Overview
Stockbrokers act as intermediaries between investors (who want to buy shares) and companies looking to raise capital by selling securities.
There are generally three types of stockbroking services: advisory, where a stockbroker only offers advice on investments; execution-only, where they buy and sell securities solely on a client’s instruction; and discretionary, where full control is given to a stockbroker to trade and make decisions on a client’s behalf…Read more
SC Approves Introduction of New Standard Remisiers’ Agreement
The Securities Commission (SC) has approved the introduction of a standard remisiers’ agreement that will govern the relationship between all remisiers and member companies in the stockbroking industry.
The SC approved the introduction of the new standard agreement after facilitating extensive consultation between the stockbroking industry and remisiers which was aimed at responding to remisiers’ comments on the previous arrangement and addressing systemic concerns arising from the relationship between the remisier and the stockbroking company. The new agreement ultimately enhances the legal certainty in the relationship between the stockbroking company and remisiers…Read more
The broker/client relationship
A broker (often called a stockbroker) is a person or firm that provides advice about shares and similar products. It is common for shareholders to use their brokers to obtain investment advice, for which the broker generally receives a commission. Brokers must be qualified, including minimum years in an appropriate financial institution and designated tertiary qualifications…Read more
Contents
Learning objectives
introduction
Stockbroking Company and Client
Rules Governing the Stockbroking Company and Client Relationship
Buying Securities on the Market
Direct Business Transaction (DBT)
Participating Organisation’s Duties to Clients
Participating Organisation’s Rights
Client’s Rights
Keeping of Records
Summary
Self-Assessment
Learning Objectives
Atthe end of this topic, you should be able to:
• List the main rules governing the Participating Organisation and client relationship, and describe the context in which these apply
• Describe the procedures for buying and for selling securities on the Malaysian stock market
• Describe the consequences of default by a client in buying or selling securities
• Describe the procedures for direct business
• List the main duties Participating Organisations owe to their clients
• List the general rights that a Participating Organisation, as agent, is entitled to enforce against its client, as principal
• Explain the procedure for a client complaint
• Explain the role of the SC’s Investor Affairs and Complaints Department
• Explain when a claim can be made against the compensation fund or through the Securities Industry Dispute Resolution Center (SIDREC).
Introduction
Investors who wish to buy or sell listed securities on a stock exchange cannot trade directly on the share market, but must approach a stockbroking company which, acting as the investors’ agent, will buy or sell securities on their behalf.
In this topic, we consider the legal relationship between the stockbroking company and client in relation to dealings in securities. This relationship can be complex, depending on the nature of the transactions.
We have previously looked at Bursa Malaysia Securities Berhad, which is responsible for establishing and maintaining the stock exchange in Malaysia, and what Participating Organisations do. Remember that the Rules of Bursa Malaysia Securities Berhad regulates the way in which Participating Organisations conduct business on the stock market. While buying and selling of securities is the traditional work of stockbroking companies, they also undertake other functions such as underwriting new securities issues, advising clients on alternative means and costs of raising new capital, providing investment advice and managing investment portfolios).
The basic legal relationship between a Participating Organisation and client is that of principal and agent; however, depending on the circumstances, it may be affected by other rules,including the Rules of Bursa Malaysia Securities Berhad and legislation.
A Participating Organisation has a number of duties in relation to a client and also a number of rights. We examine these and also the rights of clients. We conclude this topic by looking at the records which a Participating Organisation has to keep.
Stockbroking Company and Client
The basic legal relationship that exists between a stockbroking company and client is that of principal and agent. This is clearly shown in Rowlatt i’s description of the stockbroking company’s functions in Christopher Barker and Sons v. IRC [1919] 2 KB 222:
“It seems to me that what a stockbroker does is to buy and sell a commodity on the market. It is true he does not expect to have to pay for it himself or to be responsible ultimately to satisfy the contract himself, as he is a buyer and seller in the market for an undisclosed principal to whom he looks to indemnify him from liability.., the stockbroker is remunerated by a commission which he receives from his principal, the person who takes the liability off his shoulders.”
A stockbroking company that is instructed by a client to buy or to sell securities on a stock market is an agent of the client and the normal rules of the law of agency apply to the relationship between them. Although a stockbroking company stands in an agency relationship to the client, the Rules of Bursa Malaysia Securities Berhad state that Participating Organisations are deemed to act as principal for all orders and trades entered and executed in the ATS even if the orders or trades are entered for the accounts of their clients (Rule 7.03(1)).
Under certain circumstances, a stockbroking company may act for itself and hence enter into a transaction that affects the client, as principal. In such cases, the stockbroking company must inform the client that it is acting in the transaction as principal, and not as an agent. This informs the client that the stockbroking company has its own interests to consider, in addition to those of the client.
