Joint Inspection Regulations 2015

# PART II
## Statutory Notifications (S.R.O.)
### Government of Pakistan
### SECURITIES AND EXCHANGE COMMISSION OF PAKISTAN
### NOTIFICATION

*Islamabad, the 15th October, 2015*

**S.R.O./889(I)/2015.** In exercise of powers conferred under clause (ii) of sub section (2) of section 169 of Securities Act, 2015 (Act No. III of 2015), the Securities and Exchange Commission of Pakistan hereby makes the following regulations, the same being previously published in the Official Gazette Vide S.R.O.889 / 2015 dated September 01, 2015 and also placed on its website as required under sub section (4) of the said Act, namely,-

## CHAPTER I
## PRELIMINARY

### 1. Short title and Commencement.
(1) These Regulations shall be called the Joint Inspection Regulations, 2015.
(2) They shall come into force at once.
(3) They shall apply to;
(i) the Securities Brokers of all Securities exchanges in Pakistan;
(ii) the Broker Participants;
(iii) the Broker Clearing Members of NCCPL;
(iv) the employees, officers, directors and management of Securities Brokers of the Securities exchanges, Broker Participants and Broker Clearing Members of NCCPL;
(v) the members of Oversight Committee;
(vi) the members of the Inspection Team including manager and supervisor; and
(vii) the employees of the SROs, as the case may be, who perform the enforcement related activities under respective regulatory framework.

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### 2. Definitions.
(1) In these Regulations unless there is anything repugnant in the subject or context,-
(a) “Act” means the Securities Act, 2015 (Act No. III of 2015);
(b) “Articles” means the Articles of Association of the SROs;
(c) "Branch office" means an office, or branch thereof, opened and maintained by a Securities Broker within or outside the premises of a securities exchange for conducting the business and trading of securities;
(d) “Broker Clearing Member” (BCM) shall have the same meaning as assigned to it in the NCCPL Regulations 2003;
(e) “CDC Act” means Central Depositories Act, 1997;
(f) “CDS” means the Central Depository Systems established and operated by the Central Depository;
(g) “Central Depository” shall have the same meaning as assigned to it under clause (vi) of section 2 of the Securities Act, 2015;
(h) “Central Depository Regulations” means Central Depository Company of Pakistan Limited Regulations for the time being in force;
(i) “Commission” means the Securities and Exchange Commission of Pakistan established under section 3 of the Securities and Exchange Commission of Pakistan Act, 1997 (XLII of 1997);
(j) “CRO” means Chief Regulatory Officer of the Securities exchange;
(k) “Days” wherever used means calendar days;
(l) “Demutualization Act” means the Stock Exchanges (Corporatization, Demutualization and Integration) Act, 2012;
(m) “House Account” means the house account as defined and prescribed under the Regulations of Central Depository as amended from time to time;
(n) “Joint Inspection” means inspection of Securities Brokers carried out under these regulations;
(o) “Inspection Team” means Inspection Team constituted by the Committee under these regulations;
(p) “Inspection Report” means the Inspection Report submitted by the Oversight Committee under these Regulations;
(q) “ISE” means Islamabad Stock Exchange Limited;
(r) “KSE” means Karachi Stock Exchange Limited;
(s) “LSE” means Lahore Stock Exchange Limited;

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(t) “NCSS” means the National Clearing and Settlement System of the NCCPL established and operated by NCCPL under NCCPL Regulations and NCSS Procedure made thereunder;
(u) “NCCPL” means National Clearing Company of Pakistan Limited;
(v) “NCCPL Regulations” means the National Clearing Company of Pakistan Limited Regulations, 2003;
(w) “Non-Broker Clearing Member” shall have the same meaning as ascribed thereto in the NCCPL Regulations;
(x) “Ordinance” means Securities and Exchange Ordinance, 1969;
(y) “Oversight Committee” means a Committee constituted under these regulations;
(z) “participant” shall have the same meaning as is assigned to it in clause (17) of section 2 of the Central Depositories Act, 1997 (XIX of 1997);
(aa) “Regulations” means Joint Inspection Regulations, 2015;
(bb) “Regulations of the Securities exchange” means and include regulations made by the Securities exchanges and approved by the Commission under Section 34 of the Ordinance and Section 169 of the Securities Act, 2015;
(cc) “SECP Act” mean Securities and Exchange Commission of Pakistan Act, 1997 (XLII of 1997);
(dd) “SECP Rules” means the Securities and Exchange Rules, 1971;
(ee) “Secretary” means secretary of the Oversight Committee;
(ff) “SRO” means Self-Regulatory Organizations and includes all Securities exchanges, Central Depository and NCCPL;
(gg) “Sub-Account” means a sub-account as defined under the Central Depository Regulations, as amended from time to time; and
(hh) “Team Member” means member of Inspection Team as defined under these regulations.

