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Presented to: Prof. Tauqir Haider Presented by: Mohsin Mahmood Zeshan Bin Nasir Umais Akther Zaidi
L1S07MBAM2006 L1S07MBAM0057 L1S07MBAM2043
Due Date: 14, November 2009
Table of Contents No. 1 2 3 4 5 5.1 5.2 5.3 5.4 5.5 5.6 Brokerage House Kinds of Broker Choosing a Broker Registration of Broker Code of Conduct for Brokerage House Loyalty to Clients Investment Process and Actions Trading Compliance and Support Performance and Valuation Disclosures Page No.
A brokerage house, also called a brokerage firm, is a company licensed to buy and sell stocks or securities. Acting as an intermediary between buyers and sellers, a brokerage house typically employs brokers who carry out the wishes of the firm's clients as they pertain to the trading of stocks. Broker services are usually provided on a commission basis. Commission amounts charged for the buying and selling of securities vary with each brokerage house. Often, the price per trade is indicative of the level of service the firm offers. In addition to commissions, a brokerage firm may charge various other fees. These fees may include charges for transferring assets, closing an account, and wiring money. Additionally, a brokerage firm may require the payment of annual services charges and fees related to periods of account inactivity. Depending on the policies of the brokerage house, a client's account may also incur a fee for failing to meet a minimum required account balance. A brokerage house may offer a variety of investment products or specialize in just one or two. Typical choices include stocks, mutual funds, and options, as well as government and corporate bonds. Over-the-counter (OTC) bulletin board stocks may be offered as well. In addition to the trading of various investment products, a brokerage firm may offer certain banking services. These services may range from money market sweeps and check writing to visa and ATM cards. Cash kept in a brokerage house money-market account may carry a higher interest rate than money held in a regular bank account. Often, a brokerage house may offer market research and investing strategies as well. Though much of the information uncovered by such research may be available on the Internet, many individuals don't have the time or the inclination to look for it. In such cases, having an account with a firm that conducts in-depth investment research may be extremely beneficial.
Kinds of Broker
There are two kind of broker which is full-service broker and discount broker. The investor has to decide which broker he need for the services they provide Full-Service Brokers: These brokers tend to offer a wider variety of financial products, investment advice, and research than discount brokers. They may offer stocks, bonds, derivatives, annuities, and insurance. In exchange, they charge considerably higher fees. Full-service brokers solicit business and are paid mostly by commissions. This means they get compensated not according to how well your portfolio does, but by how often you trade. In turn, that means it's in your broker's interest to have you trade as often as possible.
Discount Brokers: Discount brokerages offer no advice or research -- they simply transact your trades with no frills. Because they manage fewer products than their full-service counterparts, discounters charge considerably lower fees. They also often offer online order-entry services. Live brokers at these brokerages are usually paid a fixed salary to execute your trades. They don't solicit, and they aren't paid commissions. Discount brokerages make money by doing business in volume, competing mostly on price and "reliability" of the service: Whoever has the lowest prices and the best service gets the most trades.
Choosing a Broker
Many investors feel comfortable researching, selecting and buying their own stocks, especially with the ease of buying afforded by the internet. However, if time is a factor and one’s do not feel comfortable making investment decisions on your own, you can seek help from a qualified stockbroker. If you elect to do so, here are some tips for selecting a broker. Determine in advance whether you are seeking the help of a discount or full-service broker. Discount brokers get commissions on each purchase, but offer little advice, while a full-service broker will provide more investing assistance, but for a fee. Knowing what you are looking for will save you time. Look for a broker who is easily accessible and, if he or she is not reachable, then find out who covers for them. On busy trading days, can you reach this broker? This can be very significant. Shop around. Meet with several brokers and try to find one with whom you feel comfortable. The rapport you have with your broker is important. This individual will be handling and investing your money. Therefore, if you don’t feel comfortable or you feel intimidated, then you should look for someone else. Don’t get railroaded into using someone you don’t like. Get referrals. It is always advisable to work with someone whom you have heard good things about. Ask around and find out which brokers other people use and why they selected a specific broker. Look for a broker who understands your financial goals and needs. He or she should take the time to research the type of investments that will meet your needs and understand the type of investor you are — conservative, aggressive or somewhere in between.
