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Content of Security and Exchange Commision

No. 1. Name of content Defination I. Issuance of licence II. Investment advisor III. Defination of investment advisor representative IV. Defination od broker-dealer/stock broker V. Defination of broker-dealer representative History Formation Responsbility Objectives Trading practice Its problems Prospects Recommendation page 4 4 4 4 4 4 5 6 10 11 12 13 17 18

2. 3. 4. 5. 6. 7. 8. 9.

Security and Exchange Commision

Definition:
The term "exchange" means any organization, association, or group of persons, whether incorporated or unincorporated, which constitutes, maintains, or provides a market place or facilities for bringing together purchasers and sellers of securities or for otherwise performing with respect to securities the functions commonly performed by a stock exchange as that term is generally understood, and includes the market place and the market facilities maintained by such exchange. Government commissions created by Congress to regulate the securities markets and protect investors. In addition to regulation and protection is called securities and exchange commission. The Securities and Exchange Commission (SEC) is the regulator of the capital market of

Bangladesh.

Issuance of licenses to representatives of licensees

This Market Guidance Note is issued pursuant to the Securities Industry Law 1993 (PNDCL 333) as amended by Act 590 s.9 (d) which empowers the Securities and Exchange Commission to formulate principles for the guidance of the Securities Industry. The following guidelines are provided to aid the issuance of licenses to representatives of licensees. Pursuant to Regulation 13 (1), L.I. 1728, two categories of the Commissions licensees are mandated to licence representatives, i.e. Investment Advisers and Broker-Dealers (Stockbrokers).
Definition of investment adviser Investment Adviser is defined under Securities Industry Law, 1993 (PNDCL 333) as amended by Act 590, and s.142 (1) to include: A person who carries on a business of advising others concerning securities A person who as part of a regular business issues or publishes analysis or reports concerning securities A person who pursuant to a contract or an arrangement with a client, undertakes on behalf of the client (whether on a discretionary authority granted by the client or otherwise) the management of a portfolio of securities for the purpose of investment.

Definition of investment adviser representative

Section 142 of the Securities Industry Law 1993 (PNDCL 333) as amended by Act 590 defines an Investment Representative as a person, in the direct employment of or acting for or by arrangement with an investment adviser, who performs for the investment adviser any of the functions of an investment adviser (other than work ordinarily performed by accountants, clerks or cashiers) whether his remuneration is by way of salary, wages, commissions or otherwise and includes a director or officer of a body corporate who performs for the body corporate any of the said functions. Definition of broker-dealer/stockbroker Regulation 63 of L.I. 1728 states that a broker-dealer means a person who buys and sells securities on his own account and also acts as an intermediary between a buyer and seller of securities. Definition of broker-dealer representative

Regulation 13 (1) of L.I. 1728 states that a broker-dealer representative is an executive director, officer or employee who takes part in the day-to-day management and administration of a business for which a dealers licence is required under the Law, or who deals directly with clients on behalf of the dealer. Such a person shall hold a valid dealers representative license issued by the Commission.

History:
This Market Guidance Note is issued pursuant to the Securities Industry Law 1993 (PNDCL 333) as amended by Act 590 s.9 (d) which empowers the Securities and Exchange Commission to formulate principles for the guidance of the Securities Industry. The following guidelines are provided to aid the issuance of licences to representatives of licensees. Pursuant to Regulation 13 (1), L.I. 1728, two categories of the Commissions licensees are mandated to licence representatives, i.e. Investment Advisers and Broker-Dealers (Stockbrokers).

SEC was established on 8 June, 1993 under the Securities and Exchange Commission Act, 1993. The Chairman and Members of the Commission are appointed by the government and have overall responsibility to administer securities legislation. The Commission, at present has three full time members, excluding the Chairman. The Commission is a statutory body and attached to the Ministry of Finance.
Before the crash of 1929, the stock market was unregulated, and investors had no way of determining if the securities they were buying were worth their price. Of the $50 million in new securities offered in that decade, the SEC estimates that half became worthless. Millions of people lost their fortunes in the crash of October 1929, and banks that had invested in the stock market couldn't survive the "runs" by depositors who feared their cash would be lost. Congress created the SEC in 1934 to restore investor confidence in the markets, and President Franklin D. Roosevelt named Joseph P. Kennedy, President John F. Kennedy's father, as its first chairman.

