Dealing with Market Dealing with Market Intermediaries and Intermediaries and Market InformationMarket Information

ByByMd. Ashraful IslamMd. Ashraful Islam

Executive Director, SECExecutive Director, SEC

ContentContentssPart-A: Dealing with Market IntermediariesPart-A: Dealing with Market Intermediaries

Market & intermediary fundamentalsMarket & intermediary fundamentals How investors should deal with intermediariesHow investors should deal with intermediaries How regulators deal with intermediariesHow regulators deal with intermediaries

Part-B: Dealing with Market InformationPart-B: Dealing with Market Information Efficient market hypothesisEfficient market hypothesis Access to informationAccess to information Various market informationVarious market information Mandatory disclosure of some informationMandatory disclosure of some information Restriction on disclosure of some informationRestriction on disclosure of some information Prohibition of trading on insider informationProhibition of trading on insider information OthersOthers

Market & Intermediary Market & Intermediary FundamentalsFundamentals

Market FundamentalsMarket Fundamentals Market:Market:

A market is the means through which buyers and sellers are A market is the means through which buyers and sellers are brought together to aid in the transfer of goods and/or brought together to aid in the transfer of goods and/or services. So a market need not have a physical location but services. So a market need not have a physical location but the only necessity is that buyers and sellers are facilitated to the only necessity is that buyers and sellers are facilitated to communicate regarding the relevant aspects of transaction. communicate regarding the relevant aspects of transaction. Both buyers and sellers benefit from existence of the marketBoth buyers and sellers benefit from existence of the market

A financial marketA financial market deals with variety of financial assets but deals with variety of financial assets but those who establish and administer the market do not usually those who establish and administer the market do not usually own the assets, they simply provide a physical location or own the assets, they simply provide a physical location or electronic system that allows potential buyers and sellers to electronic system that allows potential buyers and sellers to interact. They help the market function by providing interact. They help the market function by providing information and facilities to aid in transfer of ownership. There information and facilities to aid in transfer of ownership. There are mainly two types of financial assets:are mainly two types of financial assets:-Money market financial assets, maturity< or = 1 year-Money market financial assets, maturity< or = 1 year-Capital market financial assets, maturity > 1 year-Capital market financial assets, maturity > 1 year

There are many financial markets but they are not all equal – There are many financial markets but they are not all equal – some are more active and liquid, others are relatively illiquid some are more active and liquid, others are relatively illiquid and inefficient in their operations.and inefficient in their operations.

Various Types of Financial Various Types of Financial AssetsAssets Types of financial assets:Types of financial assets:

Money market financial assets:Money market financial assets: Treasury billsTreasury bills Certificate of depositsCertificate of deposits Commercial paper etcCommercial paper etc

Capital market financial assets:Capital market financial assets: Common sharesCommon shares Preferred sharesPreferred shares BondsBonds DebenturesDebentures Mutual fundsMutual funds OptionsOptions Futures etcFutures etc

Different types of financial assets have different characteristics Different types of financial assets have different characteristics and involve different levels of risk-return combinations. At present and involve different levels of risk-return combinations. At present we live in a world of rapid pace of financial innovation because of we live in a world of rapid pace of financial innovation because of two significant events- advent of telecommunication, internet and two significant events- advent of telecommunication, internet and computer technology, and the globalization of business, computer technology, and the globalization of business, especially finance.especially finance.

Features of a Good Capital MarketFeatures of a Good Capital Market

Access to timely and accurate informationAccess to timely and accurate information on on prevailing buy and sell offers (demand and supply) prevailing buy and sell offers (demand and supply) including price and volume of past transaction for including price and volume of past transaction for justifying price of current transaction by the buyer and justifying price of current transaction by the buyer and seller, which is one important attribute of a good marketseller, which is one important attribute of a good market

Liquidity,Liquidity, the ability to buy or sell an asset quickly at a the ability to buy or sell an asset quickly at a price not substantially different form the prices of prior price not substantially different form the prices of prior transactions, assuming no new information is available. transactions, assuming no new information is available. Marketability( likelihood of being sold quickly) and price Marketability( likelihood of being sold quickly) and price continuity (prices do not change much from one continuity (prices do not change much from one transaction to the next unless substantial new transaction to the next unless substantial new information becomes available). But a market to have information becomes available). But a market to have price continuity requires depth (existence of potential price continuity requires depth (existence of potential buyers and sellers at any time willing to trade at prices buyers and sellers at any time willing to trade at prices above or below the current market price)above or below the current market price)

Features of a Good Capital Features of a Good Capital Market…Market…

Low transaction costLow transaction cost.. A perfect market should be free of A perfect market should be free of transaction cost- cost of reaching the market, brokerage cost and transaction cost- cost of reaching the market, brokerage cost and cost of transferring the asset. If buyers and sellers could do cost of transferring the asset. If buyers and sellers could do transactions skillfully, brokerage cost would not be involved. But in transactions skillfully, brokerage cost would not be involved. But in reality, buyers/sellers do not have that skill and raises need for reality, buyers/sellers do not have that skill and raises need for intermediaries and involve cost bit it should be low.intermediaries and involve cost bit it should be low.

