SEC`s failure to control fraudulent practices by brokerage houses

A LOCAL English daily reported that a significant number of capital market investors have been waiting for years to get back their investments which were defrauded by a number of brokerage houses in collaboration with the company owners. The prevailing situation in the stock market will worsen the investment insecurity if due remedial actions not initiated shortly. This will in turn lower the investment flow causing huge risk to the economy. People who are afraid of investing in share market since the market crash in 2010-11 would feel threatened if their small savings and investments become insecure at the financial institutions for the feebleness of the regulatory body – the Security and Exchange Commission (SEC). Lesser control of SEC over the brokerage houses helped the brokerage firms to indulge in embezzlement. If the marginal investors lose their confidence in the stock market, it would be barren soon and capital flight would be bolstered.

In 2014, Sylhet Metro City Securities embezzled investors’ fund worth Tk 12.63 crore by selling shares of their clients without their consent. The Chief Executive of the brokerage house left the country without repaying investors the money. The broker also destroyed all accounts-related information of the investors. In September this year, the Chittagong Stock Exchange suspended the Trading Rights Entitlement Certificate (TREC) of the brokerage house. But by obtaining a High Court stay order, the said house is still continuing their fraudulence. Another brokerage house named Chittagong Bourse Trendset Securities has embezzled investors’ funds amounting to Tk 24 crore in 2007-2009. After that, the CSE confiscated the TREC of the house and sold the firm to settle the investors’ claims, but investors are yet to get their full money back. A significant number of investors’ complaints about fund fraud by a number of brokerage houses have also been pending with the SEC which received 26 such complaints in July-September this year.

As per the regulation, brokerage houses do not require any asset of its own, that could be considered as security fund, in dealing with clients’ funds. It means that anyone can handle crores of Takas of clients funds provided he/she has only a TREC. Such facility is one of the major causes of fraudulent activities with no monitoring by the SEC.

Such lax legal provisions have simply weakened the controlling authority of the SEC as regular of the Blue Chip market. This has also opened scope to indulge in malpractices such as embezzlement, fraud or cheating of the investors money. In turn, the share market failed to generate capital needed for the industry sector debarring upward movement of the economy as a whole.

The people responsible for such fraudulent activities must be brought to book soon by bringing criminal proceedings against them. And by strengthening the SEC’s overseeing activities such fraudulence activities by brokerage firms could be deterred.