Formation:
Before the Great Crash of 1929, there was little support for federal regulation of the securities markets. When the stock market crashed in October 1929, public confidence in the markets plummeted. There was a consensus that for the economy to recover, the public's faith in the capital markets needed to be restored. Congress held hearings to identify the problems and search for solutions. Based on the findings in these hearings, Congress during the peak year of the Depression passed the Securities Act of 1933. This law, together with the Securities Exchange Act of 1934, which created the SEC, was designed to restore investor confidence in our capital markets by providing investors and the markets with more reliable information and clear rules of honest dealing. The main purposes of these laws can be reduced to two common-sense notions: Capital market is a mechanism to flow fund from the hands of small savers (individuals and institutions) at low costs to those entrepreneurs who do need fund to start business or to business. In the other words, capital market mechanism gives a part ownership of big companies/corporations to small savers like you and me. In simple term, it is a globally accepted scheme to share ownership of economic development with general public. History of capital market: Capital market started in USA at Wall Street in 1653. 1t came to Mumbai, the commercial capital of India around 1890. However, investment in shares boomed in late 1970s. It took many years to come to the land, now comprising Bangladesh. The origin of stock market in Bangladesh goes back to April 28, 1954 when a stock exchange was formed under the name East Pakistan Stock Exchange Association at Narayanganj. Trading started in 1956. It was renamed East Pakistan Stock Exchange Ltd. Transferred to Dhaka in 1958 and again renamed Dhaka Stock Exchange Ltd in 1964.

Trading remained suspended during the Liberation War in 1971. The Dhaka Stock Exchange resumed operation in 1976 with nine listed companies as against 452 today. Capital market in Bangladesh got momentum with the establishment of Securities and Exchange Commission in 1994. A big wing was added to the capital market with the incorporation of Chittagong Stock Exchange on April 1, 1995. Operation of CSE started on October 10, 1995. However, there was a market crash in November 1996. Thousands of investors lost their capital and ran away from the capital market. At that time there was trading floor at both the stock exchanges. Trades were conducted through cry-out system. A high powered enquiry committee was constituted to investigate the cause of the market crash, to suggest remedial actions to avoid such crash in future. Cry-out system of trading was replaced by automated trading system under LAN. Virtually capital market facilities are now expandable to all big cities. The CSE has offered internet trading facility to get excess even from outside the country. The DSE will operate the service soon. The Asian Development Bank granted aid to strength the SEC capacity to become a pro-active regulator and facilitator. Now, we are institutionally better equipped to become a vibrant capital market Product of capital market: a. Shares, b. Debentures, c. Mutual funds, d. Bonds, e. Derivatives, f. Future and options. Players of capital market: a. Investors, b. PLCs c. C) Stock Exchanges d. Brokers and Dealers e. Merchant banks f. Securities and Exchange Commission g. CDBL Operation of capital market: Each and every step of capital market operation is regulated. Regulations may come from SEC, Stock Exchanges and CDBL under Securities Act. Parameters used to measure size of capital market: a) Number of listed companies, b) Number of securities, C) Size of market capitalization, d) Index, e) Daily trade volume, f) GSP ratio to market capitalization, Efficiency indicators of capital market: a) PE multiple, b) Dividend yield, c) Liquidity, d) Visible presence of regulators, e) Exit route regulation for sick PLC. CSE role in Bangladesh capital market development: Automation, On-line trading, SAFE, Securities Institute, International Seminar, Investors training etc. Future action plan for vibrant capital market in Bangladesh: a) Strengthen SEC b) Capital Market Education: at school, college and university levels, c) Training of Directors of PLC, Regulator and Broker house officials etc, d) Certification system for certain level of officials, e) Introduction of new Products

