Legal Perspective: Transparency must in all brokerage activities

Most potential investors in securities undertake their investment activities through brokerage firms or professional brokers.

There are certain laws and regulations to regulate the conduct of brokers.

In the UAE, no one is allowed to start brokerage activity prior to obtaining the necessary license from the securities market. Only companies are allowed to do it.

Each brokerage firm should maintain a certain paid-up capital, plus a required certain bank guarantee to be issued in favour of the concerned market.

The bank guarantee is Dh10 million, and each brokerage firm should give separate ones to Abu Dhabi Securities Market and Dubai Financial Market.

The money of the client should be placed in a separate trust account at an approved bank.
Brokers should not mix their client's money with their's under all circumstances. This is to protect investors against broker insolvency.

Brokers are obliged to register and segregate the client's investments so as to prevent mixing up and loss of the securities.

A very important prohibition comes from the rule that dealers are not, by all means, allowed to create securities for bank loans over their client's securities.

The broker, as an agent, should not put himself in a position where his personal interest conflicts with his duty to his client.

Conflict of interest are particularly acute in the case of financial conglomerates which comprise departments providing corporate financial advice to the issuer.

A manager of unit trusts and pension fund, an investment manager of discretionary accounts, a trustee of debt or conveyable issues, or syndicate agent bank - each owning duties to the principal or beneficiary and each potentially in conflict with its own interests or those of another principal.

The laws also should regulate the priority rules.

This happens in cases where a client orders a sale of a large block of securities, the price may fall and the broker may be tempted to sell his own securities first. If the client orders a large purchase, the price may go up and the broker may be tempted to buy fist. To control such overlap, the law should regulate the priority rules.

First priority should always be given to the investor, and the broker could be in the second or third priority according to the orders received. In all cases, the brokers should obtain the approval of the manager of the securities market before acting for himself.

The broker should not delay any order and should take the required steps to finalise the sale or the purchase. His immediate action is mandatory in all cases.

Undisclosed self-dealing is not allowed and, based on this, a broker may not secretly sell his own securities to the investor or secretly buy the client's securities for himself.

Such undisclosed activities are not allowed by law. This rule is very strict and should not be allowed even if the broker buys at the markets price.

Transparency is the golden rule in all brokerage activities.

These duties include:

A duty to act promptly on instruction.

A duty to obtain the best bargain reasonably obtainable.

A duty to warn clients, or unsophisticated individual clients, of the risks associated to the investment, particularly in cases of options and futures.

A duty of the broker to familiarise himself with the customers' financial and personal circumstances.

The laws always require agreements in writing between the broker and his investor client.

The agreement could contain description of the services to be rendered to the client, remuneration of the broker, disclosure of conflict of interest and risks warnings.


The writer is a legal consultant on banking and stock market laws.