exchange (Guarantee) Limited

This term not used in the new Regulations. NO CHANGE 2.1.6

"Audit Committee" means the Audit Committee of the Board. -

Not required in new Regulations as covered through respective rules.

Internal Audit Department

Internal Audit Department

[Refer S.No 7.2 of proposed Regulations for appointment of auditors.]

Internal Audit Department

SELECTION OF BROKERS AND STATUS OF COMPLIANCE

Internal Audit Department

Internal Audit Department

5.1 The Scope of Audit shall be as mentioned in Schedule A to these Regulations.

Please refer S.No 7.5 of the proposed regulation

Internal Audit Department

Refer 3(b) of Existing Regulation

Internal Audit Department

Internal Audit Department

Internal Audit Department

Internal Audit Department

EXISTING REG. REF

PROPOSED SCOPE 1. Client level compliance

Internal Audit Department

Internal Audit Department

Operations would make necessary changes in relevant Regulation.

Internal Audit Department

Internal Audit Department

Internal Audit Department

Internal Audit Department

registers of accounts of agents;

Internal Audit Department

DELETED Checked by External Auditors.

DELETED Monitored by the Exchange on regular basis.

Internal Audit Department

Details to be Printed on Correspondence and Contracts 1.

DELETED There is no such requirement in any rules / Regulations.

Internal Audit Department

DELETED Monitored by regular basis. Exchange on

Internal Audit Department

(2) (a) (b) (c)

3. Branch Offices & Agents

Internal Audit Department

name of Stock Exchange Member prominently displayed outside the branch

Registration Certificate is prominently displayed at the branch;

Internal Audit Department

Internal Audit Department

DELETED Rule 2(d) is being certified by Chartered Accountant Firms

Internal Audit Department

Segregation of Client Funds and Securities

Internal Audit Department

NO CHANGE. Only appropriately re-worded.

Trading by employees of brokerage houses

NO CHANGE. Only appropriately re-drafted.

Internal Audit Department

Monitoring of OFF-Market transactions by CDC

Auditor will check only auditable clauses as mentioned in proposed scope

Internal Audit Department

Internal Audit Department