BSEC draft rules: Brokerage firms need to appoint a director from clients

The securities regulator has prepared draft rules for stock brokers and dealers in a move to ensure the protection of the clients of brokerage houses. 

Every brokerage firm needs to appoint a representative of its clients as a director in its board. In addition, to appoint or terminate a Chief Executive Officer (CEO), brokerage houses must secure the approval by the Bangladesh Securities and Exchange Commission (BSEC). 

The draft regulation titled "Bangladesh Securities and Exchange Commission (Stock Dealer, Stock Broker and Authorised Representative) regulations, 2023" is up on the BSEC website. Stakeholders have until 9 November to express their opinion on the draft rules. 

In this regulation, the BSEC has drawn guidelines regarding the minimum paid-up capital requirement, investment, client account management, and appointment and termination of officers and authorised representatives for stock brokers and dealers. 

Stock brokers are those who buy-sell securities for the account of others, whereas dealers buy-sell securities for their own accounts. 

In the past few years, BSEC probes have found evidence of misappropriation of client money against a large section of brokerage firms. For this, the licence of several firms has been cancelled. Also, many firms have refunded their clients.

Every stock broker has to maintain a Consolidated Customer Account (CCA) with any scheduled bank, into which clients deposit money for the purpose of buying and selling shares. If the fund in the account is any less than the money deposited by clients, it indicates mismanagement or misappropriation or embezzlement of cash.

Hence, BSEC has come up with the new draft to ensure the protection and better services to the investors. BSEC said that the draft will be released in the form of a gazette after the verification of public opinion.

However, brokerage firm owners were not at all happy with the draft rules.

In this regard, DSE Brokers Association (DBA) President Richard Rozario told The Business Standard, "BSEC's draft law is not helpful in managing the business of brokerage firms. We don't know if the rules they set are followed anywhere else in the world."

"The commission has released the draft for feedback at a time when our senior members have gone to Europe to participate in a road show organised by the BSEC. Therefore, we do not have the opportunity to give our opinion within the time set by the commission. Hence, we will ask the commission for more time," the DBA president added. 

Ashequr Rahman, managing director of Midway Securities, said, "BSEC's draft law has actually put intermediaries at risk in the name of investor protection."

He also said that many houses will be closed if the rules mentioned in the draft are followed, nor are the rules reality-based.

According to the draft, if more than 50% of the directors of the brokerage firm's board are from entrepreneurs, one should appoint a representative from among the clients of the concerned organisation as a director.

Within three months from the date of publication of these rules in the gazette form, a director shall be appointed from the client of the brokerage firm.

Paid-up capital requirement

According to the draft regulations, to get a stock broker licence, applicants need to keep at least Tk5 crore as paid-up capital, joint ventures with foreign entrepreneurs at least Tk8 crore and fully foreign ownerships Tk10 crore.

In case of stock dealer licensing, the paid-up capital for local entrepreneurs is at least Tk10 crore. To get a stock broker and stock dealer licence, the minimum paid-up capital required is Tk15 crore and for joint ventures or fully foreign ownerships it should be Tk20 crore.

Those who want to manage operating a margin loan account need to maintain the minimum paid-up capital by complying with the risk-based capital adequacy rule.

Every stock dealer or broker should maintain at least 75% as net worth of the paid-up capital. Stock dealers should invest a minimum 75% of its paid-up capital in the capital market including the government securities.

After the draft regulation gets published in gazette form, existing dealers and brokers should comply with the requirement within the next two years.

Meanwhile, a brokerage firm can open a maximum of 15 branches with complying the minimum paid-up capital. However, if they want to open more branches, they have to have an additional paid-up capital of Tk2 crore each. Extension offices of branches or booths cannot be opened.

Besides, stock brokers cannot invest in any subsidiary or associate companies.

Appointment of CEOs and compliance officers

An entrepreneur or shareholder of a stock dealer or broker cannot be the CEO and compliance officer of a brokerage firm.

According to the draft law, the appointment of the CEO must be approved by the BSEC. However, in order to get this appointment approved, the concerned brokerage firm has to submit the application to the commission along with the recommendation of the stock exchange.

BSEC will approve the appointment of CEOs in brokerage firms for a period of four years. Further extension or re-appointment will also require the commission's approval. 

Meanwhile, brokerage firms with the permission of stock exchanges will appoint compliance officers for four years.

Dismissal of the CEO and compliance officer will also require commission's permission. If someone wants to resign then the resignation letter has to be submitted to the board of the concerned brokerage house and the BSEC.

Every stock broker shall formulate policies regarding appointment of officers and employees. Their pay structure will be fixed by the BSEC.

Any complaint against any officer or employee should be reported to the stock exchange. The stock exchange will give the accused an opportunity to explain.

Rules regarding customer accounts

No advance or margin loan can be granted from money deposited in the CCA. Also, no loan can be taken from banks or financial institutions using this money as lien or security.

By January every year, the stock exchange will send the list of CCAs of all stock brokers to all banks.

Also, the stock exchange will inform banks to not allow cash withdrawals from CCA through cash cheques.