Prices should adjust quickly to all new informationPrices should adjust quickly to all new information in the in the marketmarket regarding the asset reflecting fairness of prevailing market regarding the asset reflecting fairness of prevailing market price of the asset.price of the asset.

A perfect market should be free from regulationA perfect market should be free from regulation, , but in but in

reality to handle the prevailingreality to handle the prevailing imperfections, market regulation is imperfections, market regulation is required but it should be at minimum level.required but it should be at minimum level.

But in real market, all these features are hardly existing, which But in real market, all these features are hardly existing, which raise the need for intermediaries and regulation of the market in raise the need for intermediaries and regulation of the market in order to develop a fair, transparent, efficient and reliable market. order to develop a fair, transparent, efficient and reliable market.

Transform financial assets in more Transform financial assets in more preferred form:preferred form: Intermediaries transform less preferred Intermediaries transform less preferred financial assets into more preferred financial financial assets into more preferred financial assets for the general public assuming the assets for the general public assuming the risk involved in the transformation process. risk involved in the transformation process. Various intermediaries are involved in various Various intermediaries are involved in various parts of transformation and value parts of transformation and value addition/retention services for the assets.addition/retention services for the assets.

Work as Conduit between buyers and Work as Conduit between buyers and sellers:sellers: Market intermediaries work as Market intermediaries work as conduit between buyers and sellers.conduit between buyers and sellers.

Roles of Market Roles of Market IntermediariesIntermediaries

They perform at least any one of the They perform at least any one of the following economic functions:following economic functions: Maturity intermediation,Maturity intermediation, Denomination intermediationDenomination intermediation Liquidity intermediationLiquidity intermediation Risk reduction through diversification and Risk reduction through diversification and

credit credit enhancement,enhancement,

Cost reduction through large number of Cost reduction through large number of contract signing contract signing and information processing,and information processing,

providing payment mechanism etcproviding payment mechanism etc

Market Intermediary Market Intermediary Economic FunctionsEconomic Functions

Various Types of Capital Various Types of Capital Market IntermediariesMarket Intermediaries

Merchant bankers (Investment bankers)- Merchant bankers (Investment bankers)- Issue manager, portfolio manager, Issue manager, portfolio manager, underwriterunderwriter

Mutual fund (Investment companies)- Asset Mutual fund (Investment companies)- Asset management companies, trustees, management companies, trustees, custodianscustodians

Brokers, dealers, authorized Brokers, dealers, authorized representatives, market makers, depository representatives, market makers, depository participantsparticipants

Credit rating agencies etc.Credit rating agencies etc.

Financial Financial InnovationInnovation Financial innovation:Financial innovation: At the edge of more competition, At the edge of more competition,

increased volatility, and existing tax regulation and laws, increased volatility, and existing tax regulation and laws, market participants need more efficient ways of risk sharing market participants need more efficient ways of risk sharing or more efficient ways of merely doing things by the use of or more efficient ways of merely doing things by the use of modern communication and computer technologies which modern communication and computer technologies which resulted in many innovative products and services. A key resulted in many innovative products and services. A key financial innovation in the 1980s is financial innovation in the 1980s is asset backed asset backed securitizationsecuritization that dramatically influences the role of that dramatically influences the role of financial intermediaries.financial intermediaries.

Asset securitizationAsset securitization converts illiquid pool of loans into converts illiquid pool of loans into securities with greater liquidity and reduced credit risk. It securities with greater liquidity and reduced credit risk. It provides direct financing between the borrowers and provides direct financing between the borrowers and investors, short-circuiting the traditional intermediaries. In investors, short-circuiting the traditional intermediaries. In securitization, more than one institution may be involve in securitization, more than one institution may be involve in lending capital. This technique has major implications for lending capital. This technique has major implications for financial market as well as the structure of financial financial market as well as the structure of financial intermediaries. This may be a wave of the future, as it intermediaries. This may be a wave of the future, as it appears to be more efficient mechanism for brining borrowers appears to be more efficient mechanism for brining borrowers and investors together than traditional financing through and investors together than traditional financing through financial intermediaries. Securitization benefits issuers, financial intermediaries. Securitization benefits issuers, investors, borrowers and financial system.investors, borrowers and financial system.