The key point to remember is that the basic duty of the stockbroking company is to execute the orders given by the client.
Case
In a Singaporean case, Chien Chung Ming v. Kay Hian & Co Pte & Anor [1992] 1 SLR 242, the facts were that:
“a remisier with a stockbroking company was an agent of the stockbroking company and was expressly authorised to carry on the business of the sale and purchase of stocks, shares and other marketable securities in the name of the stockbroking company. The plaintiff (client) was serviced by the remisier and became a client of the stockbroking company through the recommendation of the remisier. In maintaining his account with the stockbroking company, the dient had deposited certain shares in respect of which the remisier had committed fraud. It was held that the stockbroking company was liable to the client for the remisier’s fraud. With respect to the relationship between the remisier and the stockbroking company the court held that:
Duties and obligations of remisiers
Remisiers are responsible for any losses which may be incurred by the Participating Organisation arising from any transaction in securities dealt by or through him/her. For this reason, the agreement requires the remisier to take into account the client’s investment objectives, knowledge and experience in dealing in securities, as well the particular needs of the client (see also Rule 3.47 (3) of the Rules of Bursa Malaysia Securities Berhad).
Apart from the responsibilities and obligations to clients, the agreement stipulates administrative arrangements between the remisier and Participating Organisation, including the provision of facilities to remisiers in order for them to conduct their trading activities.
Duties of the Participating Organisation
The Participating Organisation is required to take all relevant and reasonable action against clients for the recovery of indebtedness which should be reimbursed to the remisier in the event that the rennisier’s security deposit has been utilised towards that indebtedness.
The Participating Organisation must disseminate copies of all directives, circulars and information relevant to the remisier in respect of the conduct of the remisier’s trading transactions.
The standard agreement also covers remisiers’ transfers and the rights of the Participating Organisation.
Rules Governing the Stockbroking Company and Client Relationship
The sources of rules governing the stockbroking company and client relationship include:
(a) The general law of principal and agent
(b) Legislation, in particular, the Capital Markets and Services Act 2007 (CMSA)
(c) Rules of Bursa Malaysia Securities Berhad.
We shall briefly consider each of these sources in the following.
Principal and Agent
The law of principal and agent is part of contract law and is governed by Part X of the Contracts Act 1950 (Revised 1974).
Contract of Agency
A contract of agency is formed when one person, the agent, has the authority to act on behalf of another person, the principal.
In stockbroking companies, the client is the principal and the stockbroking company is the agent. The client authorises the stockbroking company to buy or sell shares. The stockbroking company is paid a commission or brokerage by the principal.
The contract of agency is formed by the agreement of the principal and the agent. The agreement can be express (stated orally or in writing, e.g. in the account opening form) or implied (unsaid or unwritten, but taken for granted). No formality is necessary as words or conduct show that the two parties consent to be principal and agent.
The rights and duties of each party to the contract of agency depend upon the agreement reached between them.
Instructions
The terms of the instructions are given by the client to a stockbroking company and therefore, the terms of the contract may be express or implied, as explained by the following:
Express instructions
In most cases, the instructions by the client to the stockbroking company will be given orally.
The Participating Organisation is required under Rules 5.15 (4) and 5.16 (3) of the Rules of Bursa Malaysia Securities Berhad and s.108 of the CMSA to keep records of its dealings with clients, particularly monies received or paid, and orders for purchase or sale of shares.
Implied instructions
In contracts of agency, many terms are implied rather than being expressly mentioned when the agreement is formed, because their inclusion is so obvious that it goes without saying. It is an important rule of the law of principal and agent that the usages and customs of the market upon which the agent is instructed to deal are implied into the contract between the agent and principal unless they have been expressly excluded. See s.164 of the Contracts Act 1950.
In most cases, the relationship of principal and agent is a fiduciary one. This is because the principal relies on the agent, putting faith and trust in the agent. Consequently, the agent has a duty to act with the utmost good faith towards the principal and, when acting on its behalf, to disclose every material fact that will likely affect the principal’s judgment.
In particular, an agent cannot let its own interest conflict with its duty to its principal. See s.168 of the Contracts Act 1950. It is in the interest of a stockbroking company to earn commission, but it also has a duty to inform its client if it knows of any reason why the client should not proceed to purchase or sell shares. The conflict of interest rule also applies when the stockbroking company wishes to meet the client’s order by buying shares from a different client or selling shares to the client. 5.93 of the CMSA states that priority must be given to the client’s order.
Indeed, a Participating Organisation cannot enter into any transaction where there is likely to be a conflict between its duty and its interests, unless it has first made the adequate and accurate disclosure of those exact interests’.
