THE broker’s power is finally being subdued. And the strongest evidence of this surfaced at mid-night last Tuesday when a team from the National Accountability Bureau barged into the offices of AWJ Securities and seized all relevant records.

On reference forwarded by Mr Zafar-ul-Haq Hijazi, Chairman, Securities and Exchange Commission of Pakistan (SECP), NAB also took a director of AWJ under custody.

Flashback: a decade ago such action against a stockbroker was next to impossible.

In recent weeks, AWJ of Islamabad is the second brokerage house that was caught and accused of defrauding the public of its money. The other, M.R. Securities of Lahore, is also believed to have embezzled investors’ funds, estimated at over Rs1bn.

The Pakistan Stock Exchange (PSX) put that figure based on claims received, while independent sources reckoned the sum to be much bigger.

The five-day investigation of the SECP against the doings of M. R. Securities revealed that the brokerage house was involved in unauthorised trading, illegal deposits, non-payment of cash, non-delivery of securities to investors and non-compliance with the requirement of segregation of client assets.

The SECP has also recently cracked down on stock brokerages to enforce the prescribed margin in Margin Finance System (MFS).

Earlier, even the defaults of a major broker would go unpunished. Many sullen investors still recall Munir Ladha of Eastern Capital (Pvt) Ltd — who also sat for a term on the Board of, the then, Karachi Stock Exchange — who sold investors’ shares in the crash of 2008, took billions of rupees of their money and ran away.

The bourse suspended its chief regulatory officer pending a detailed inquiry and announced a number of steps to streamline stockbrokers’ business activities and safeguard investor interests

The latest in the series of stock scams was that of Ace Securities whose sponsors fled the country in April 2015 after defrauding investors of Rs533m. Although the principal accused was thought to have applied for a plea bargain, it is unclear if dues of all 400 affected investors have been cleared.

Following the M.R. Securities debacle, the apex regulator took up the matter with the PSX board of directors and ‘convinced them to play their due role as a front line regulator’.

The bourse suspended its chief regulatory officer pending a detailed inquiry and announced a number of steps to streamline business activities of stockbrokers and to safeguard investors’ interests.

Despite these mishaps, there are known to be scores of honest brokers whose words are still their bound. They have helped the Pakistan capital market achieve its present high esteem among global markets.

The PSX issued a five-page statement last week detailing the duties and responsibilities of the PSX and other regulators. The bourse claimed that all regulators were performing their functions in an orderly manner and that the recent defaults were not due to any negligence on the part of the PSX.

The bourse said in the recent incidents of M.R. Securities and AWJ Securities, it was the Joint Inspection Team (JIT) that found brokers’ non-compliance.

No investor complaints had been lodged. Those two firms were brokers of the former Lahore and Islamabad stock exchanges and only came into the PSX’s ambit after the January 2016 integration of the exchanges.

As such, this was the first direct audit with the PSX involvement. “A System Audit of M. R. Securities by an outside, independent authorised auditor had not highlighted any wrongdoing. Thus the JIT initiative of the SECP actually was effective”. But before the full report with any evidence could be completed, the broker shut shop.

The PSX also said: “While PSX, Central Depository Company (CDC) and National Clearing Company of Pakistan Limited (NCCPL) will continue to improve their systems regarding market and broker risk management under the SECP’s guidance, investors also need to exercise care.

Investors must also be aware that brokers are not allowed to obtain loans from them in any form or pay a fixed return. Such activity is illegal.

Coming back to regulators, closer co-ordination can now be observed between the SECP and the SBP, the two regulators, who held their last meeting on Wednesday and ‘viewed with concern the history of financial scams and fraudulent financial activities, illegal liquidity mobilisation schemes and unregulated lending operations’.

Such a meeting is a departure from the previous practice of each regulator holding on to his own on such churlish issues as ‘who among the two is the major regulator?”

In this context, Competition Commission of Pakistan (CCP) also needs to join hands so as to clean up the whole spectrum of market abuse.

Yet, a little obscure remains the role of the ‘outside independent auditor’.

In the recent cases of M. R. Securities, ‘the auditors had not highlighted any wrongdoing’ according to the PSX. Was that negligence on the part of auditors?

If so, the unsavoury question would once again raise its head: Who will audit the auditor?

Published in Dawn, Economic & Business, February 27th, 2017