Measuring Market Measuring Market PerformancePerformance

IndexIndex

Operational efficiencyOperational efficiency

Price efficiencyPrice efficiency

How Investors Should How Investors Should Deal with Market Deal with Market IntermediariesIntermediaries

How Investors Should Deal How Investors Should Deal with Market Intermediarieswith Market Intermediaries

Investors should know the services and obligations of Investors should know the services and obligations of the stock brokers/ARs and portfolio managers to themthe stock brokers/ARs and portfolio managers to them

Investors should know their own responsibilities to Investors should know their own responsibilities to brokers/ARs and portfolio managersbrokers/ARs and portfolio managers

Investors should know their own obligations to the Investors should know their own obligations to the marketmarket

What investors should do if feel deceivedWhat investors should do if feel deceived

Obligations of stock broker to their Obligations of stock broker to their clientsclients

Accepting customer to open customer account for tradingAccepting customer to open customer account for trading

Executing customer’s orders for buy/sell as per their Executing customer’s orders for buy/sell as per their written or telephonic orderwritten or telephonic order

Providing trade confirmation report on the executed order Providing trade confirmation report on the executed order with details within 24 hours of tradingwith details within 24 hours of trading

Making payment against sell of security, or delivery of Making payment against sell of security, or delivery of security bought, to the customer on end of T+3(for security bought, to the customer on end of T+3(for A,B,G,N scripts) or on end of T+79doe Z category script). A,B,G,N scripts) or on end of T+79doe Z category script). In case of default, interest @1.5 per month on the value In case of default, interest @1.5 per month on the value of transaction is also payable to the customer.of transaction is also payable to the customer.

Obligations of stock broker to their Obligations of stock broker to their clients…clients… Replacing defective script or refund the money to the customer Replacing defective script or refund the money to the customer

with interest @ 2.5% per month from the date of settlement of with interest @ 2.5% per month from the date of settlement of transaction to the date of refund, along with the benefit transaction to the date of refund, along with the benefit accrued, if any, provided complaint is lodged within 10 days of accrued, if any, provided complaint is lodged within 10 days of book closure or 6 months of settlement date, whichever is book closure or 6 months of settlement date, whichever is earlier, for defective script as per the settlement of transaction earlier, for defective script as per the settlement of transaction regulationregulation

Settling customers complaint, if any, against the stock broker Settling customers complaint, if any, against the stock broker concerned.concerned.

Keeping separately customer’s securities from others securitiesKeeping separately customer’s securities from others securities

Keeping separately customers money through consolidated Keeping separately customers money through consolidated customers bank account from brokers moneycustomers bank account from brokers money

Responsibilities of investors to stock-Responsibilities of investors to stock-brokersbrokers

Signature of investor/client in the customer account Signature of investor/client in the customer account information form to create contractual agreementinformation form to create contractual agreement

Knowing the client code number for tradingKnowing the client code number for trading Introducers informationIntroducers information Following margin facilities terms & conditionsFollowing margin facilities terms & conditions Negotiating a rate for broker commission for tradeNegotiating a rate for broker commission for trade Taking acknowledgement receipt for share deposit Taking acknowledgement receipt for share deposit

with signature of concerned AR of brokerwith signature of concerned AR of broker Taking money receipt for fund deposit with signature Taking money receipt for fund deposit with signature

of concerned AR of brokerof concerned AR of broker Declaration in respect of share trading by director or Declaration in respect of share trading by director or

sponsor, 10% or above holder etc.sponsor, 10% or above holder etc.

Obligations of investors for the Obligations of investors for the marketmarket

Investors should not involve in creating artificial Investors should not involve in creating artificial price through syndication and manipulationprice through syndication and manipulation

Should not influence issuer to inflate financial Should not influence issuer to inflate financial report and to declare artificial dividendreport and to declare artificial dividend

Should not influence/misguide other investors Should not influence/misguide other investors for tradingfor trading

Should not involve in spreading rumor or phony Should not involve in spreading rumor or phony information in the marketinformation in the market

How Regulators Deal with How Regulators Deal with Market IntermediariesMarket Intermediaries

How Regulators Deal with How Regulators Deal with Market IntermediariesMarket Intermediaries