The fairness of a transaction is immaterial. A potential conflict is enough to set aside a transaction. It is also the duty of an agent to display skill and diligence. S.165 of the Contracts Act 1950 provides that an agent must act with as much skill as is generally possessed by people engaged in a similar profession.
Capital Markets and Services Act 2007 (CMSA)
The CMSA regulates the conduct of people engaged in the capital market:
(a) S.91 provides that a licensed person must inform its client of any interest which may influence its recommendation to the client
(b) S.92 sets out the specific requirements which must be followed when a licensed person provides recommendations to a client
(c) S.97 provides that a Capital Markets Services Representative’s Licence (CMSRL) holder who carries on the business of dealing in securities must inform the client when it is acting as principal in the transaction with the client. This puts the client on notice that the CMSRL, holder has its own interest to consider, as well as those of the client.
Rules of Bursa Malaysia Securities Berhad
The Rules of Bursa Malaysia Securities Berhad set out the procedures and obligations of participants of the stock exchange in trading and dealing with each other and their clients. The Rules of Bursa Malaysia Securities Berhad are binding on the participants, as they can be suspended or expelled if they do not comply with the rules.
The Rules of Bursa Malaysia Securities Berhad stipulate that for trading purposes, Participating Organisations are deemed to be contracting as principals with each other (Rule 7.03 (1)) and that the contracts are inviolable, i.e. a failure to deliver or to accept and pay on delivery shall not annul a contract. Rule 8.08 (3) provides that contracts entered into and executed in the ATS are not subject to cancellation and shall be binding on the Participating Organisations except when circumstances under Rule 8.09 and Rule 8.10 arise.Amendments can only be made in accordance with Rule 8.09.
The Rules of Bursa Malaysia Securities Berhad are not directly binding on clients. The rules are evidence, however, of the usages and customs of the market and, as such, are usually implied into the contract of agency between the Participating Organisation and client unless expressly excluded.
The Rules of Bursa Malaysia Securities Berhad can be expressly incorporated into the contract of agency by the terms and conditions set out in the account opening form.
While the Rules of Bursa Malaysia Securities Berhad are applicable to participants of Bursa Malaysia Securities Berhad and will normally only be enforceable by participants between themselves, 5.354 of the CMSA provides that the Rules of Bursa Malaysia Securities Berhad can be enforced by the SC against any person who is under an obligation to comply, observe or give effect to them. This gives the Rules of Bursa Malaysia Securities Berhad greater importance as a source of law governing the Participating Organisation and client relationship.
Buying Securities on the Market
Market Transaction
One of the functions of a Participating Organisation is to buy and sell securities for clients. Before considering the law relating to a Participating Organisation’s duties and rights, we examine the practices of Participating Organisations in a normal stock exchange transaction, from the time of placing an order, to completion.
The procedures and practices of Participating Organisations in Malaysia when buying or selling securities on behalf of a client on Bursa Malaysia Securities Berhad are as follows:
Before a person can trade in the shares of a company listed on Bursa Malaysia Securities Berhad, he/she will first need to open a trading account with a Participating Organisation. Note the requirements of Rule 5.15 in relation to opening of client accounts. A person can only buy or sell shares through a licensed dealer’s representative (whether salaried or commissioned). To trade shares, an account must also be opened with the Participating Organisation acting as an authorised depository agent of Bursa Malaysia Depository Sdn Bhd.
A client instructs his/her dealer’s representative to buy or sell securities on his/her behalf.
The order is entered into the Automated Trading System (ATS) and an order confirmation is received by the Participating Organisation.
The order for shares is automatically matched by the system.
Once matched, the contract is made and the Participating Organisations are bound by it.
Once the order has been matched, a trade confirmation is displayed on screen at the Participating Organisation’s office providing details, such as the original order number, stock number, price and quantity matched, and the counterparty Participating Organisation.
The dealer’s representative confirms with the client that the shares have been bought or sold and informs him/her of the price.
The Participating Organisation sends contract notes to the client giving details of the transaction such as commission, stamp duty and clearing fees payable, and the cost of purchase or the proceeds of sale.
The delivery and settlement of shares by the seller and buyer will then take place in line with Bursa Malaysia Securities Berhad’s Fixed Delivery and Settlement System (FDSS) through the clearing house (Bursa Malaysia Securities Clearing Sdn Bhd).
There is no physical delivery of shares as book-entry delivery will be effected.
looked at trading in detail in Topic 5. However, note that Participating Organisations can only I in securities defined in Rule 7.02 as permitted dealings.
The Contract Note
The contract note, prepared by the Participating Organisation and forwarded to the client, does not constitute the contract of agency — it is merely a note setting out the terms of the contract already made by the Participating Organisation on the client’s behalf. It is evidence, however, that the Participating Organisation has performed the transaction described in it.
