BSEC to conduct surprise inspections of brokerages to curb irregularities, protect investors

The Bangladesh Securities and Exchange Commission (BSEC) has decided to conduct surprise inspections of brokerage firms to detect irregularities early and strengthen investor protection.

Under the new mechanism, firms will be selected for spot inspections based on information about suspicious transactions, possible irregularities or activities that could put investors' money and securities at risk.

Infographics: TBS

The BSEC will form an eight-member pool comprising two representatives each from the regulator, Dhaka Stock Exchange (DSE), Chittagong Stock Exchange (CSE) and Central Depository Bangladesh Limited (CDBL). Three members will be selected for each inspection – one from the BSEC, one from CDBL and one from either the DSE or CSE.

An executive director of the relevant BSEC department will coordinate the inspections, assisted by two other commission officials.

How surprise inspections will work

On the day of an inspection, officials will meet at the BSEC office in the morning and select a brokerage from a list of firms identified as potentially risky based on suspicious activities, possible irregularities and other risk indicators.

The inspection team will then be sent to the vicinity of the selected firm before the inspection notice is issued. The BSEC will subsequently send a spot inspection letter to the firm's head, after which the team will arrive at the office and begin the inspection.

The procedure is intended to minimise the time available for firms to alter records, manipulate software or conceal irregularities.

Abul Kalam, executive director and spokesperson of the BSEC, told TBS that the commission had decided to introduce spot inspections and would implement the mechanism accordingly.

"Spot inspections allow us to get a clearer picture of the actual condition of a brokerage firm. We have already inspected one firm under this approach, and the result was good," he said.

He said the DSE and CSE already conduct spot visits, but brokerage firms can often learn about them in advance, giving them an opportunity to conceal irregularities.

However, he did not disclose when the BSEC's new mechanism would formally begin.

What inspectors will examine

The inspection team will examine the brokerage firm's Consolidated Customers' Account (CCA) and check for any shortage of securities belonging to investors.

It will also scrutinise the firm's back-office software, which contains information on clients' accounts, transactions and securities holdings, to determine whether it has been manipulated, unauthorised changes have been made or information has been concealed.

Inspectors will also check whether a firm is operating multiple back-office software systems and verify its registration certificate and compliance with regulatory requirements.

The BSEC, stock exchanges and CDBL will cross-check brokerage firms' back-office records with trading and securities-holding data maintained by the exchanges and CDBL. This will help identify securities shortages, discrepancies and the use of multiple software systems.

The move comes amid allegations that six brokerage firms have embezzled a combined Tk608 crore in recent years by allegedly misusing internal systems and back-office software, according to stock exchange sources.

The alleged amounts include Tk140 crore involving Tamha Securities, Tk128 crore involving Banco Securities, Tk65 crore involving Crest Securities, Tk14 crore involving Shah Mohammad Sagir Securities, Tk161 crore involving Moshiur Securities and Tk100 crore involving Salta Capital.

Market stakeholders said surprise inspections could help detect irregularities early and strengthen investor protection. However, they said the initiative's effectiveness would depend on regular monitoring, proper analysis of inspection findings and prompt action against violations.