Although market intermediaries provide their services Although market intermediaries provide their services to the capital market, their activities are not free from to the capital market, their activities are not free from supervision and beyond securities lawssupervision and beyond securities laws

Intermediaries must have to comply with the Intermediaries must have to comply with the securities laws in conducting their activitiessecurities laws in conducting their activities

Regulators supervise and monitor their activities and Regulators supervise and monitor their activities and ensure their compliance with securities laws to uphold ensure their compliance with securities laws to uphold a fair, efficient and transparent market through a fair, efficient and transparent market through conducting inspection, ensuring maintenance of their conducting inspection, ensuring maintenance of their books of accounts and records, ensuring submission of books of accounts and records, ensuring submission of compliance report, quarterly and annual reports etc.compliance report, quarterly and annual reports etc.

1.1. Dealing with stock brokers/dealers/ Dealing with stock brokers/dealers/ authorized representativesauthorized representatives Inspection to check compliance:Inspection to check compliance: To ensure whether stock To ensure whether stock

brokers/dealers/authorized representatives are discharging their brokers/dealers/authorized representatives are discharging their duties and performing their activities as per securities laws and duties and performing their activities as per securities laws and rules, the Commission by its own initiative or based on any rules, the Commission by its own initiative or based on any complaint if it deems, may conduct inspection of books of complaint if it deems, may conduct inspection of books of accounts, registers, other documents within 3 days of prior notice accounts, registers, other documents within 3 days of prior notice or without notice in case of emergency. Inspection is to be carried or without notice in case of emergency. Inspection is to be carried out and result of the inspection is to be furnished in a report to the out and result of the inspection is to be furnished in a report to the Commission within 30 days of inspection notice from the Commission within 30 days of inspection notice from the Commission. The Commission can extend the time if it deems so.Commission. The Commission can extend the time if it deems so.

Measures on inspection report:Measures on inspection report: The Commission takes The Commission takes necessary measures based on the report or it may instruct for necessary measures based on the report or it may instruct for more detailed inspection. The Commission informs all concerned more detailed inspection. The Commission informs all concerned including the complainants about the measures it has taken.including the complainants about the measures it has taken.

Opportunity for appeal:Opportunity for appeal: If any stock broker/dealer/AR become If any stock broker/dealer/AR become affected by any order under the Stock Broker, Stock Dealer and affected by any order under the Stock Broker, Stock Dealer and Authorized Representative Rules, 2000, it can appeal to the Authorized Representative Rules, 2000, it can appeal to the Commission within 15 days of receiving the order in Appeal Form, Commission within 15 days of receiving the order in Appeal Form, supplementing additional information and papers in favor of the supplementing additional information and papers in favor of the appeal.appeal.

Dealing with stock Dealing with stock brokers/dealers/authorized brokers/dealers/authorized representatives…representatives…

Hearing on appeal:Hearing on appeal: To consider the appeal, the To consider the appeal, the Commission conduct hearing in presence of the appealer or Commission conduct hearing in presence of the appealer or its representative and can call necessary papers. its representative and can call necessary papers.

Commission’s decision:Commission’s decision: The Commission will decide on The Commission will decide on the appeal within 30 days of its submission and inform the the appeal within 30 days of its submission and inform the decision to the appealer.decision to the appealer.

If the decision on the appeal cancels the registration or If the decision on the appeal cancels the registration or suspend the registration, a copy of the decision will be send suspend the registration, a copy of the decision will be send to the Stock exchanges.to the Stock exchanges.

If suspension of the registration occurs under section 12(1) If suspension of the registration occurs under section 12(1) or 12(7), the suspension order shall prevail until the appeal or 12(7), the suspension order shall prevail until the appeal resolved.resolved.

Review of decision:Review of decision: The Commission can review its The Commission can review its decision given under section 17 by its own initiative or decision given under section 17 by its own initiative or appeal petition from the concerned and in this case the appeal petition from the concerned and in this case the Commission’s decision will be the final decision.Commission’s decision will be the final decision.

Dealing with stock Dealing with stock brokers/dealers/authorized brokers/dealers/authorized representatives…representatives…

Status of the authorized representatives in case of Status of the authorized representatives in case of suspension/ cancellation of employer’s registrationsuspension/ cancellation of employer’s registration -- In such case, AR can work with other operational In such case, AR can work with other operational

broker/dealer after taking release from the existing broker/dealer after taking release from the existing broker/dealerbroker/dealer

Issue of notice etc:Issue of notice etc: Notice or any other order/information Notice or any other order/information under this rules can be sent to the person or authorized person under this rules can be sent to the person or authorized person of the organization. Otherwise it can be sent to last known of the organization. Otherwise it can be sent to last known address of that person or its authorized person through address of that person or its authorized person through registered post or special messenger or corrier service or if registered post or special messenger or corrier service or if required through newspaper. required through newspaper.