Directive No 5-001 (12.2) of the Rules of Bursa Malaysia Securities Berhad states that the currency values reflected in the contract note must be in the currency in which the securities are traded, and the name of the buyer and seller in the contract note must be the names of clients.
Default
The common default situation is either that of sellers failing to “deliver” securities that they have sold, or buyers failing to pay for securities that they have purchased. The consequences of these breaches need to be considered at two levels: the Participation Organisation level and the client level.
Under the Rules of Bursa Malaysia Securities Berhad, a selling Participation Organisation and a buying Participation Organisation deal with each other as if they were principals. Hence, a Participation Organisation is personally liable to the other Participation Organisation, but each has a right to indemnity against its respective client. Indemnity means legal exemption from penalties incurred by one’s actions.
We have previously discussed the consequences of non-delivery and the fact that buying-in can then be instituted against the selling Participation Organisation. We also discussed non-payment and the fact that selling-out can be instituted against the buying Participation Organisation. See Topic 6.
A Participation Organisation that defaults in meeting commitments is liable to be excluded from the stock exchange.
Note that Rule 9.05 and Rule 9.12 of the Rules of Bursa Malaysia Securities Berhad concern buying-in and selling-out. There are remedies that Participation Organisations can exercise against defaulting clients.
If a client fails to complete a contract and the Participation Organisation has to sell-out or buy-in, the client is liable for the difference between the contract price and market price together with any losses and expenses (including any brokerage and any stamp duty) incurred. If the resale or repurchase of the securities results in a profit, the Participation Organisation must pass this profit to the client.
In addition, a Participation Organisation has a lien on all securities held by it on account of the client under Rule 7.07 of the Rules of Bursa Malaysia Securities Berhad. Under common law, Participation Organisations are entitled to indemnity for any transaction entered into on behalf of clients.
Direct Business Transaction (DBT)
General
In the Rules of Bursa Malaysia Securities Berhad, a Direct Business Transaction (DBT) is defined as a contract for a sale and purchase of securities transacted on the stock market of the Exchange that is done outside the ATS but excludes ISSBNT (Islamic Securities Selling and Buying — Negotiated Transaction) entered into outside of the ATS, and includes:
Crossings
Crossing is defined as a DBT reported to the Exchange between:
(a) Two clients of different Participating Organisations
(b) Two different Participating Organisations
(c) A Participating Organisation and a client of another Participating Organisation.
Married transactions
Married transactions means a DBT reported to the Exchange between:
(a) Two clients of the same Participating Organisation
(b) A Participating Organisation and its client.
Other transactions as determined by Bursa Malaysia Securities Berhad (Rule 1.01).
All DBTs must be delivered and settled in accordance with the fixed delivery and settlement time Rule 10.03.
Price Ranges and Reporting Requirements
DBTs can be transacted at any price as agreed between the parties (see Rule 10.09 (1)).
See Rule 10.09 of the Rules of Bursa Malaysia Securities Berhad for further requirements on the price ranges for DBTs and Rule 10.10 on the reporting requirements.
Participating Organisation’s Duties to Clients
Having examined the interaction of stockbroking companies and clients on dealings in securities, we now consider the main duties of stockbroking companies (Participating Organisations) to clients.
It is of utmost importance that you are familiar with Bursa Malaysia Securities Berhad’s requirements of doing business with clients contained in Rule 5.16 of the Rules of Bursa Malaysia Securities Berhad.
Standard of Conduct
To ensure that the market is orderly and fair and for the integrity of the market, Participating Organisations and Registered Persons must ensure that they act with due skill, care and diligence when carrying out their businesses. Therefore, they are required to comply with the following standard of conduct:
(a) Observe professional conduct and high standards of integrity and fair dealing
(b) Conduct their business in a manner that contributes to the maintenance of an orderly and fair market
(c) Prevent insider trading, misuse of confidential information and the commission of other offences relating to the abuse of confidential information. In doing so, a Participating
(d) Organisation and Registered Person must strictly maintain the confidentiality of all relevant information, including information that on becoming generally available would or would tend to have a material effect on the price or value of securities
(e) Not engage in any act that amounts to advertising securities for sale or purchase or share hawking
(f) Not engage in any unlawful or irregular or unhealthy practice
(g) Not engage in any act that may damage the confidence of investors or hamper the sound development of the stock market of the Exchange
(h) Not do or cause or permit to be done any act which:
(i) Would adversely affect the goodwill or public image of the Exchange
(ii) Would bring or is likely to bring the Exchange into disrepute
(iii) Is injurious to the character and interest or prejudicial to the objects of the Exchange
(i) Not engage in any act or practice:
(i) That might lead to a false or misleading appearance of active trading in any securities on the stock market of the Exchange or a false or misleading appearance with respect to the market for, or the price of, any such securities, or
(ii) That directly or indirectly is tantamount to stock market manipulations and must not participate in any operation by others that might have the same result.
