Wednesday, June 15, 2011

Removal of a member of stock exchange in case of fraud and breach of trust under Pakistani Law

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By Yasser Latif Hamdani
The question before us is whether the SECP could remove a member of the exchange in powers given to it. The answer to this question is yes.
7(1)d of the Securities and Exchange Ordinance 1969  (“SEO”) reads:
“Where the Commission is of opinion that an Exchange or any member, director or officer hof the Exchange has contravened any provision, or has otherwise neglected or failed to comply with any requirement, of this Ordinance, or of any regulation or direction made or given thereunder, the Commission if it considers it necessary for the protection of investors or to ensure dealings or fair administration of the Exchange so to do by order in writing, -
(d) suspend or remove the director, officer or member from his office in, or membership of, the Exchange”
This when read with 20 (6) (b) and (g) of the Securities and Exchange Commission of Pakistan Act 1997 gives wide-ranging powers to the Commission to remove such a member from the exchange. Further more it becomes clear when one reads these together that Commission is required to maintain and protect investor confidence. Therefore the continuation of membership of an individual who has contravened provisions such as Section 24 of the Central Depositories Act 1997 and 17 (a) and e(ii) and (v) of the aforesaid SEO would be counterproductive and would undermine investor confidence. The question of restoration thus does not arise again.
17(a) of the SEO forbids the employing of any device, scheme, artifice, or engage in any act, practice or course of business, which operates or is intended or calculated to operate as fraud or deceit upon any person.”
17(e)(ii) of the SEO prohibits creation of a “false and misleading appearance of active trading in any security”.
17(e)(v) of the SEO prohibits direct or indirect effecting of “a series of transactions in any security creating the appearance of active trading therein or of raising of price for the purpose of inducing its purchase by others or depressing its price for the purpose of inducing its sale by others”.
24 of the Central Depositories Act 1997 forbids the handling of book entry securities without authority and 28(2) prescribes a term which may extend to five years or a fine which may extend to a million rupees and a further fine not exceeding twenty thousand rupees a day for every day after the first contravention till the contravention continues.
Meanwhile 4(f) of the Brokers and Agents Registration Rules 2001 (“Rules”) states unequivocally a person shall be eligible for registration as such if he has not been convicted of an offence involving fraud or breach of trust.
8 and 9 of the Rules gives the Commission the power to suspend and then cancel registration if a broker has been found guilty of fraud. 9(ii) and (iii) give the Commission the power to cancel the registration in case the broker has been found guilty of fraud and if the stock exchange has cancelled his membership.

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