Compliance with code of conduct:Compliance with code of conduct: Brokers/dealers/AR’s Brokers/dealers/AR’s have to maintain code of conduct as per their concerned rules.have to maintain code of conduct as per their concerned rules.

A. Regular and sudden A. Regular and sudden inspectionsinspections

SEC conductsSEC conducts regular monthly inspection on 2 brokers/dealers regular monthly inspection on 2 brokers/dealers of DSE and 2 brokers/dealers of CSE at random basis to check of DSE and 2 brokers/dealers of CSE at random basis to check whether they are operating in compliance with securities laws whether they are operating in compliance with securities laws and to enforce its implementationand to enforce its implementation

DSE conductsDSE conducts regular monthly inspection on its 5 regular monthly inspection on its 5 brokers/dealers at random basis to check whether they are brokers/dealers at random basis to check whether they are operating in compliance with securities laws and to enforce its operating in compliance with securities laws and to enforce its compliancecompliance

CSE conductsCSE conducts regular monthly inspection on its 5 regular monthly inspection on its 5 brokers/dealers at random basis to check whether they are brokers/dealers at random basis to check whether they are operating in compliance with securities laws and to enforce its operating in compliance with securities laws and to enforce its compliancecompliance

SEC and exchangesSEC and exchanges may initiate any inspection on any may initiate any inspection on any intermediary any time if it deems to do so.intermediary any time if it deems to do so.

Supervision & Monitoring Supervision & Monitoring Broker/dealer/ AR Activities:Broker/dealer/ AR Activities:

B. Report B. Report submissionsubmission

Monthly compliance report:Monthly compliance report: All the stock All the stock brokers/dealers /authorized representatives have to brokers/dealers /authorized representatives have to furnish compliance report on their activities in furnish compliance report on their activities in prescribed format to the Commission on monthly prescribed format to the Commission on monthly basisbasis

Quarterly report:Quarterly report:

Audited financial statements:Audited financial statements: Each stock Each stock broker/dealer shall submit audited financial broker/dealer shall submit audited financial statements to the Commission through stock statements to the Commission through stock exchange within 4 months after completion of their exchange within 4 months after completion of their respective financial year.respective financial year.

C. Maintenance of books of accounts C. Maintenance of books of accounts etc :etc :

1) 1) Maintenance of books of accounts:Maintenance of books of accounts: Journal, cash books or any other original entries that form the basis Journal, cash books or any other original entries that form the basis

for the ledgersfor the ledgers- books of record of all order for purchase or sale of securities, books of record of all order for purchase or sale of securities, - all purchase and sale of securities, all purchase and sale of securities, - all receipts and deliveries of securities, all receipts and deliveries of securities, - all other debts and creditsall other debts and credits

Ledgers reflecting asset, liability, reserve capital, income and Ledgers reflecting asset, liability, reserve capital, income and expense accountsexpense accounts

Ledgers reflecting securities in transfers, securities borrowed and Ledgers reflecting securities in transfers, securities borrowed and securities loaned and securities bought or sold of which the delivery securities loaned and securities bought or sold of which the delivery is delayedis delayed- Chronological and customer wise record of money received and - Chronological and customer wise record of money received and paidpaid- Chronological and customer wise record of securities received - Chronological and customer wise record of securities received and and

delivered including name, quantity, ref no. of securitydelivered including name, quantity, ref no. of security- Chronological record of transactions made in a consolidated - Chronological record of transactions made in a consolidated customer’s account customer’s account

Trial balance of all ledger accounts to be prepared at least once at Trial balance of all ledger accounts to be prepared at least once at the end of six months of every year of accountthe end of six months of every year of account

Maintenance of books of accounts Maintenance of books of accounts etc…:etc…:

Record of transactions with the banksRecord of transactions with the banks Book of contracts with other membersBook of contracts with other members Duplicates/counterfoils of memos of confirmation issued to Duplicates/counterfoils of memos of confirmation issued to

customerscustomers The books of accounts and other documents are to be The books of accounts and other documents are to be

preserved for a period of not less than five years.preserved for a period of not less than five years.