Check out the broker’s background and strategy. First, make sure he or she is properly licensed. Then find out about his or her experience, training and certifications. Next, determine how he or she approaches investing. What are his or her criteria for making an investment decision? Do not use a broker that is steering you toward investments that he or she benefits from by receiving higher commissions. You need someone who has your interests in mind. If a broker has a "sure thing," be leery. After all, is there ever really a sure thing? Find out how commissions are determined and how much they will be. Get a commission schedule that spells out when you will be paying. Keep in mind that an annual fee, rather than a transaction-based fee, can eliminate "churning," a practice whereby a broker is running up commissions by making unnecessary transactions. Find out in advance all additional fees and charges you will be expected to pay. Be careful with the "deep discount" brokers. Use only ones that you have heard (from people you know) are reliable. Read the fine print carefully.
Registration of Broker
Following is the registration procedure for a broker laid by Securities and Exchange Commission of Pakistan (SECP): Application for Registration: A member desirous of acting as broker shall make an application to the SECP in Form as set out in the First Schedule of the Brokers and Agents Registration Rules 2001 for grant of a certificate of registration through the stock exchange of which he is a member. The exchange shall forward the application to the SECP within 14 days from the date of its receipt. ELIGIBILITY for Registration: A person is eligible for registration as a broker, if he – Is a member of the stock exchange; Is not less than twenty one years of age; Is a citizen of Pakistan;
That promoters of such house are persons of means and integrity and have special knowledge of matters which the house may have to deal with as a clearing house; and That such person has complied with such other conditions as may be required by the SECP in the interest of the capital market. Has at least passed graduation or equivalent examination from an institution recognized by the Government; Provided that the SECP may relax the educational qualification in suitable cases on merit having regard to the applicant’s experience; Is not a lunatic or a person of unsound mind; Has not been convicted of an offence involving fraud or breach of trust; Has not been adjudicated as insolvent or has suspended payment or has compounded with his creditors ; Has experience of not less than five years in the business of buying selling or dealing in securities; Has not been a partner of a brokerage firm or a director of a brokerage company which has been convicted of an offence concerning brokerage; Has not defaulted in payment of dues at clearing house; Has not defaulted in compliance with the provision of the Ordinance the Act and the rules and regulations made there under, Is not in default on settlement of an investor complaint where such complaint has been adjudicated by a stock exchange or a committee of a stock exchange or the SECP and Has complied with the directives of the SECP in respect of business conduct dealings with clients and financial prudence;
Grant of Certificate of registration:
The SECP, if it is satisfied that the applicant is eligible for registration as a broker, and that it is in the interest of the stock market to do so, may grant certificate of registration to the applicant. The certificate of registration of a broker shall be valid for one year from the date of issue. Renewal of Registration: The certificate of registration is renewable on payment of fee as prescribed in the Second Schedule of the Rules. Requirements of initial registration are applicable to renewal of the registration.
Code of Professional Conduct for Brokerage Houses
The Code of Professional Conduct for Asset Managers and Brokerage Houses (the ―Code‖) outlines the ethical and professional responsibilities of firms that manage assets on behalf of clients. This Code is meant to apply, on a global basis, to firms (―Managers‖), who manage client assets as separate accounts or pooled funds (including brokerage houses, collective investment schemes, mutual funds, and fund of funds). Ethical leadership begins at the highest level of an organization. The Code should, therefore, be adopted by the Manager’s board of directors, senior management, or similar oversight body. Such adoption sends a strong message regarding the importance of ethical behavior at the firm. Rather than creating rules that only apply to certain people or groups, this Code is intended to cover all employees of the firm. Although not every employee is actively involved in conduct covered in the Code, a code that is broadly applied reinforces the need for all employees to understand the ethical issues involved in the asset management business. By adopting and enforcing a code of conduct for their firm, Managers demonstrate their commitment to ethical behavior and the protection of investors’ interests. 1. Loyalty to Clients Managers Must: Place client interests before their own Preserve the confidentiality of information communicated by clients within the scope of the Manager-client relationship Refuse to participate in any business relationship or accept any gift that could reasonably be expected to affect their independence, objectivity, or loyalty to clients.
