The Colombo Stock Exchange (CSE) has sent stockbrokers the new stockbroker rules (now adopted by the CSE) on Tuesday, industry sources said. "These are now regulations and the stockbrokers have to abide by them," an industry source told the Business Times. Areas covering trading practices, clients' money, minimum standards for stockbrokering firms, capital requirements, operational requirements, etc are comprehensive in the rules.
Under operational requirements, a section on client agreement in writing stipulates that stockbroker firms shall enter into a written agreement (client agreement) with each client before services are provided to the client. "Stockbroker firms shall provide a copy of the client agreement to the client and draw the client's specific attention to the risks that are described in the appropriate risk disclosure statements. The type of client agreement may vary depending on the services provided," the rules say.
Written risk acknowledgement
They also say that this agreement shall include a 'written risk acknowledgement statement' to the effect that the client is aware of the risk associated with trading of securities. The trading practices and conduct section says that when acting on behalf of clients, a stockbroker firm and their employees who deal with clients will observe the highest standards of professional conduct and integrity, act fairly, and avoid any conflict of interest which may arise. "If a conflict of interest arises, a stockbroker firm shall ensure equal and fair treatment to its clients by disclosing such conflict of interest or by declining to act or by taking any other appropriate measures," the rules say.
Under disclosure of client orders, the rules say that a stockbroker firm and their staff who deal with clients shall not disclose a client's order to any third party unless the prior written consent of the client is obtained for the disclosure of the information or the disclosure is required under any applicable law.
Recording orders
Trading practices and conduct section has an area on 'recording orders' which stipulate the broking houses to use a telephone recording system by August this year to record clients' order instructions and maintain these records for at least six years. They also have the option to obtain written instructions from clients and maintain these records for at least six years.
The rules also say that a stockbroker firm shall not effect transactions in a discretionary account unless the client has given prior written authorization to the stockbroker firm to effect transactions for the client without the client's specific instructions and that such written authorization given by the client shall clearly state the investment objectives of the client. "The Chief Executive Officer of the stockbroker firm shall approve any arrangement to operate a discretionary account," the rules further stipulate.
Unauthorized trading
Unauthorized trading rules section says that a stockbroker firm and its employees who deal with clients shall not execute a buy/sell transaction in a client account without the authority of the client; execute trades contrary to the instructions received from the client, execute its/their personal trades in the account of the client and use the client's account for third party trading.
On market manipulation and creating a 'false market', the rules stipulate that stockbroker firms and their staff dealing with clients shall not execute or cause to be executed purchases of any share at successively higher prices, or sales of any such share at successively lower prices to create or inducing of false, misleading or artificial appearance of activity in such a share. The rules also prohibit unduly or improperly influencing the market price of a share, or establishing a price which does not reflect the true state of the market in such a share.
They also say that stockbroker firms and their employees are prohibited from creating or inducing a false or misleading appearance of activity in a share or creating or inducing a false or misleading appearance with respect to the market in such a share.
Excessive trading (churning)
The brokers are prohibited from executing buy and sell transactions in a client account without the authority of the client, with the intention of generating commission for their company or themselves.
There's a section on 'front running' and use of non-public price sensitive information for trading which stipulates that stockbroker firms have procedures in place to ensure that its employees do not deal (for the benefit of the stockbroker firms any employee of the stockbroker firms or a client) in shares where the employee concerned effects the dealing in order to 'front-run" pending orders/transactions for or with clients. The rules also specify some minimum standards for stockbroker firms pertaining to their human resources and also the organizational structure with clearly defined responsibilities and authority for each category of employees. The rules also require the stockbroker firms to maintain a duly updated Systems & Procedures Manual covering trading, financial management, information systems, research (if applicable) and human resource management.
The rules also want these firms to have a documented Disaster Recovery Plan (Eg. Daily back-up of all accounting and other records maintained off-site). In supplying information to the CSE where the CSE may require a stockbroker firm to provide information or records which may be relevant to an investigation in order to discharge the CSE's duties, a stockbroker firm shall be bound by such requirement and that the broker firm shall ensure that such information and records are accurate and complete. "A Stockbroker Firm shall not willfully make, furnish or permit the making or furnishing of any false or misleading information, statement or report to the CSE," the rules further say.
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