Stock investors would have better protection from fund misappropriation by brokers had the intermediaries not opposed the finalising of proposed Bangladesh Securities and Exchange Commission (stock dealer, stock broker and authorised representatives) Rules, 2023.
The securities regulator received public opinions on the draft rules by November last year. The Dhaka Stock Exchange (DSE) Brokers Association deemed it as unfavourable for the market.
In a letter to the securities regulator, the DBA even said the capital market would face instability if the rules were brought into effect before the national election. It kept on opposing the rules after the polls, saying the enforcement of the rules would be detrimental to the market's development.
Meanwhile, investors continued to fall victim to the mishandling of money deposited by them into the Consolidated Customers' Account (CCA) maintained by brokers for day-to-day trading in securities. The latest reported instance is linked with Moshihor Securities. The Dhaka bourse identified a Tk 685.8 million shortfall in Moshihor Securities' CCA as of August 19 this year.
The proposed rules have a provision that the bank with which a broker has opened the CCA will check whether a recipient of cash from the CCA is the broker's client.
A deficit in CCA of brokers is the much-talked-about issue in the country's capital market. Many stockbrokers, including Crest Securities and Tamha Securities, had siphoned off a large amount of clients' money from the accounts.
The securities regulator and the Dhaka bourse are yet to settle the claims of defrauded clients in the absence of any laws meant for protection and sufficient assets of the brokers.
How does money embezzlement happen?
A stockbroker deposits its clients' funds received through cash or cheques into its CCA.
The CCA account is opened with a bank for handling clients' money only. However, clients do not possess any information about the account and remain unknown to the bank. The broker maintains the account, and the bank is bound to provide services to the trading facilitator whenever requested.
Even securities rules are not applicable to transactions requested by brokers against CCA. The bank will act as per the provisions set for its clients, unless there is any monitoring by the stock exchanges.
Money can be withdrawn from CCA through account payee cheques only. On receipt of a cheque from a stockbroker, anyone can encash the payment in his own account opened with the same or another bank.
A corrupt stockbroker can issue cheques to another company of his or other individuals who are not supposed to receive money from the CCA.
The new rules, if made effective, will provide for the relevant bourses sending lists of clients to banks on behalf of brokers. The banks will then be able to prevent to some extent the fraudulent practices. Moreover, the CCAs of brokers will come under regular scrutiny as the lists will be revised from time to time.
Apart from moving away funds from CCA, stockbrokers have also been caught using clients' money for issuing margin loans. They also sold shares from clients' portfolios, while providing them with fake asset statements.
Furthermore, funds in CCAs had been kept as lien by stock brokers to receive loans, advances or overdraft facility from individuals, banks, or other financial institutions.
The proposed rules aim to stop all these malpractices.
Why is the opposition to proposed rules?
President of DSE Brokers Association Saiful Islam said they were against the draft rules designed for stock brokers and dealers because they were not market friendly.
The rules have another provision requiring the board of any brokerage firm to choose a client to sit in the board. BSEC officials say clients should be aware of the decisions made by the board of their brokerage firm.
The proposed rules also have a provision of a minimum paid-up capital worth Tk 100 million for brokers to gain eligibility to disburse margin loans.
The draft rules are aimed at securing wider protection of investors, said BSEC director Md. Abul Kalam.
DBA chief Saiful Islam, however, insisted that a dialogue is necessary to reach a consensus. "Previous self-willed commission did not hold any discussion with the stakeholders."
Asked what exactly the anti-market provisions are, Mr Islam said there are problems in every paragraph of the draft rules.
"It's not possible to mention the problems right now. We will hold a dialogue soon to discuss the matter."
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