Enforcement and not new rules is what is required to clean stock market

Wednesday, 6 June 2012 00:06 - - {{hitsCtrl.values.hits}}

Everybody agrees that the stock market was manipulated and driven up to unsustainable levels by a few high net worth individuals, enjoying much influence with the ruling politicians. The latest incident is one of conflict of interest where the Chairman of the NSB entered into a deal to buy the shares of the loss making and financially weak The Finance Co, at exorbitant prices.

In modern American financial circles the term “conflict of interest” is used when they believe someone may be promoting private interests while acting in a public role. The NSB Chairman is carrying out a public role and is expected to act in the best interests of the bank.

Even in a private company it is possible for an individual director or chairman to ignore the interests of the company and feather his own nest. But can these situations be corrected by the SEC rule requiring directors and broker firm employees to hold shares they buy for a minimum six months period?

How would this rule have prevented the transaction in The Finance shares by the NSB? The rule does not deal with conflict of interest situations at all. Such violations should be reported to the Bribery and Corruption Commission instead since the SEC cannot stop it nor punish those responsible.

As for banning trading by directors and employees of broker firms this may help to curb front running. But such front running is not carried out by the majority but a minority of brokers/investment advisers. In the past several such brokers/investment advisers were sacked. But this time round hardly any such transgressors of the rules have been punished.

There are many investment advisers who have churned the accounts of their clients to earn commissions for themselves (easily verifiable from the record of selling and buying the same stock after the settlement day of T+3) and they did so without the permission of their clients. Why have they not been punished?

It is true that the disciplinary action must be taken by the member firm. But the top managements of these firms protect their subordinates. But it is the SEC that issues licenses to investment advisers and it should cancel their licenses. There are investment advisers who have violated the rule which requires a prior deposit in shares or cash before buying shares to a client’s CDS account. This rule has been violated.

Investment advisers have used proxy accounts of their brothers, sisters, fathers, mothers or girlfriends to trade for themselves. They have then saddled the member firms with the losses incurred by them through such proxy accounts.

There is another rule which requires that credit to clients should not be extended beyond the 50% value of the client’s portfolio. This rule has been violated by many investment advisers. The SEC should cancel the licenses of all those investment advisers who violated these rules and the rules relating to trading like buying shares of a particular company at higher and higher prices and driving the market up to oblige market manipulators.

This country has a surfeit of rules but hardly any of them are enforced. This penalises the law-abiding and the honest at the expense of the law breakers and crooks who choose to ignore rules.

Stock market investor