Many people are aware that brokers work on stock exchanges and primarily deal with trading various securities, but few truly have a clear understanding of who brokers are, why the profession is considered prestigious, and what exactly brokers do.
Who can become a broker?
To begin with, let us define who a broker is. A broker acts as an intermediary between a seller and a buyer in the securities market. In accordance with the legislation of the Republic of Kazakhstan, individuals may conduct transactions in securities only through a licensed broker, except in cases expressly provided for by law. This may be done only through a broker — a professional market participant who carries out transactions in financial markets on behalf of and in the interests of the client. A broker must hold a licence to carry out activities in the securities market and be a direct participant in the stock exchange. A broker does not become the owner of the securities acquired for the client and is remunerated for their services in the form of commission fees. The terms and procedure for the client’s payment of the broker’s remuneration for services in the securities market are determined by the broker’s internal documents and/or by an agreement concluded between the broker and the client.
A brokerage organization authorized to maintain clients’ accounts as a nominee holder shall be established and operate in the legal form of a joint-stock company. A brokerage organization without the right to maintain clients’ accounts may operate in the form of a limited liability partnership.
The requirements regarding the organizational and legal form and the conditions for conducting such activities are established by the legislation of the Republic of Kazakhstan and the regulatory legal acts of the authorized authority. Individuals and legal entities, whether residents or non-residents of the Republic of Kazakhstan, may act as founders and shareholders of a brokerage company, subject to the restrictions established by the legislation of the Republic of Kazakhstan. The minimum authorized capital of a brokerage organization is determined by the legislation of the Republic of Kazakhstan, including the Law of the Republic of Kazakhstan “On Joint-Stock Companies”.
The requirements regarding equity capital, prudential standards, and other mandatory financial indicators are established by the Law of the Republic of Kazakhstan “On the Securities Market” and the regulatory legal acts of the authorized body, including the Rules for establishing prudential standards and other mandatory norms and limits to be observed by brokers and/or dealers.
To obtain a licence, an applicant must comply with the following qualification requirements:
- the availability of a business plan approved by the applicant’s governing body for the following three years, which shall set out the objectives for obtaining the licence, the financial plan for the first three financial (operating) years, the investment policy, the sources of financing for the company’s activities, etc.;
- the availability of software, technical facilities, and other equipment necessary for carrying out activities in the securities market;
- the existence of an organizational structure that complies with the requirements of the legislation of the Republic of Kazakhstan;
- the existence of internal regulations on the applicant’s internal audit service.
A licensee may conduct activities in the securities market only subject to the existence of internal documents establishing the following:
- the conditions and procedures for conducting activities in the securities market;
- general terms for conducting transactions;
- the rights and obligations of the licensee and its client, and their respective liability.
To obtain a licence, the applicant shall submit to the Agency for Regulation and Development of the Financial Market of the Republic of Kazakhstan (hereinafter - authorized body), via the e-Licensing Information System, the documents listed in the Rules for granting, suspension and revocation of licences for professional activities in the securities market, approved by Resolution No. 40 of the Board of the Agency of the Republic of Kazakhstan for Regulation and Development of the Financial Market as of March 30, 2020. The licence shall be issued by the authorized body within the time frame established by the Rules for granting, suspension and revocation of licences for professional activities in the securities market, approved by a resolution of the Board of the authorized body.
Brokerage activities are subject to state regulation, control, and supervision by the authorized body.
Is brokerage activity subject to supervision?
Brokerage activities are subject to state regulation, control, and supervision by the authorized body. Brokers are required to submit reports on their securities market activities to the authorized body, with the frequency and procedure for submission established by the regulatory legal acts of the authorized body.
In addition, the authorized body exercises control and supervision through inspections and other forms in accordance with the Law on state regulation, control and supervision of the financial market and financial organizations. Inspections are conducted on the basis of risk assessment and include unscheduled and documentary inspections of supervised entities, carried out either comprehensively or selectively with respect to specific aspects of their activities.
The authorized body also exercises other forms of control and supervision, including by analyzing information and reports submitted in accordance with the requirements of the legislation of the Republic of Kazakhstan, analyzing the activities of financial organizations to identify factors affecting the deterioration of their financial condition (remote supervision), etc.
The grounds for conducting inspections of brokers’ activities may include the following:
- investors' appeals;
- complaints from securities holders;
- complaints from professional participants in the securities market and professional organizations;
- a court ruling, a prosecutor’s order, or a decision of an inquiry body or pre-trial investigation authority to conduct an inspection or to involve employees of the authorized body in such inspection;
- irregularities identified by the authorized body during the review of reports on a broker’s activities;
- the existence of information indicating market manipulation, transactions involving issued securities and other financial instruments using insider information, as well as the use of commercial and other legally protected confidential information;
- other facts indicating violations of the legislation of the Republic of Kazakhstan by a broker that have become known to the authorized body.
An inspection is conducted on the basis of an inspection order approved by the head of the authorized body, as a rule, at the organization’s actual location on working days. Following the inspection, a report is drawn up, and for each identified violation the authorized body applies supervisory measures and/or sanctions.
On what grounds may a brokerage licence be suspended?
Based on the results of scheduled and unscheduled inspections, the authorized body may apply supervisory measures provided for by the legislation of the Republic of Kazakhstan, including suspension of the licence. The authorized body may suspend a licence for a period of up to six months in the following cases:
- identification of inaccurate information contained in documents submitted for obtaining a licence or for the review of a broker’s activity report;
- failure to provide information on amendments to the documents submitted for obtaining a licence;
- failure to comply with qualification requirements;
- violation of the legislation of the Republic of Kazakhstan governing activities in the securities market, as well as of the broker’s internal documents;
- failure to comply with the requirements of limited remedial measures imposed by the authorized body;
- failure to provide a letter of undertaking at the request of the authorized body;
- refusal to enter into a written agreement with the authorized body;
- the existence of a written application for voluntary suspension of the licence;
- failure by the broker to carry out the activity for which the licence was issued for a period of six months or more;
- failure to comply with the requirements established by the legislation of the Republic of Kazakhstan regarding the submission of information on securities market activities to government agencies;
- engaging in activities prohibited or restricted for brokers;
- violation of the requirements relating to the approval of the broker’s senior personnel;
- systematic violation (three or more times within the preceding twelve calendar months) of the requirements set out in the Law of the Republic of Kazakhstan "On Counteracting the Legalization (Laundering) of Proceeds from Crime and Financing of Terrorism".
Brokers whose licences have been suspended shall, within the prescribed period, remedy the identified violations and submit a report thereon to the licensing authority. If the broker’s report is reviewed positively, the suspended licence may be reinstated.
On what grounds may a brokerage licence be revoked?
The authorized body may revoke a licence for brokerage activities in the securities market in the following cases:
- failure to eliminate the grounds for suspension of the licence;
- systematic violation (three or more times within the preceding twelve calendar months) of the legislation of the Republic of Kazakhstan governing activities in the securities market, as well as of the broker’s internal documents;
- systematic failure (three or more times within the preceding twelve calendar months) to comply with the orders of the authorized body;
- a repeated violation within the preceding twelve consecutive months of the requirements set out in the Law of the Republic of Kazakhstan “On Counteracting the Legalization (Laundering) of Proceeds from Crime and Financing of Terrorism”, for which a sanction in the form of licence suspension has been applied;
- involvement of licensees in transactions related to money laundering or the financing of terrorism;
- on other grounds provided for by this Law and other legislative acts of the Republic of Kazakhstan.
Upon termination of the licence, the licensee shall return the licence to the licensing authority within 10 working days.
