A majority of stockbrokers and investors are in favour of stringent, new rules governing insider trading and risk management issues introduced by the Colombo Stock Exchange (CSE), a poll by the Business Times shows.
Asked whether they are in favour of the rule where employees of broking firms who deal with clients are barred from insider dealing or knowingly assisting a person in such trades, 88.8% said ‘YES’, 8.3% voted ‘NO’ while 2.7% were ‘Undecided’.
However some respondents, while praising this rule, were in doubt whether it would get implemented at all. “There are politically, powerful investors in the market for whom rules mean nothing. There are others who’ll circumvent the rules. The question is, is the CSE strong, courageous and ‘brave’ enough to go after these ‘big guns,” one investor said, adding ‘Your guess is as good as mine.”
More than 300 stockbrokers and investors responded to the poll based on new rules and guidelines issued to stock brokers, the details of which were exclusively reported in this newspaper last week headlined “CSE sends Valentine present to stockbrokers”. The rules were sent to brokers and are effective from February 14.
The depressed stock market has been rocked by allegations of insider trading, market manipulation and a cartel of powerful investors controlling the market. Such was their (cartel’s) power that Malik Cader was eased out of the position of Director-General of the Securities & Exchange Commission (SEC) while SEC Chairperson Indrani Sugathadasa threw caution to the winds and continued the probes against investors and some brokers. However she too wilted under pressure and quit after the brokers and investors met President Mahinda Rajapaksa and expressed their concerns over issues relating to the credit squeeze and over-regulation.
To the question on whether they favour rules where all transactions with clients on the telephone must be recorded, the response was 94.4% - YES and 5.5% - NO.
Respondents also gave a resounding 97.2% YES vote against only 2.7 % - NO, when asked whether they were in favour of brokers providing a copy of the client agreement to the client and explaining the risks in investments. The risks include explaining to the client that a stock can fall sharply and be ‘valueless’.
Some of the comments received in the poll were:
On recording transactions:
a) It is customary in the West to resort to e-trading or online trading. That means placing orders on the electronic media with the central clearing agency such as the Securities Exchange or any appropriate Stock Exchange through a broker and when displayed, a buyer can agree to purchase at the negotiated price. It also assists sellers to monitor the trend in the sales of shares. However this is possible only through a broking firm but it helps monitoring the trend in the price indices.
b) This will not resolve the issue as it is well known that brokers ‘manage’ clients’ accounts. The recent controversy over the buy-back price of a blue chip company where the client revealed that he did not ‘know’ that the broker bought the shares on his behalf, raised a hornet’s nest. What has the regulatory authorities to say about such behaviour?
c) This could be a negative rule as brokers would be reluctant to talk on some issues (client-broker relationship).
d) It should help maintain an audit trail for the benefit of both the broker and client.
e) This will help the SEC to probe and penalize investment advisors who use nominee accounts to trade on their own, resort to insider trading and market manipulation that is widespread in the Sri Lanka stock market.
On brokers explaining risks of an
investment to a client:
a) A broker who deals with a portfolio of a client should regularly inform the client the long term trends in the market value of shares and advise him/her in the sale or purchase of shares that will do well in various market conditions, depending on the performance of the various companies. It was the practice of the CSE to publish a book on Rupee Companies in Sri Lanka that gives the performance of the companies for the past 10 years. I am not sure whether this practice stills continue. That is a useful publication and I hope would be revived.
b) Irrespective of the product, a customer should be clearly advised on the product that he is buying. The benefits and the possible downfalls should be outlined. If the customer then wants to purchase the product, then he would be doing it at his own risks, and be ready to absorb the downward risks as well.
c) This will help create awareness of the risks of investing in the stock market. Investors, in Sri Lanka are largely unaware of market malpractices and don’t even take the trouble to check their bought and sold notes and CDS/stock broker statements to ensure stocks bought and sold are actually what they requested the investment advisor to buy or sell and whether their cheque payments have been credited to the broker account.
On barring insider trading for brokers:
a) Brokers should have the liberty to advice clients on how to deal with the trading floor. However some brokers are used to unethical practices of advising client to sell shares at lower prices so that another client will be at an advantage. The onus must be on the client to follow trends in the market and double check on what the broker advises specially on sale or purchase on the trading floor.
b) On another but related issue, is phone tapping legal under the present Constitution of Sri Lanka other than when the security of the nation is at stake?
c) Very good rules and timely. However, in this country where rules are meant to be broken, what safeguards can an investor take?
d) This is critical to maintain market integrity/confidence.
e) Most of the malpractices widespread in the Sri Lanka stock market are aided and abetted by employees of stock broking firms.
General comments:
- Rules are of no use when there is politicization of public institutions and endemic corruption rages on in the country. The market as well as the economy will begin to function efficiently only when checks and balances are built into the Constitution, independent commissions under the 17th amendment are restored and recruitment to public institutions is made only on the basis of merit. What this means is the revision of the Constitution to reintroduce democratic rights and the abolition of the draconian 18th amendment.
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