Make the Best Deal for Client
A Participating Organisation must make the best possible price for the client, i.e. if it can purchase at a price lower than that stipulated by the client and, if possible, sell at a higher price than specified, it should do so.
Issue Contract Note
A Participating Organisation must inform the client of any transaction entered into on its behalf. The Participating Organisation does this by delivering to the client after completion of a sale or purchase of securities, a contract note recording the essential details of the transaction. The requirements for the giving of, and the form and content of contract notes are contained in s.90 of the CMSA and the regulations made under it.
Not to Compete with Client
In common with other agents, Participating Organisations in the capital market carrying out dealings on behalf of clients have their own financial interests to which they are legally entitled. It is where the agents’ personal interests conflict with the interests of their clients, that the law imposes very stringent limits on the extent to which the agents may pursue their own interests.
This most clearly arises where a Participating Organisation contracts with a client. Of course, there are other possible conflicts of interest between the Participating Organisation and the client, even without dealing in securities.
A Participating Organisation has a duty of good faith to a client to avoid potential or actual conflicts of duty and interest. Where a Participating Organisation contracts with a client, it must act with perfect good faith and make full disclosure of all material circumstances and everything known to the Participating Organisation concerning the subject matter of the contract that will likely influence the conduct of the client.
When acting as an agent, a Participating Organisation should put the client’s interests ahead of its own interests. 5.93 of the CMSA requires a Participating Organisation to give, priority to a client’s order for the purchase or sale of particular securities over the purchase or sale of the same class of securities as a principal or on behalf of an associate. This restriction, however, does not apply where the client has imposed conditions as to the price, and the Participating Organisation has been unable to execute the client’s order because of those conditions.
Rule 3.16 of the Rules of Bursa Malaysia Securities Berhad states that no Participating Organisation or any of its dealer’s representatives shall knowingly enter into a transaction in which either any of them has any interest which conflicts or may conflict with its duty to the client. Where a conflict cannot be avoided, there must be full disclosures made by the dealer’s representative to the Participating Organisation and to the client, prior to the execution of the transaction.
Inform the Client When Acting as Principal
A Participating Organisation is not permitted to meet a client’s order by buying securities from, or selling securities to, a client without informing the client that it is acting as a principal. For example, a Participating Organisation cannot sell its own shares to the client unless the Participating Organisation has earlier informed the client and has obtained his/her consent.
If no consent is obtained, the client, upon discovery of the fact, has a right to repudiate the transaction, even though the Participating Organisation may have acted fairly and has sold the shares at the market price (s. 97(5) of the CMSA).
S.97 of the CMSA specifically requires disclosure by a Participating Organisation when it is acting as principal. Read s.97 and note that:
(a) The Participating Organisation must inform the client
(b) The Participating Organisation must state in the contract note that it is acting as principal in the transaction and not as an agent
(c) If the required disclosure is not made, the client may rescind the contract by giving notice in writing within 14 days.
Participating Organisations that send circulars to clients recommending particular securities must disclose any interest they may have in those securities. S.83 of the CMSA requires Participating Organisations (and others) to maintain a register of interest that they have in securities.
Rule 7.03 (2) of the Rules of Bursa Malaysia Securities Berhad also provides that Participating Organisations, its officers, employees or representatives shall not deal in securities as a principal with a client without so informing the client.
Transactions by Employees, Dealer’s Representatives, Trading Representatives and Directors
Employees of Participating Organisations who trade in securities for their own must notify their Participating Organisations of such trades in writing or electronic means. Upon receipt of the notifications, a Participating Organisation must take the necessary steps to ensure compliance with its obligations to manage conflicts of interests and risks that may arise in the conduct of Participating Organisation’s business. Please refer to Rule 7.26 (1) of the Rules of Bursa Malaysia Securities Berhad. For the purpose of Rule 7.26, a Director’s account will include an account in which such a Director has a direct or indirect interest.
Due Care and Diligence
A Participating Organisation should use due care, skill and diligence in carrying out its duties. While in theory this is supposed to refer to the standard of a reasonably competent person, in practice, if there is a dispute that goes to the court, the court generally looks to a fairly high standard of efficiency, particularly in a somewhat specialised area such as the securities industry.
