Investors suffer as SEC stops trading at brokerages suffering from shortage

Aminur Rahman was thrilled to learn that the company he had invested in had recently been upgraded to Category A. Expecting prices to rise, he rushed to his brokerage house, but was greeted with disappointing news: he could not trade.

Rahman’s broker, PFI Securities, was stopped by the stock market regulator for mismanagement of client funds. But investors like Rahman played no role in this.

“Who will lose if my stock prices fall before I can trade again?” Rahman (not his real name) asked as he requested anonymity.

Stock exchanges should closely monitor consolidated client accounts and publish account balances weekly to see if any brokerage has a net capital deficit.

— Saiful Islam, President, DSE Brokers Association

The answer to Rahman’s question is disappointing as neither the regulator nor the stockbroker will bear the losses.

The Bangladesh Securities and Exchange Commission (BSEC) recently announced that it will not renew the license of brokerage houses that have deficits in their consolidated customer accounts (CCAs).

These gaps in CCA funds – bank accounts used by brokers to hold and manage client funds – indicate possible mismanagement, misappropriation or embezzlement of funds, prompting the BSEC to take strict action.

PFI Securities, with a CCA deficit of TUR 28 crore, was one such brokerage house whose trading was stopped.

While Rahman supported the regulatory measure, he said the BSEC should have warned investors and given enough time to transfer their shares to linked accounts before stopping trading at brokerage firms.

However, the regulator says the trading halt will not harm investors as they will be able to transfer their shares by opening linked accounts with other exchange dealers.

Saiful Islam, President, DSE Brokers Association (DBA), said investors should not suffer due to shortcomings in their brokerage operations and this is a key issue to improve investor confidence.

“Therefore, the country’s stock exchanges should closely monitor and publish a weekly report if any brokerage house has a net capital deficit,” he added. “If dealers don’t become transparent, then neither will the market.”

Additionally, Islam suggested forming a committee of representatives from stock exchanges and the BSEC so that they can take immediate action whenever the stock exchanges detect a deficiency in the CCA of a brokerage company.

“If immediate steps had been taken, we would not have seen the Mashiur Securities case,” he said.

Recently, the DSE found that Mashiur Securities had misused investor funds totaling TRY 161 crore, prompting the BSEC to suspend its operations.

However, Islam reported that the OCA shortage at Mashiur Securities has existed for about 10 years.

“So what role did the regulator actually play in protecting investors?” – he said.

Citing how several brokerage houses have pilfered investor funds over the past 15 years, the new BSEC Commission recently announced that it will be cracking down on those with CCA deficits to protect the interests of investors.

Thus, the BSEC has sought a travel ban on senior management of Dhanmondi Securities and PFI Securities due to CCA deficit of TRY 35 crore.

In addition, the BSEC has asked the Bangladesh Central Depository to freeze the accounts of the beneficial owners of these firms.

Earlier, the stock exchanges had investigated all stock dealers and found that 108 of them had a cumulative CCA deficit of more than TRY 500 crore.

Later, 102 brokerage houses covered the shortfall as directed by the regulator. The remaining six failed to do the same and for this reason trading at Subvalley Securities was stopped.

Kazi Fariduddin Ahmed, Managing Director and CEO of PFI Securities, did not answer phone calls or respond to messages seeking comment as of the time of filing this report.

Similarly, the phone of Mizanur Rahman Khan, Managing Director and CEO of Dhanmondi Securities, was found switched off.

Mahbub-E-Elahi, managing director of Subvalley Securities, also could not be reached.

BSEC spokesman Mohammad Rezaul Karim said that the regulator is taking steps on the recommendations of stock exchanges in order to protect the rights of investors.

“Investors should not face any problem despite the trading halt at some brokerages as they can transfer their shares to linked accounts with other dealers,” he said.

After the trading halt, their investors will not face any problems in trading as they will be able to transfer their shares through opening linked accounts with other exchange dealers.

“If any brokerage house is not facilitating the transfer of shares, let us know and we will take action against it,” he added.

He also said that the BSEC has already taken steps to form a “Union Online Platform” which will require brokers to upload their CCA balance on a daily basis.

At the same time, the BCC will be under full control, Karim added.

Sattik Ahmed Shah, chief financial officer and acting managing director of DSE, said publishing the net worth of stock brokerages on a weekly basis is a good proposal. Therefore, they will immediately discuss this with all concerned parties.

“We will also study global practice in this regard to resolve the problem,” he added.