SECP Warns Brokers Suspected of Unauthorized Deposit-taking

Brokerage houses have been issued warning letters by the SECP for unauthorized deposit-taking.

It is the moral, ethical and licit duty of a broker to comply with the Companies Act which has been imposed by the SECP. Certain unauthorized deposit-taking does not comply with the Act.

The SECP stressed that accountancy professionals are to follow the rules as laid down in the Company Act. The Act’s main objective is to serve as a piece of regulation and brokers could do well enough to be acquainted with it.

“This act of brokers is not only in contravention of the Companies Act 2017 but also against the Securities Act 2015 as deposit-taking is not a permissible activity for a broker under the Act,” – SECP

SECP’s Conditions

To protect the public interest, all the brokers, their representatives and agents are required to comply with the following:

A broker and/or their representing agent shall not accept any sort of deposit, money or borrow from any person, individual or any constituent of public and sponsors including their representatives and/or agents unless;

  1. Redeemable Capital is issued complying with the Companies Act.
  2. Finance for application and subscription is obtained for the broker’s shares.
  3. Payment is made by a financial institution for the broker’s services.
  4. Subordinated loans from broker directors or sponsors as identified at the time of license renewal in terms of Regulation 4(c) of the Securities Brokers (Licensing and Operations) Regulations, 2016 or substantial shareholders of brokers subject to the following conditions:

The broker and the loan provider must sign a formal written agreement which also underlines terms of repayment and repayment schedule.

  • Subordinated loans must be in the form of cash.
  • No markup or interest shall be paid on this loan.
  • The auditor must authorize and produce a certificate which details the flow of the funds from the subordinate loan.
  • A subordinated loan is allowed only to be utilized as an increase in capital (overall investment/worth of the brokerage) or as anything that serves the same purpose. Margin trading/margin financing etc is not allowed.
  • An approval is required prior to any repayment.

However, finance may be accepted from the broker’s customers but only for trading purposes if that customer’s UIN is already mapped in NCCPL system.

No rate of return shall be given to the customer as a part of reduced commission structure.

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