2. Investment Process and Actions Managers Must: Use reasonable care and prudent judgment when managing client assets. Not engage in practices designed to distort prices or artificially inflate trading volume with the intent to mislead market participants. Deal fairly and objectively with all clients when providing investment information, making investment recommendations, or taking investment action. Have a reasonable and adequate basis for investment decisions. When managing a portfolio or pooled fund according to a specific mandate, strategy, or style:
o Only take investment actions that are consistent with the stated objectives and constraints of that portfolio or fund; o Provide adequate disclosures and information so investors can consider whether any proposed changes in the investment style or strategy meet their investment needs. When managing separate accounts and before providing investment advice or taking investment action on behalf of the client: o Evaluate and understand the client’s investment objectives, tolerance for risk, time horizon, liquidity needs, financial constraints, and any other unique circumstances (including tax considerations, legal or regulatory constraints, etc.), and any other relevant information that would affect investment policy. o Determine that an investment is suitable to a client’s financial situation. 3. Trading Managers Must: Not act, or cause others to act, on material nonpublic information that could affect the value of a publicly traded investment.
Give priority to investments made on behalf of the client over those that benefit their own interests. Use commissions generated from client trades only to pay for investment-related products or services that directly assist the Manager in its investment decision making process and not in the management of the firm. Maximize client portfolio value by seeking best execution for all client transactions. Establish policies to ensure fair and equitable trade allocation among client accounts.
4. Compliance and Support Managers Must: Develop and maintain policies and procedures to ensure that their activities comply with the provisions of this Code and all applicable legal and regulatory requirements. Appoint a compliance officer responsible for administering the policies and procedures and for investigating complaints regarding the conduct of the Manager or its personnel. Ensure portfolio information provided to clients by the Manager is accurate and complete and arrange for independent third-party confirmation or review of such information. Maintain records for an appropriate period of time in an easily accessible format. Employ qualified staff and sufficient human and technological resources to thoroughly investigate, analyze, implement, and monitor investment decisions and actions. Establish a business-continuity plan to address disaster recovery or periodic disruptions of the financial markets.
5. Performance and Valuation
Managers Must: Present performance information that is fair, accurate, relevant, timely, and complete. Managers must not misrepresent the performance of individual portfolios or of their firm. Use fair market prices to value client holdings and apply, in good faith, methods to determine the fair value of any securities for which no readily available, independent, third-party market quotation is available.
6. Disclosers Managers Must: Communicate with clients on an ongoing and timely basis. Ensure that disclosures are prominent, truthful, accurate, complete, and understandable and are presented in a format that communicates the information effectively. Include any material facts when making disclosures or providing information to clients regarding themselves, their personnel, investments, or the investment process. Disclose the following: o Conflicts of interests generated by any relationships with brokers or other entities, other client accounts, fee structures, or other matters. o Regulatory or disciplinary action taken against the Manager or its personnel related to professional conduct. o The investment process, including information regarding lock-up periods, strategies, risk factors, and use of derivatives and leverage. o Management fees and other investment costs charged to investors, including what costs are included in the fees and the methodologies for determining fees and costs. o The amount of any soft or bundled commissions, the goods and/or services received in return, and how those goods and/or services benefit the client. o The performance of clients’ investments on a regular and timely basis.
o Valuation methods used to make investment decisions and value client holdings. o Shareholder voting policies. o Trade allocation policies. o Results of the review or audit of the fund or account. o Significant personnel or organizational changes that have occurred at the Manager.
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