Rule 5.16 (1) of the Rules of Bursa Malaysia Securities Berhad states that every Participating Organisation shall ensure that its dealer’s representatives carry out clients’ instructions with proper skill, care and diligence, and give priority to the execution of orders given by clients in the sequence in which they are received, regardless of whether the client is an individual or an institution.
S.92 of the CMSA places a substantial legal onus on licensed persons when giving investment advice to clients. This section requires any advice given to be based on the client’s investment objectives, financial situation and particular needs as far as the Participating Organisation can ascertain. A Participating Organisation that contravenes the requirements under s.92 is not guilty of an offence, but may be liable to pay damages for any loss suffered.
In addition, Rule 5.16 (1) and No. 5-001 (11.4) of the Directive of Conduct of Business of the Rules of Bursa Malaysia Securities Berhad require Participating Organisations to implement and maintain guidelines to assist dealer’s representatives in learning essential facts about their clients’ backgrounds, including the clients’ investment objectives, knowledge and experience in dealing in securities, financial background and other information as required by Bursa Malaysia Securities Berhad.
In making recommendations to clients, the Rules of Bursa Malaysia Securities Berhad requires the Participating Organisation or dealer’s representatives to:
(a) Take into account and ensure the suitability for the client of such recommended transactions,on the basis of accurate information provided by the client concerning his/her investment objectives, knowledge and experience in dealing in securities, financial background and other relevant information. Reliance can be placed on representations made by the client.
(b) Disclose to the client the potential risks involved in such recommended transactions and ensure that the client has knowledge and experience to enable him/her to evaluate such risks.
(c) Satisfy itself that the client has the financial capability to bear any risks attached to such recommended transactions.
Maintain Separate Client Accounts
A Participating Organisation must keep the client’s property separate from its own, and keep proper accounting records that enable identification of clients’ property. This basic general law rule is reinforced by the more precise provisions of the CMSA (ss.111 and 112) and Rules of Bursa Malaysia Securities Berhad (Rule 5.16(4)) and No. 5-001 of the Directives on Conduct of Business of the Bursa Malaysia Securities Berhad.
A Participating Organisation must open or maintain at least one trust account with a licensed institution. Money received by a Participating Organisation on behalf of clients must be paid into a designated trust account. The reason for this requirement is to segregate funds held on behalf of clients from its own funds, so that if it becomes bankrupt, the clients’ funds cannot be used to pay its general debts. A Participating Organisation must also ensure that the trust account at any time is not in deficit and if it is in deficit the Participating Organisation must take immediate steps to deposit monies in the trust account to ensure that the monies in the trust account commensurate with amounts due to clients. The Participating Organisation must accurately account for all the clients’ money that comes into its possession and must have clear written guidelines on the treatment of clients’ money which have been approved by Bursa Malaysia Securities Berhad.
Profit and loss accounts, and balance sheets must be prepared and audited. In addition, every Participating Organisation is, under the Rules of Bursa Malaysia Securities Berhad, subject to inspection and/or audit. See Rule 12.03 of the Rules of Bursa Malaysia Securities Berhad.
The market supervision group of Bursa Malaysia Securities Berhad conducts inspection and/or audits to ensure and appraise the Participating Organisation’s compliance with provisions of the Depository Rules, Clearing House Rules, the Rules of Bursa Malaysia Securities Berhad, the Participating Organisation’s internal policies and procedures and/or other rules and regulations related to its business in dealing in securities.
Conflicts of Interest
We have already looked at two types of conflicts of interest:
(a) A Participating Organisation trading in competition with the client
(b) A Participating Organisation trading as principal with the client.
In such cases, it is important to identify the conflict and the Participating Organisation’s duty.
Participating Organisation Trading in Competition with Client
Conflict: The Participating Organisation buys or sells before the client and gets a better price for itself than for the client.
Duty: The Participating Organisation must give the clients’ order priority.
Participating Organisation Trading as Principal with the Client
Conflict: The Participating Organisation’s interest to achieve the best price for itself can conflict with its duty to obtain the best price for the client. The client may be able to buy or sell at a better price elsewhere.
Duty: The Participating Organisation must make full disclosure of the fact that it is acting as a principal.
As a potential conflict of interest is enough to set aside the transaction, practitioners must learn to recognise potential conflicts of interest. The Participating Organisation must give full disclosure of its interest or potential interest in the transaction.
Participating Organisation is Underwriter of Shares and Also Acts for Clients Who Buy Shares
Conflict: The Participating Organisation faces losses if the underwritten issue is not fully subscribed. Its interest in encouraging clients to buy the shares conflicts with its duty to act in the best interest of its clients.
Duty: The Participating Organisation must disclose that it has acted as an underwriter so that clients are aware that its advice may be biased.