2)2) Maintenance of consolidated customers account with Maintenance of consolidated customers account with scheduled bank for the deposit of money received from or paid scheduled bank for the deposit of money received from or paid to customerto customer

3)3) Separation of customers’ securities from the securities of its Separation of customers’ securities from the securities of its own accountown account

4)4) Additional documents: Additional documents: 1)1) Register for the list of customers with name, address , code numberRegister for the list of customers with name, address , code number2)2) Registers relating securities buy/sell of securities:Registers relating securities buy/sell of securities:

a.a. Howla or contract wise registerHowla or contract wise registerb.b. Security wise registerSecurity wise registerc.c. Customer wise registerCustomer wise register

3)3) Preservation of hard copy of the documents signed by authorized Preservation of hard copy of the documents signed by authorized officer if computer-based system is usedofficer if computer-based system is used

4)4) List of AR with name, addressList of AR with name, address5)5) Agreement incorporating AR’s responsibly and limit of activityAgreement incorporating AR’s responsibly and limit of activity

Maintenance of books of accounts Maintenance of books of accounts etc…..:etc…..:

Company law matters:Company law matters:Holding Holding board meetingboard meeting at least once in at least once in

every three months and four in a yearevery three months and four in a yearHolding of Holding of AGMAGM once in every calendar once in every calendar

year as per section 81 of Company Actyear as per section 81 of Company ActReporting Reporting change in directorshipchange in directorship to to

RJSC and SE within 14 days of changeRJSC and SE within 14 days of changeReporting any Reporting any change in company change in company

statusstatus to SEC 15 days of change to SEC 15 days of change

Maintenance of books of accounts etc…:Maintenance of books of accounts etc…: General:General:

Margin arrangement through agreementMargin arrangement through agreement No. of trade workstationsNo. of trade workstations No. of ARsNo. of ARs Paid-up capitalPaid-up capital Net worth (min half of paid-up capital)Net worth (min half of paid-up capital) Appointment of compliance officerAppointment of compliance officer Reporting net capital balanceReporting net capital balance as per rule 3(2) to SE as per rule 3(2) to SE

within 3 working days of next monthwithin 3 working days of next month Margin maintenance statusMargin maintenance status Single security exposureSingle security exposure Single client exposureSingle client exposure Reporting short sale if anyReporting short sale if any Reporting financial netting if any for non-permitted Reporting financial netting if any for non-permitted

securitiessecurities

2.2. Dealing with Merchant Dealing with Merchant BankersBankers

Inspection to check compliance:Inspection to check compliance: To be sure whether merchant To be sure whether merchant bankers and portfolio managers are discharging their duties, bankers and portfolio managers are discharging their duties, performing their activities and keeping its books of accounts, records performing their activities and keeping its books of accounts, records and other documents as per securities laws and Merchant Banker and and other documents as per securities laws and Merchant Banker and Portfolio Manager Rules, 1996, the Commission can appoint any person Portfolio Manager Rules, 1996, the Commission can appoint any person as as inspectorinspector to conduct inspection within 3 days of prior notice to conduct inspection within 3 days of prior notice including the subject or less than that time as approved by the including the subject or less than that time as approved by the Commission. Inspection is to be carried out and result of the inspection Commission. Inspection is to be carried out and result of the inspection is to be furnished in a report to the Commission within 60 days of is to be furnished in a report to the Commission within 60 days of starting inspection. starting inspection.

Measures on inspection report:Measures on inspection report: The Commission will consider the The Commission will consider the matter within 30 days of receiving the report and if any merchant matter within 30 days of receiving the report and if any merchant banker or portfolio manager is found guilty, the Commission can banker or portfolio manager is found guilty, the Commission can suspend or cancel the registration or can issue directive to comply with suspend or cancel the registration or can issue directive to comply with the laws and rules. But it will not cancel or suspend registration the laws and rules. But it will not cancel or suspend registration without giving a reasonable opportunity of 15 days to defend in writing without giving a reasonable opportunity of 15 days to defend in writing and without conducting a special inspection about the allegation.and without conducting a special inspection about the allegation.

Opportunity to defend:Opportunity to defend: On having written defense in time and in On having written defense in time and in consideration of special inspection report, the Commission will conduct consideration of special inspection report, the Commission will conduct hearing and take decision and inform it in writing.hearing and take decision and inform it in writing.

2.2. Dealing with Merchant Dealing with Merchant Bankers….Bankers….

Opportunity to appeal:Opportunity to appeal: Being aggrieved by the Being aggrieved by the Commission decision, the merchant banker and Commission decision, the merchant banker and portfolio manager can appeal to the commission portfolio manager can appeal to the commission for its review within 15 days of receiving the for its review within 15 days of receiving the copy.copy.