5 e) Incentives for listing with Stock Exchange

f) New pricing mechanism for IPO g) Appropriate fiscal measures h) Fully automated settlement system i) Separate bench at High Court The Economist Intelligence Unit: The Economist Intelligence Unit is the world's foremost provider of country, industry and management analysis. Founded in 1946 the Economist Intelligence Unit of The Economist magazine is now a leading research and advisory firm with more than 40 offices worldwide. For nearly 60 years, the Economist Intelligence Unit has delivered vital business intelligence to influential decision-makers around the world. The Economist's international reach and unfettered independence make it the most trusted and valuable resource for international companies, financial institutions, universities and government agencies. Its mission is to provide executives with authoritative analysis and forecasts to make informed global decisions. Institutional investor: Institutional Investor is a leading international business-to-business publisher, focused primarily on international finance. It publishes magazines, newsletters and journals as well as research, directories, books and maps. It also runs conferences, seminars and training courses and, is a provider of electronic business information through its capital market databases and emerging markets information service. The DIFC: The Dubai International Financial Centre (DIFC) is an onshore hub for global finance. It bridges the time gap between the financial canters of Hong Kong and London and services a region with the largest untapped emerging market for financial services. In just under two years, over 400 firms have registered with the DIFC which operates in an open environment complemented with world-class regulations and standards. The DIFC offers its member institutions incentives such as 100 per cent foreign ownership, zero tax on income and profits and no restrictions on foreign exchange. A brief overview of the Tokyo Stock Exchange: The Tokyo Stock Exchange (TES), located in Tokyo, Japan, is the second largest Stock Exchange in the world based on money volume just behind the New York Stock Exchange. The TSE provides a market for Securities and Exchange. The major function of the Exchange is to provide a market place, monitor trading and supervise trading participants. The Exchange was established May 15, 1878. By 1920s when Japan experienced rampant growth in its economy, trading stock over bonds, gold and silver currencies become the norm. The Exchange was shut down in 1945 and reopened 1949 under the guidance of the Americans after World War II. The TSE accounts 90.6 per cent of all securities transaction in Japan dwarfing its rivals, the Osaka Stock Exchange 4.2 per cent and Nagoya Stock Exchange 0.1 per cent. Stock listed on the Exchange is divided into three sections. The first section, for large companies; the second section for mid-sized companies and the mother section, for high growth start up companies. Proclaimed as the fairest, most liquid, and fasted growing market in

Japan. Stock Market in India: Indian stock markets are one of the most dynamic and efficient stock markets in Asia. In terms of the makeup and overall dynamics, the Indian stock markets are at par with international standards. The two national exchanges operating in India are the National Stock Exchange (NSE) and the Bombay Stock Exchange (BSE). These exchanges are well equipped with electronic trading platforms and handle large volume of transactions on a daily basis. Company Security Profiles: The information provided here will help investors and traders of Indian stocks, bonds and debentures. This section will provide useful information on the large, mid-sized and small capitalization companies which are listed under the BSE and NSE. Conclusion: In today's world, if you rely on fundamental analysis, brokers advise, share price information, newspaper articles or business channels for your investing or trading decisions, you are asking for a painful experience in the markets. Whether you are a first time investor, a seasoned pro, an "in and out" day trader or a long term investor the Dhaka Stock Exchange Ltd, Chittagong Stock Exchange Ltd, StockBangladesh.com and Securities and Exchange Commission will provide you with the necessary information you need for maximum profits and success in today's dynamic markets. The methods used to analyze securities and make investment decisions fall into two very broad categories: fundamental analysis and technical analysis. Fundamental analysis involves analyzing the characteristics of a company in order to estimate its value. Technical analysis takes a completely different approach; it doesn't care one bit about the "value" of a company or a commodity. Technicians (sometimes called chartists) are only interested in the price movements in the market. Despite all the fancy and exotic tools it employs, technical analysis really just studies supply and demand in a market in an attempt to determine what direction, or trend, will continue in the future. In other words, technical analysis attempts to understand the emotions in the market by studying the market itself, as opposed to its components. If you understand the benefits and limitations of technical analysis, it can give you a new set of tools or skills that will enable you to be a better investor.

