Brokerage activities

Dr. AbdelGadir Warsama Ghalib

From my book “Securities Markets & Company Laws”

 

Most potential investors in securities markets undertake their investment activities through brokerage firms or professional brokers. This is required primarily for their protection. In this connection, we need to mention that, there are certain laws and regulations to regulate the conduct of brokers and their relation with the investors . Due to their sensitive portfolio, no one is allowed to start brokerage activity prior to obtaining the necessary license from the securities market and as allowed by the concerned licensing entities. 

Each brokerage firm should maintain a certain paid-up capital, plus a required certain bank guarantee to be issued in favor of the concerned market. The bank guarantee is required in certain places, and the law regulates this matter according to the merits of each case... The broker sells and buys on behalf of the investor client, the money of the client should be placed in a separate trust account at an approved bank. The brokers, at all times, should not mix their client's money with theirs under all circumstances. Even, there is confidence and trust between the broker and his client, however, this separation is needed to protect investors against broker insolvency or other matters. The brokers are obliged, always, to register and segregate the client's investments so as to prevent mixing up and loss of the securities. A very important prohibition comes from the rule that dealers \ brokers are not, by all means, allowed to create or give guarantees \ securities for bank loans over their client's securities.

The broker, as an agent, should not put himself in a position where his personal interest conflicts with his duty to his client. Conflicts of interest are particularly acute in the case of financial conglomerates which comprise departments providing corporate financial advice to the issuer. A manager of unit trusts and pension fund, an investment manager of discretionary accounts, a trustee of debt or conveyable issues, or syndicate agent bank… each of them is owning duties to the principal or beneficiary and each is potentially in conflict with its own interests or those of another principal.

The law also regulates the priority rules, which comes first ? This happens in cases where a client orders a sale of a large block of securities, the price may fall and the broker may be tempted to sell his own securities first. Likewise, if the client orders a large purchase, the price may go up and the broker may be tempted to buy first. To control such overlap, between the interests of the broker versus the client, the law should regulate the priority rules and proper implementation is required to follow-suit.

The first priority should always be given to the investor, and the broker could be in the second or third priority according to the orders received. In all cases, the broker should obtain the approval of the manager of the securities market before acting for himself. The broker, as a rule, should not delay any order and should take the required steps to finalize the sale or the purchase. His immediate action is mandatory in all cases. Undisclosed self-dealing is not allowed and, based on this, a broker may not secretly sell his own securities to the investor or secretly buy the client's securities for himself..

Such undisclosed activities are not allowed by law. This rule is very strict and should not be allowed even if the broker buys at the markets price. Any action of such nature, to be taken by the broker, must be fully & timely disclosed. This is mandatory, as transparency is the golden rule in all brokerage activities. To preserve the relation between the two parties and to protect the investor, the on-going duties of the broker include: A duty to act promptly on instruction. A duty to obtain the best bargain reasonably obtainable. A duty to warn clients, or unsophisticated individual clients, of the risks associated to the investment, particularly in cases of options and futures. A duty of the broker to familiarize himself with the customer financial and personal circumstances.

For the sake of streamlining  the relation between the investor client and the broker, the law requires written agreement between the two parties. The agreement, normally, contain description of the services to be rendered to the client, remuneration of the broker, disclosure of conflict of interest and other details including risks warnings. 

All brokers are obliged to stick to professionalism all through, this will help in protecting the investors and at the same time lay the foundation for strong stable Securities Markets. This will help the national economy and boost investment activities…