Review of decision:Review of decision: The Commission can The Commission can review upon receiving appeal petition from the review upon receiving appeal petition from the concerned, and the Commission will take final concerned, and the Commission will take final decision in this connection.decision in this connection.

Compliance with code of conduct:Compliance with code of conduct: Merchant banker and Merchant banker and portfolio managers have to maintain code of conduct as per portfolio managers have to maintain code of conduct as per their concerned rules.their concerned rules.

Supervision & Monitoring of Merchant Banker Supervision & Monitoring of Merchant Banker and Portfolio Manager Activities:and Portfolio Manager Activities:

SEC conductsSEC conducts sudden inspection on sudden inspection on merchant bankers and portfolio managers merchant bankers and portfolio managers to check whether they are operating in to check whether they are operating in compliance with securities laws and compliance with securities laws and keeping records of their activities properlykeeping records of their activities properly

A. Inspection

B. Report B. Report submissionsubmission

Monthly compliance report:Monthly compliance report: All the merchant All the merchant bankers and portfolio managers have to furnish bankers and portfolio managers have to furnish compliance report on their activities in prescribed compliance report on their activities in prescribed format to the Commission on monthly basisformat to the Commission on monthly basis

Unaudited quarterly financial statement:Unaudited quarterly financial statement: Each merchant banker shall submit unaudited Each merchant banker shall submit unaudited quarterly financial statement to the Commission quarterly financial statement to the Commission to check capital adequacyto check capital adequacy

Financial statements:Financial statements: Each merchant banker Each merchant banker or portfolio manager shall submit financial or portfolio manager shall submit financial statements to the Commission. statements to the Commission.

C. Maintenance of books of accounts C. Maintenance of books of accounts and records:and records:Books of accounts & records:Books of accounts & records:

Balance sheetBalance sheetProfit-loss statementProfit-loss statementCash flow statementCash flow statementAuditor’s opinion on accountsAuditor’s opinion on accountsBooks of accounts as prescribed by the Books of accounts as prescribed by the

CommissionCommissionShall maintain records for min 12 yearsShall maintain records for min 12 years

3.3. Mutual Mutual fundfund Four participants of MF are:Four participants of MF are: SponsorSponsor TrusteeTrustee Asset management company (AMC)Asset management company (AMC) CustodianCustodian

MF is a trust fund and trustee bears MF is a trust fund and trustee bears responsibility to ensure activities of MF, responsibility to ensure activities of MF, AMC, custodian in accordance with trust AMC, custodian in accordance with trust deeds, securities laws, Mutual Fund Rules.deeds, securities laws, Mutual Fund Rules.

Supervision and monitoring of MF Supervision and monitoring of MF activities:activities:

Inspection objectives:Inspection objectives:Ensuring proper maintenance of books of Ensuring proper maintenance of books of

accounts to reflect their activitiesaccounts to reflect their activitiesEnsuring compliance of securities laws and Ensuring compliance of securities laws and

rulesrulesExamination of the role of MF, trustee, asset Examination of the role of MF, trustee, asset

management company in case of takeovermanagement company in case of takeoverEnquiring complaints against MF Enquiring complaints against MF

participants in the interest of investorsparticipants in the interest of investorsAny other reason if the Commission deemsAny other reason if the Commission deems

InspectionInspection::

Inspection and action Inspection and action procedure:procedure:

Inspection notice to be issued at lest 3 days prior to Inspection notice to be issued at lest 3 days prior to inspection, to all MF participantsinspection, to all MF participants

All directors, officers, staffs of the inspecting participant All directors, officers, staffs of the inspecting participant will produce their respective books of accounts, other will produce their respective books of accounts, other documents, document on activities of MF to the inspection documents, document on activities of MF to the inspection officerofficer

Based on inspection result, the inspection officer will Based on inspection result, the inspection officer will submit report to the Commission as soon as possiblesubmit report to the Commission as soon as possible

The Commission will consider the report within 30 days of The Commission will consider the report within 30 days of receipt and give the defaulter an opportunity to express receipt and give the defaulter an opportunity to express its personal opinion before taking any decisionits personal opinion before taking any decision

The Commission may appoint auditor to investigate in to The Commission may appoint auditor to investigate in to books of accounts or other matters based on inspection books of accounts or other matters based on inspection reportreport

Inspection and action procedure…..:Inspection and action procedure…..: Without investigation by appointing investigation officers, the Commission shall Without investigation by appointing investigation officers, the Commission shall

not suspend or cancel registration of any participant.not suspend or cancel registration of any participant.