Responsibilities:
Regulating the business of the Stock Exchanges or any other securities market. Registering and regulating the business of stock-brokers, sub-brokers, share transfer agents, merchant bankers and managers of issues, trustee of trust deeds, registrar of an issue, underwriters, portfolio managers, investment advisers and other intermediaries in the securities market. Registering, monitoring and regulating of collective investment scheme including all forms of mutual funds. Monitoring and regulating all authorized self regulatory organizations in the securities market. Prohibiting fraudulent and unfair trade practices relating to securities trading in any securities market.

Promoting investors education and providing training for intermediaries of the securities market. Prohibiting insider trading in securities. Regulating the substantial acquisition of shares and take-over of companies. Undertaking investigation and inspection, inquiries and audit of any issuer or dealer of securities, the Stock Exchanges and intermediaries and any self regulatory organization in the securities market. Conducting research and publishing information

Objectives:
To provide market place or facilities for bringing together buyers and sellers for trading of securities; Listing of the securities; Provide investment opportunities for all groups of investors through quick, easy and accurate transaction; To ensure orderly market, fair trading and protect investors in the securities in compliance of laws; Clearing and settlement of the traded securities; Stock Exchanges are basically functioning as Self regulatory Organization (SRO);

Trading practice:
Trading of securities on the stock exchanges can only be done through brokers of the concerned exchanges; An investor is required to open an account with a broker by filling-in a prescribed Customers Account Information Form. For trading in the demated securities it is required to have a Beneficiary Owners (BO) account with a Depository Participant (DP) in addition to the A foresaid account; An investor can trade through a broker either in cash or credit; The credit transaction, however, is subject to the provisions of M Trading in the securities can be executed through written orders submitted to the concerned broker; Telephonic orders can also be submitted provided that such orders shall be confirmed in writing with in 24 hours; The price of the securities can not go beyond specified circuit breaker range and an investor can quote at the tick price of the securities as specified by the exchanges. Short-selling of the securities are prohibited if it is not done under Dhaka Stock Exchange (Short Sale) Regulations 2006argin Rules, 1999; Types of Order Based on price, orders may be of the following Categories, namely:Limit order Market order I. Limit order: Limit order must have a price limit which ensures that the order shall be traded at the price equal to or better than the limit price. II. Market order: Market order is the order to be executed at the touchline price. A market order is matched immediately on arrival in to the trading engine at the touchline price

I. II.

All orders will match automatically. Orders which are at the most favorable price, that is, at the lowest selling or highest buying price, shall be executed first. If two or more orders are listed in the order book at the same price, the oldest order shall be executed first. Orders that cannot immediately be executed shall be queued for future execution in a specific order of priority mainly based on price and time of entry. If an order is executed partly, the remaining part of such order shall not lose its priority. The queue priority is determined by the system through an interactive process Trade Confirmation Trade confirmation note is a proof of the transaction issued by broker; The broker shall issue a trade confirmation note to his client within twenty four hours of the execution of order and it should be numbered and time stamped; The trade confirmation note shall show: Date of the trade; Name and quantity of the security bought or sold; Price of the security, brokerage and other charges; The order and howla or contract note number and date; etc

Its Problems:
The recent performance of the capital markets in Bangladesh, notably from December 2010 till February of 2011, has been very poor compared with its performance over the last five years. The index fell from a high of around 8,900 points to 5,200 points, a drop of almost 42 percent in just three months!!! Bangladesh capital markets have been in the top three best performing markets in the world over the last three years. However, its recent performance has cast a big doubt about its future performance. It is a case of too much money chasing too few stocks. This correction in the market has been long overdue because there was too much money in the stock market in too few stocks. This inflationary pressure was finally controlled by the central bank by raising its cash reserve ratio (CRR) and statutory liquidity ratio (SLR) thus resulting in limiting the liquidity flow into the capital market. The inter bank call money rate (DIBOR Dhaka Inter bank Offer Rate) went up by 189 percent. One of the main reasons for this was that the domestic banks had too much of their money invested in the stock market, for quick and easy profit taking and as a result caused the stock market to rise even higher. So, to control the excess money in the capital market the central bank took these drastic measures, as it is within their right to do so, to control inflation. The problems of the capital markets in Bangladesh are structural, and, actually quite farreaching than what meets the eye. As we all know, the capital markets here, notably the Dhaka Stock Exchange (DSE), is way overvalued due to, firstly, the DSE index calculations being incorrect. Secondly, there are big syndicates acting together to artificially influence the prices resulting in huge profits for them at the expense of the average investors who put in their hard earned lifetime savings. And last, but definitely not least, is the Securities and Exchange Commission (SEC) whose total policy and regulations favors' the syndicates which primarily consists of high net worth people and the stock exchange members resulting in an artificial demand driven market. Until and unless these fundamental issues are addressed the capital markets here will fail to see the light of the day.