(2) All words and expressions used but not defined in these Regulations shall, have the same meaning as assigned to them in the Act, SECP Act, the Ordinance, the Companies Ordinance, 1984 and the CDC Act or any rules and regulations made thereunder.

## CHAPTER II
## THE PROCEDURE FOR JOINT INSPECTION

### 3. Joint inspection of Securities broker.
(1) The Joint Inspection will be carried out by joint inspection team of SROs as per the requirements of these regulations;
(2) The Oversight Committee may order Inspection of books and record required to be maintained by a Securities broker of Securities exchange under respective rules and regulations.
(3) All Securities brokers of the Securities exchanges shall be liable for Inspection under these Regulations. For the purpose of this clause, the selection criteria shall be assessed by the Oversight Committee at the start of each quarter.

### 4. Process for issuance of inspection order.
(1) The Oversight Committee shall determine the total number of Securities brokers for Inspection at the start of the each quarter on the basis of available information and details using risk based approach as per the requirement of this regulations.;
(2) The Oversight Committee may assign risk based rankings to Securities brokers by giving appropriate weightage to the factors including but not limited to the following at the start of each quarter:
(a) net Capital Balance of Securities broker;
(b) number of UINs registered with the Securities broker;
(c) assets under Custody of the Securities broker;
(d) volume of trades in terms of quantity and amount;
(e) number of erroneous transactions carried out/rectified;
(f) number of NDM Transactions;
(g) number of complaints outstanding against the Securities brokers;
(h) history of Non-compliances or irregularities identified during last system audit, Central Depository inspection or inspection carried out by the Commission;
(i) financial statements analyses of Securities brokers;
(j) any news in electronic or print media; and
(k) any other factor which could impact investors’ rights and functioning of the securities market.

(3) The cumulative weight should be used to assign risk based ranking and Oversight Committee shall use the latest available data for this purpose and the process shall be repeated at the start of each quarter.
(4) On the basis of above categorization, Securities brokers with the highest risk rankings shall be selected by the Oversight Committee for Inspection at the start of each quarter;
(5) The decision of the Oversight Committee regarding selection of securities broker shall be binding on the respective Securities brokers.
(6) The Securities brokers selected for joint inspection shall be excluded from the forthcoming balloting Cycle of system audit of respective securities exchange in which the said securities broker was required to be considered for selection and the same broker will also be excluded from the forthcoming inspection of CDC.
(7) The Securities brokers selected by Oversight Committee for inspection and data and basis used including related workings for its selection shall be communicated to the Commission by the Oversight Committee on immediate basis.

### 5. Inspection notice.
(1) The Oversight Committee shall give a fifteen days prior notice to the Securities broker selected for the purpose of Inspection as per the format attached herewith as Appendix-I:
Provided that not more than seventy five per cent (75%) of the total number of Securities Brokers selected under regulation 4(1) may be given prior notice and the decision, whether or not to serve the notice, shall be made by the Oversight Committee considering the risk based rankings assigned to Securities Brokers under regulation 4(2) of the regulations and in all cases, Inspections of at least twenty five (25%) of the Securities Brokers will be conducted without prior notice. The Oversight Committee shall record in writing reasons and basis of such decision and report the same to the Commission.

(2) The Oversight Committee shall appoint two or more officials of SROs as Inspectors to inspect the books and record of the Securities brokers. The inspection team shall at least include one official from central depository.
(3) The Inspection request communication shall be issued by the inspector which may at least include the minimum list of documents/information/details as specified in Appendix-II or may include a comprehensive list of documents that are required to be made available by the selected Securities broker at the start of the Inspection. The selected Securities brokers shall be liable to ensure the availability of the documents on the date of commencement of Inspection as notified.
(4) Such Securities brokers shall provide required access to the information and documents needed by the inspector for the Inspection and co-operate with the inspector for timely and smooth completion of the Inspection.

### 6. Scope of Inspection.
(1) The Inspection Team shall carry out the Inspection to ensure compliance with the requirements of the Act, the Ordinance, the Securities and Exchange Rules, 1971, the Code of Conduct for Brokers as enshrined in the Third Schedule of the Brokers and Agents Registration Rules, 2001, Rule Book of KSE, Regulations of LSE and ISE (whichever is applicable), Regulations of Central Depository and NCCPL, Central Depository Act, Demutualization Act, Securities and Exchange Commission of Pakistan Act, 1997 and any other relevant rules/regulations of the Commission, and directives/ circulars/ guidelines issued by the Commission / Securities exchange / Central Depository / NCCPL:
Provided that the scope of Inspection shall at least include the minimum activities as specified in Appendix III or as may be prescribed by the Commission from time to time under the Act.

### 7. Inspection Period.
The Inspection period shall be at least one year which may be most latest financial year or calendar year at the time of issuance of Inspection Notice:
Provided that the inspection period may be more or less than one year if considered expedient by the Oversight Committee.