Participating Organisation Owns Shares and Recommends These Shares to Clients, But Does Not Trade Directly with Them
Conflict: It is in the Participating Organisation’s interest to see a price increase for shares that it owns. The price of the Participating Organisation’s shares is likely to rise if its clients buy those shares.
Duty: The Participating Organisation must disclose the nature of its shareholding to its clients so that they are aware that its advice might be biased.
Participating Organisation’s Rights
Right to Receive Commission
A Participating Organisation is entitled to be paid by the client for carrying out its duties. The commission rates are fixed and prescribed in) Schedule 6 of the Rules of Bursa Malaysia Securities Berhad. Commission is payable both for buying and selling, even where a Participating Organisation acts for both the buyer and seller.
Remember also that for each transaction on the stock exchange, there is a 0.015% (of the price) levy which is charged to the client and then paid by the Participating Organisation to Bursa Malaysia Securities Berhad for account of the SC (see Schedule 7 of the Rules of Bursa Malaysia Securities Berhad).
Right to Indemnity
If a Participating Organisation properly carries out the instructions of the client, the Participating Organisation is entitled, under common law, to an indemnity for any transaction entered into on behalf of the client. That is, the Participating Organisation is legally protected against any liability hat may result from the transaction and can receive compensation from the client for any monetary loss incurred.
This right of indemnity is recognised under Rule 9.12 of the Rules of Bursa Malaysia Securities Berhad by giving a buying Participating Organisation the power to resell securities if the client defaults in paying for them, as well as giving a selling Participating Organisation the right to buy securities to satisfy delivery obligations, where the client fails to “deliver” the shares.
A Participating Organisation loses the right to indemnity if it acts outside its authority or it acts in a situation it knows to be illegal.
Right to Lien
A Participating Organisation is entitled to retain a client’s securities until it has received full payment from the client. The payment need not necessarily be directly related to the securities being held. Where money is owing to the Participating Organisation, Rule 7.07 of the Rules of Bursa Malaysia Securities Berhad permits the Participating Organisation to deposit the client’s shares as a security for a loan if it owes the Participating Organisation any money in respect of the purchase of securities until the amount owing is fully paid to the Participating Organisation.
Client’s Rights
Complaint Procedure by Bursa Malaysia Securities Berhad
It is the duty of every Participating Organisation to establish and implement written procedures for the handling of complaints from its clients (see Rule 5.16 (5) of the Rules of Bursa Malaysia Securities Berhad). This includes the performance of reviews on clients’ complaint files to ensure that all complaints have been duly investigated and dealt with accordingly. Every Participating Organisation shall designate an officer to handle all complaints lodged by clients or the public.
The name of such officer must be made known to the public.
A participant or a client can lodge a written complaint to Bursa Malaysia Securities Berhad against a Participating Organisation or its dealer’s representative in respect of transactions in securities effected on Bursa Malaysia Securities Berhad. The decision of Bursa Malaysia Securities Berhad shall be binding on the Participating Organisation or its dealer’s representative and the complainant.
Upon investigation, Bursa Malaysia Securities Berhad will have the authority to put the complaint to be heard and adjudicated by Bursa Malaysia Securities Berhad. The decision of Bursa Malaysia Securities shall be binding on the Participating Organisation or its dealer’s representative and the complainant.
Securities Commission Malaysia’s Investor Affairs and Complaints Department
The establishment of the Investor Affairs and Complaints Department represents the formalisation of the SC’s existing system of handling public complaints on improper conduct or other irregularities in the capital market that relate to violations of securities laws and regulations.
The SC’s Investor Affairs and Complaints Department receives all types of complaints related to market misconduct or other irregularities involving activities regulated by the SC under the CMSA such as:
(a) Complaints against public-listed companies
(b) Complaints against licensed intermediaries
(c) Complaints against share registrars
(d) Complaints against issuing houses
(e) Complaints against exchanges
(f) Complaints concerning dealings in unit trust
(g) Complaints concerning dealings in securities
(h) Complaints concerning dealings in derivatives.
It should be noted that any action taken by the SC is taken on its own behalf. The SC cannot assist in contractual, monetary or private civil disputes. The SC does not conduct arbitrations and will not act as a lawyer or adviser for the complainant. If losses are suffered, the aggrieved party will have to file his/her own claim, either on his/her own or by procuring services of a lawyer.
Claims for Compensation Fund
Following amendments to the CMSA in December 2012, provisions on the Compensation Fund, Fidelity Fund and deposit requirements under ss.70 and 106 of the CMSA, were repealed. The 2012 Amendment Act introduced a consolidated compensation fund which is dministered by the Capital Market Compensation Fund Corporation (CMC) and CMC was established and became effective on 28 December 2012. Please see Part IV of the CMSA.