So if we define the problems then we find---1. The Political Situation: The Peoples Republic of Bangladesh has been a parliamentary Democracy since September 1991. The present government is headed by the Awami League Which has an absolute majority, but the opposition party has stepped up its nationwide program of strikes, processions, and mass meetings. These activities have weakened the governments intentions to foster changes such as the development of the financial market. In addition, certain commercial and financial regulations are outdated in that they tend to focus on institutions rather than functions. Governance and accountability are lacking in certain areas, and there are elements of inefficiency in the financial system, mainly concerning the stateowned banking sector. Although the government is aware of these problems, it has been slow to improve governance and develop strong institutional capacity. The problems created by these weak institutions are compounded by an increasingly confrontational. 2. A sense of urgency is missing in policymaking, despite the growing imbalances in the economy and crowding out as Bangladesh continues to channel vast monetary resources into servicing bad loans. Given that macroeconomic changes can happen in short periods of time and that nonperforming loan, which account for a third of the loan portfolio, can create financial sector vulnerability, the bad-loan situation could trigger a severe liquidity crisis nationwide. It can take decades to build a fixed-income market in the wake of such crises. This issue clearly needs immediate and focused attention. 3. Certain omissions or drawbacks of the broader laws and regulations directly affect development of the fixed-income market. 4. The government securities market in Bangladesh is small, does not provide much of a yield curve to support a corporate bond market, and does not provide intermediaries with skills and a profit base to support the corporate bond market. 5. Regulators and Regulations: One impediment at the regulator and regulation level is the overlapping authority between the two financial market regulators, Bangladesh Bank and the Securities and Exchange Commission (SEC) and no clear jurisdiction over the fixed-income market. In general, BB regulates the commercial banks and their activities, while the SEC regulates the NBFIs, the two stock exchanges, and the capital market. A second problem is that the SEC has no authority to issue rules and regulations, and the procedure as a whole is long and drawn out. As a result, the SEC has not proposed any regulations for the issuance of bonds or debentures. All rule proposals must first be submitted to the Minister of Finance for approval and then passed on for approval from Ministry of Law. Furthermore, potential issuers have to look at various sets of regulations and follow a long and cumbersome procedure. 6. Investors: On the investor side, few investors are sophisticated enough to think about investing in bonds. Most of them dont have even financial literacy. 7. Intermediaries. Intermediaries in Bangladesh lack many of the skills needed to foster an active local corporate bond market. As mentioned earlier, commercial banks dominate the financial sector and not enough intermediaries are skilled in securities. Few are able to identify issuers and investors and bring them to the market. They provide little or no research analysis on industries or companies to encourage investment in the local debt market. Too few private merchant banks are able to conduct financial advisory and trust services. Nor do any feel motivated to become a market maker for an issue. Hence the market is illiquid, with large spreads. At the same time, the fee structure and pricing are high enough to allow intermediaries