On receipt of report from investigation officer, the Commission will issue show On receipt of report from investigation officer, the Commission will issue show cause notice to the defaulter as to why punishment will not be imposed on himcause notice to the defaulter as to why punishment will not be imposed on him

On receipt of answer, the Commission will issue order and shall send copy to all On receipt of answer, the Commission will issue order and shall send copy to all participantsparticipants

If the fund is suspended, all its operation will remain suspended during the periodIf the fund is suspended, all its operation will remain suspended during the period

If the fund registration is cancelled, all activities and transaction will be stopped.If the fund registration is cancelled, all activities and transaction will be stopped.

Suspension/cancellation news will have to be published in national news Suspension/cancellation news will have to be published in national news papers(2)papers(2)

The aggrieved person may appeal to the CommissionThe aggrieved person may appeal to the Commission

Dealing with Market Dealing with Market InformationInformation

Efficient Market HypothesisEfficient Market Hypothesis Everyday, at any point of time, the price of a security Everyday, at any point of time, the price of a security

is thought to be built as a consequence of various is thought to be built as a consequence of various market information as interpreted by the investors, market information as interpreted by the investors, which is known as Efficient Market Hypothesis(EMH)which is known as Efficient Market Hypothesis(EMH)

A good market provides access to timely and accurate A good market provides access to timely and accurate information information

Flow of unauthorized information and misleading Flow of unauthorized information and misleading information can cause disruption of the marketinformation can cause disruption of the market

Disclosure of some information is mandatory and Disclosure of some information is mandatory and restriction of misleading information is also mandatoryrestriction of misleading information is also mandatory

Access to Market Information NetworkAccess to Market Information Network

Trade data in

CD

SEC/DSE/ CSE Review/ Publications

News paper/magazinesElectronic

media (Website, TV, Radio, Email,

Message Group, SMS)

Capital Market

3rd party data

service providers

SEC/DSE/ CSE/CDBL/

Company websites

Company annual/half-

yearly/quarterly reports

Various stakeholders in capital market•Issuers•Investors•Intermediaries•Regulators•Others

Various Market Related Various Market Related InformationInformation

Past Trade dataPast Trade data Current trade dataCurrent trade data Price sensitive informationPrice sensitive information AGM, EGM & record date/book closureAGM, EGM & record date/book closure Technical informationTechnical information Fundamental informationFundamental information Economic informationEconomic information Securities laws related informationSecurities laws related information ProspectusProspectus Lottery result & refund information etc.Lottery result & refund information etc.

Mandatory disclosure of Mandatory disclosure of some informationsome information

Price sensitive information:Price sensitive information: Price sensitive information that may affect the price of a Price sensitive information that may affect the price of a

security must be disclosed in public by the issuer through security must be disclosed in public by the issuer through daily newspaper advertisement(within 2 days).daily newspaper advertisement(within 2 days).

SEC and the stock exchanges are to be informed within 30 SEC and the stock exchanges are to be informed within 30 minutes minutes

Price sensitive information is stored in stock exchange news Price sensitive information is stored in stock exchange news server that can be viewed through website.server that can be viewed through website.

Issuer companies are directed to hold their meetings that Issuer companies are directed to hold their meetings that may decide on price sensitive information after trade hours may decide on price sensitive information after trade hours or in holidays or in holidays

Restriction on disclosure Restriction on disclosure of some informationof some informationCompany must not publish Company must not publish

undecided information sensitive to undecided information sensitive to priceprice

Nobody can publish or spread Nobody can publish or spread misleading information about capital misleading information about capital marketmarket

Prohibition of Insider Prohibition of Insider TradingTrading

Insiders of a company like sponsors, Insiders of a company like sponsors, directors, officers or staff involving in directors, officers or staff involving in price sensitive issues are restricted price sensitive issues are restricted from buy/sell of their securities of from buy/sell of their securities of that company under the Prohibition that company under the Prohibition of Insider Trading Rules, 1995.of Insider Trading Rules, 1995.

OthersOthers Quarterly, annual FS:Quarterly, annual FS: Issuer companies are directed to submit their Issuer companies are directed to submit their

quarterly FS and annual FS in their websitequarterly FS and annual FS in their website

Company statistics:Company statistics: DSE/CSE website DSE/CSE website provide trade data and also other company provide trade data and also other company financial data in their website, which is easily financial data in their website, which is easily accessible.accessible.

Company websites etcCompany websites etc

Thank YouThank You