Chapter 7 of Nepal’s securities legislation is a key framework that directly impacts securities operations, underscoring the need for firms to prioritise compliance under SEBON’s oversight to maintain trust and integrity.
This article highlights key elements of Chapter 7. Firms are encouraged to consult SEBON’s official guidance or legal advisors to clarify requirements, ensure full compliance, and avoid inadvertent violations.
What Are the Business Conduct Standards for Securities Firms?
At the core of Chapter 7 are the fiduciary obligations of securities businesses. Section 76 outlines nine essential principles that firms must follow to foster trust and confidence among clients and stakeholders.
These principles require companies to act fairly, exercise skill, and provide diligent services to investors.
The most notable provision in this section is the conflict-of-interest clause, which requires securities firms to disclose any conflicts of interest to their clients.
Even after disclosure, firms must continually prioritise the client’s interests, reinforcing their ongoing responsibility to uphold transparency and trust in the industry.
This ongoing obligation highlights the value of transparency and trust, reassuring securities firms that upholding these principles builds confidence with regulators and investors.
Additionally, firms are required to provide clear information about investment products, educate their clients about potential risks, and maintain detailed records of all transactions.
The emphasis on staff training reflects the need for skilled personnel to manage customer relationships and ensure regulatory compliance.
What Are the Documentation Requirements for Securities Transactions?
Under Section 77, securities firms must ensure thorough documentation for every transaction, helping them feel responsible and diligent in protecting investors and maintaining market integrity.
Before conducting any securities transactions, firms must complete procedures for investor identification, account opening, and money transactions. These processes help maintain transparency and security in the market.
A critical part of the documentation process is the contract note. Firms must issue a contract note for every purchase, sale, or exchange of securities, clearly documenting the details of each transaction. This must be done before the market closes the following day.
Section 77(3) specifies nine mandatory items that must be included in every contract note. These items provide clarity and transparency regarding the type and value of the securities involved, the parties to the transaction, and the commission or fees charged.
By documenting these details, securities businesses create an audit trail and ensure customer protection, which also serves as evidence of compliance during inspections by SEBON or auditors.
How Are Financial Records Maintained and Client Funds Protected?
Section 78 focuses on the financial health and record-keeping standards for securities firms. Segregating client funds reassures the audience that investor interests are protected and that their funds are secure.
Firms must maintain separate accounts for client money, ensuring that it is not mixed with the firm’s operational funds.
This segregation is a critical investor protection measure, preventing the misappropriation of funds and providing a safety net in case the firm faces financial difficulties.
In addition to client money segregation, firms are required to keep accurate financial records that reflect the true state of their business.
Maintaining accurate financial records that are readily available for inspection by SEBON or auditors reinforces your commitment to transparency and accountability, fostering trust with clients and regulators.
What Role Does Insurance Play in Securities Business Regulation?
Under Section 79, securities firms are required to obtain insurance for their business activities, excluding agents.
This mandatory insurance helps mitigate the risks associated with securities trading, providing a financial cushion in the event of unforeseen losses or liabilities.
While SEBON determines the exact insurance requirements, this provision highlights the recognition of inherent business risks in the securities sector.
Excluding agents from this requirement reflects their separate roles and lower exposure to financial risk. However, agents must still comply with all other regulations under Chapter 7.
What Are the Auditor Appointment and Reporting Requirements?
From the selection criteria for qualified auditors to the detailed protocols for reporting findings, each step plays an integral role in maintaining the integrity of financial statements.
Let us explore the specific requirements that govern these vital functions.
Independent Auditing Standards
Sections 80 and 81 outline strict rules for auditor appointments. Securities firms must choose auditors from a list approved by SEBON.
These auditors must meet specific qualifications to ensure they provide objective scrutiny of the firm’s operations.
Independence and Transparency in Auditing
To maintain independence, the law disqualifies any director, shareholder, or officer of the firm from serving as its auditor.
Similarly, employees of stock exchanges cannot function as auditors for the firms they oversee. These provisions ensure that audit functions remain impartial and that firms are regularly and fairly evaluated.
Notifying SEBON of Auditor Changes
Firms must notify SEBON of any changes in their auditor relationship, including the appointment or removal of auditors.
This requirement ensures transparency and enables SEBON to monitor changes in audit practices that could signal emerging issues.
What Are the Financial Reporting Obligations for Securities Firms?
Securities firms play a crucial role in the financial markets by facilitating the buying and selling of securities.
To ensure transparency and maintain investor trust, these firms are subject to a comprehensive set of financial reporting obligations.
Section 82 requires that securities businesses submit audited financial statements within three months of the end of their fiscal year.
These documents, which include profit and loss accounts, balance sheets, and cash flow statements, help regulators assess the firm’s financial health.
Failure to meet the financial reporting deadline results in fines ranging from 5,000 to 25,000 rupees.
However, if the audit is delayed, unaudited accounts can be submitted temporarily, but the firm must provide audited accounts shortly after. This policy balances the need for timely reporting with practical challenges auditors may face.
Securities firms are required to submit their financial statements to both SEBON and the relevant stock exchange.
This creates a dual reporting obligation, reflecting the shared oversight role of SEBON, the regulator, and the stock exchange, the market operator.
What Is the Auditor’s Role in Reporting Violations?
Section 83 stipulates that auditors have a dual reporting obligation. If they uncover any violations of financial bylaws during an audit, they must report these directly to SEBON.
This requirement places an additional responsibility on auditors to ensure that regulatory breaches are swiftly brought to light.
This provision creates a potential conflict for auditors, as they must balance their duty to maintain client confidentiality with their obligation to report violations to SEBON.
Securities businesses should be aware that auditors have a legal duty to prioritise regulatory compliance over client interests when violations are detected.
What Are the Practical Implications for Securities Firms?
For securities businesses, compliance with Chapter 7’s provisions presents both operational challenges and opportunities for improvement. Key implications include:
- Customer Protection - Securities firms must implement comprehensive systems to ensure that customer interests are prioritised. Staff training on conflict management and providing transparent information is crucial.
- Transaction Documentation - Efficient systems are needed to ensure contract notes are issued accurately and promptly, reducing errors.
- Financial Record Keeping - Implementing systems that keep client funds separate from business funds is essential for protecting customers and maintaining transparency.
- Auditor Relationships - Securities firms must recognise the importance of independent auditors and manage their relationship with auditors carefully to ensure full compliance with regulations.
- Timely Financial Reporting - Meeting deadlines for financial reporting requires proper planning and coordination with auditors to avoid penalties.
Conclusion
Chapter 7 establishes a comprehensive regulatory framework for securities business operations in Nepal. By setting clear standards for business conduct, transaction documentation, financial record keeping, and auditor oversight, the legislation ensures customer protection, market transparency, and regulatory accountability.
While compliance presents challenges, particularly around maintaining accurate records and meeting reporting deadlines, it provides significant benefits by promoting trust and stability in the securities market.
Securities businesses must invest in robust compliance systems to meet these regulatory requirements. Firms should regularly review the prescribed rules and implement practices to ensure compliance with both regulatory standards and investor expectations. Additionally, maintaining open communication with regulators and auditors will be crucial for navigating Nepal’s evolving securities market.