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to make money, but because transactions are so limited, the intermediaries seldom make money. Even if they are able to participate, intermediaries are reluctant to take any risk in dealing. 8. Growth of mutual fund in Bangladesh has been slow. Only recently there has been a rush for new funds. Many banks and financial institutions are in the queue with proposals for their funds. Mutual fund is often a misunderstood subject in Bangladesh. Many investors do not understand the difference between mutual fund shares and other company shares. 9. The Securities and Exchange Commission will have to be more efficient and professional. It simply cannot run with the present manpower. It needs more professionals, more training at home and abroad and more logistic support. But it is just not possible to attract the right kind of professionals with the current pay structure. 10. Lack of transparency in public sector borrowing: Public sector borrowing has been riddled with lack of transparency that failed to eventually proffer any reliable demand-supply scenario in which an efficient debt market can function. Because of the frequent shifts and ad hoc culture and volatility of demand, many of the debt instruments could not be designed to be publicly traded that could fuel a vibrant market. Efforts are now on to issue tradable instruments and bring fiscal discipline. 11. Price manipulation: It has been observed that the share values of some profitable companies has been increased fictitiously some times that hampers the smooth operation of DSE 12. Delays in settlement: Financing procedures and delivery of securities sometimes take an unusual long time for which the money is blocked for nothing. 13. I regulations in dividends: Some companies do not hold AGM and eventually declare dividends that confused the shareholders about the financial position of the company. 14. Some members being the directors of listed companies of DSE look for their own interest using the internal information of share market 15. Many companies of DSE dont focus real position of the company as some audit firms involve in corruption while preparing financial statements. 16. As the DSE is small market, the spread/cost ratio is relatively higher which a more is important factor for capitalization.

Prospects:
1. A large number of new investors from across the country are entering the market. Institutional investors are active in the market. Asset management companies are growing and their activities are visible. A number of proposals for new mutual funds are awaiting approval. 2. Regulatory policies should be framed with long term vision. In recent months, some policy decisions are being taken to address current problems at the cost of long term market interest. These policy changes include fixation of minimum size of new public issue, imposing restriction on private placements, disqualifying private sector companies under direct listing and discouraging new mutual funds. 3. Many of the stocks are overpriced and this is a serious risk factor for the inexperienced investors. Entry of new companies in the market can help reduce gap between demand and supply and help bring stability in the market.

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4. Immediate entry of at least two or three large companies could be extremely helpful for a balanced growth of the market. Currently, Grameen Phone alone accounts for a large portion of the market capitalization. As a result, normal movement of its price affects the index substantially and entire market is influenced by it. 5. BTCL with its huge asset is another public sector company that could make immense contribution to supply side of the market. 6. Private placements have been stopped in case of smaller companies. It is true that scope of private placement has been misused in some cases recently and the problem called for intervention. 7. In the interest of improving supply of shares in the market, direct listing could also be allowed for the private sector companies with some modifications. There should be an improved price discovery mechanism so that general investors get the shares at an acceptable price and manipulations are controlled. 8. SEC has taken very crucial initiatives to publicize and educate the investors about fundamentals to deal in share transactions.

Recommendation:
The solution is actually twofold. Firstly, there needs to be structural changes in the capital markets and secondly, there needs to be more supply of good companies getting listed. Let's look at the structural changes first. What it means by structural changes is, in essence, changes required at the DSE, CSE and the SEC. Let's look at the structural changes at the stock exchanges first which can be brought about through demutualization. Demutualization is the process of transformation from members associations into for-profit corporations. Stock exchanges across the globe have rethought their business strategy and model due to the simultaneous convergence of a number of powerful developments in order to find ways of how best to survive. And, in the process the exchanges have evolved towards new corporate, legal and business models to strengthen governance and face competition through the process of demutualization. Currently, the DSE and the CSE operate under a modularized structure. Under demutualization the mutual ownership structure will change to a share ownership structure. The process entails first converting memberships into shares, which may or may not be followed by a public issue. Ownership and trading privileges are effectively separated. Stockbrokers are no longer owners but customers of the exchange. Directors are elected by shareholders and answerable to them. Henceforth, we can see that, until and unless there are structural changes brought about in the capital market it will not grow. Artificially creating demand by pumping in more money in the capital market will only inflate the market temporarily before falling again. This will never solve the underlying fundamental problems. Whereas, when you open up the capital market by addressing its structural problems and bring in new products and regulations the market will grow, become more dynamic as capital flow will increase thereby increasing profitability for all. Good examples of demutualised and highly profitable exchanges can be seen all over the world like the LSE, NASDAQ, NYSE, and EURONEXT to name just a few. These exchanges have evolved to such an

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extent that now the exchange business and the financial markets are in trillions of dollars! So Bangladesh needs to wake up, as the benefits are enormous! .