PSX and SECP ignore violations in 2015 audit of MR Securities

Despite certain regulation violations that occurred during the audit of MR Securities conducted in 2015, the Securities and Exchange Commission of Pakistan (SECP) and the Pakistan Stock Exchange (PSX) have ignored them, a report of the PSX received by Pakistan Today said.

“Two audits of MR Securities were conducted in 2015, one by PSX through a system audit and another by the SECP. The report of the system audit was without any adverse findings. However, the Regulatory Affairs Committee (RAC) was informed that the SECP audit revealed certain issues and violations with respect to segregation of assets and maintaining of two types of books by the broker,” the report claimed.

One of the brokers who disclosed this report said, “This means that an SECP official is involved in a scam with MR Securities.”

The SECP had previously issued show cause notices to more than 30 brokers throughout the country but no fine has been imposed on them till now.

“One or two other brokers from Lahore who are involved in scams may also be investigated and could default,” another broker said.

However, in the report it is mentioned that despite a red alarm being raised, the matter was not forwarded to the right forum for timely action or any action at all.

The judgment and working style of the PSX chief returning officer (CRO) seemed questionable. Being a part of the oversight committee and privy to the relevant vulnerable situation of the brokerage house well in advance, the CRO did not share the information with the SECP despite their query.

Being a member of the oversight committee and the joint inspection, there was no bar on the CRO to perform his role as the CRO of PSX and he was obliged to bring into the loop the RAC chairman to whom he functionally reports. Instead, the CRO never apprised the chairman either in person or otherwise.

The report further said that the CRO, having become aware of the situation on January 16, did not raise the issue in the RAC meeting held on January 27 and only moved sent an email to the RAC on night on February 3. Furthermore, after the closure of the office by the broker on February 01 and the panic created by investors, the CRO deputed the CCO to visit Lahore instead of going himself to handle the situation despite knowing the gravity of the situation.

In a visit of the sub-committee of the RAC to the PSX for hearing appeals on February 07, the CRO was to brief the sub-committee about cases of vulnerable brokers but did not avail the opportunity. The CRO remained constantly in contact with the CEO of MR Securities on Whatsapp, but did not bother disclosing this information during the interview held by the head of internal audit and the RAC only came to learn of the fact after seeing the CRO’s cellphone.

The report further said that a design lapse was found in the structure and governance of the oversight committee and the mechanism under which it carries out a joint inspection of brokerage houses of the PSX. There is an urgent need to re-visit the governance of the said committee and its reporting requirements.

“There is a dearth of market intelligence in the exchange unless an alarm is raised by another broker or complaints are filed by the investors,” the report said. “Surveillance function at the PSX was found wanting and there is a systemic gap,” it added.

Questions regarding the system audit were also raised also, but without any specifics, in a total failure to identify the relevant issues.

Although TREC holders are represented on the PSX board, all of them are based in Karachi and there is no representation from the north to highlight issues related to brokers from the former Lahore and Islamabad stock exchanges (LSE and ISE).

Other recent problems are due to the brokers of the former LSE and ISE. According to the CRO, prior to the integration of the stock exchanges, he had raised the concern whether the brokerage houses of the LSE and ISE were in order, but the SECP took the stance that there were time constraints and that the issue would be addressed later.

“As the actual status of the finding of the inspection of the former LSE & ISE’s brokers is unknown, they could be potentially be very high risk. Joint inspection of all these brokers needs to be carried out on a priority basis to assess the real situation and to take remedial action. It is feared that some of them may still be suffering from the 2008 crises and hiding their real position. Going forward, the CRO should brief the key findings of III in each meeting of the RAC,” the report says.

Allowing the custody of investor cash and securities by the brokerage houses in their sub-accounts, should be eliminated as soon as possible with the alternate mechanism of settlement of trades directly through client investor accounts, the report added.