The objective of the CMC is to provide an avenue for individuals to make a claim in the event a Capital Markets Services Licence (CMSL) holder fails to pay amount owing to its investors. When a CMSL holder is unable or is likely to be unable to pay for its debts due to fraud, defalcation or mis-selling which leads to insolvency, the CMC has the power to step in to work towards compensating individual investor’s investments up to a maximum amount of RM100,000.
The CMC applies to individual investors of the following CMSL holders:
• Participating Organisations in relation to client’s investments on the Bursa Malaysia Securities Berhad
• Trading Participants in relation to client’s investments on the Bursa Malaysia DerivativesBerhad
• Fund Managers in relation to client’s investments managed by the fund managers
• Unit Trust Management Companies (UTMC) in relation to client’s investments in unit trust funds
• Private Retirement Scheme (PRS) providers in relation to client’s investments in private retirement schemes
• Trading Participants who invest in a specified exchange for clients as provided for in s.105 of the CMSA
• Holders of a CMSL for dealing in securities and dealing in derivatives that are not Participating Organisations or trading participants. For example, such an entity includes a provider of contract for difference (CFD provider).
Claims to the Securities Industry Dispute Resolution Center
Alternatively, if the complaint is regarding a monetary dispute not exceeding RM250,000 against licensed intermediary, the complainant may be eligible to seek the assistance of the Securities Industry Dispute Resolution Center (SIDREC). SIDREC is a body approved by the SC to handle monetary claims by investors against stockbrokers, futures brokers, fund managers and unit trust management companies, amongst others, who are licensed under the CMSA, to conduct regulated activities in Malaysia. (Please refer to Topic 2 for further details on SIDREC).
Keeping of Records
The Rules of Bursa Malaysia Securities Berhad provide that Participating Organisations must keep records of their transactions and that these records must comply with s.108 of the CMSA. A client can ask a Participating Organisation for copies of entries in the Participating Organisation’s books which relate to any transaction carried out on behalf of that client.
Rule 5.15 (4) of the Rules of Bursa Malaysia Securities Berhad provides that Participating Organisations must record and maintain up-to-date relevant information on their clients, their trading accounts, and trades executed in the client’s trading account. The following are the information that should maintained in respect of each client’s account.
• Date of opening the account
• Name of the officer who approved the opening of the account and the date of the approval
• The type of transaction, products and investments for which the account is approved
• Details of all transactions including commission charged, type of transaction and current position of the account
• Client’s financial position
• Dealer’s representative handling the account.
A Participating Organisation is required to maintain all records for a period of not less than seven years.
Summary
In this topic we considered the legal relationship between the Participating Organisation and client in the context of buying and selling securities. We saw that the relationship is governed principally by the law of principal and agent. A Participating Organisation also has statutory duties, particularly under the Capital Markets and Services Act 2007 (CMSA). The Rules of Bursa Malaysia Securities Berhad also affects the relationship between the Participating Organisations and their clients.
In addition to examining the duties of Participating Organisations to their clients, we discussed the rights of Participating Organisations and their obligations to keep records of their transactions. We also looked at the rights of clients, including the right to make a complaint to the Participating Organisation, Bursa Malaysia Securities Berhad or to the SC’s Investor Affairs and Complaints Department and the right to recover from the compensation fund or through the Securities Industry Dispute Resolution Center (SIDREC).
Self-Assessment
1. Lisa is a dealer who is working with ROCKY Investment Sdn Bhd. Lisa has a new client and when making recommendations to her client on any transaction for the buying and selling of securities, the Rules of Bursa Malaysia Securities Berhad requires Lisa to do the following EXCEPT:
A. To ensure that her client has the knowledge and experience in financial matters that will enable him/her to evaluate the risk involved.
B. To disclose to her client the potential risk involved in a recommended transaction.
C. To ensure that her client has the financial capability to bear any risk attached to such recommended transactions.
D. To ensure that her client discloses her sibling’s financial record.
2. Which of the following clients’ information should be maintained by a participating Organisation for a period of not less than seven years?
I. Date of opening the account
II. Client’s and his/her family’s financial position
III. Name of officer who approved the opening of the account and the date of approval
IV. The type of transaction, products and investments for which the account is approved.
A. I and II only
B. III and IV only
C. I, III and IV only
D. All of the above
3. Identify the following statements which are FALSE in relation to why Participating Organisations must inform their clients when they are acting as principal rather as agents in a transaction.
I. To prevent the client from switching to another stockbroking company
II. To enable the client to take immediate action against the stockbroking company for misconduct
III. To provide the client due notice that the stockbroking company may consider its own interests in addition to those of the client.
A. I only
B. II only
C. I and II only
D. All of the Above