A stockbroker firm plays a pivotal role in your journey of investing in stocks. Thus, it is of paramount importance for investors to be informed about the scope of a stockbroker firm. Having perceived the need to disseminate knowledge on the said topic, the article will focus on areas investors should bear in mind when working with a stockbroker firm. It is needless to state that it is a continuation of last week’s article. 
 

Financial positions of stockbroker firms are monitored periodically
The Colombo Stock Exchange (CSE) and Securities and Exchange Commission of Sri Lanka (SEC) monitor the financial position of stockbroker firms. For example, a stockbroker firm is expected to forward to the CSE, monthly financial statements prepared in accordance with the given format, within 20 days from the end of the particular month. A similar review will be undertaken annually. 
Constant monitoring undertaken by both entities will facilitate the effective functioning of stockbroker firms and thereby increase investor confidence. Constant monitoring compels stockbroker firms to adhere to the given guidelines while providing an excellent service to the clients (investors).   
 

Right to information 
As an investor you have a right to access certain information held by the stockbroker firms that would enable you to make informed investment decisions. For an example, it is a requirement that stockbroker firms handover their audited financial statements within four months from the end of the particular financial year to the CSE. It is important to bear in mind that the stockbroker firm is bound to disclose these audited financial statements to clients (investors) if requested. 
It is important to inculcate a proactive practice of referring to these statements as it will enable investors to determine the financial position of the stockbroker firms. In most situations investors select a stockbroker firms or continue to work with the firm with hardly any information about its financial position. Such practices could be unhealthy for intelligent decision-making.  
Further on, a stockbroker firms should furnish clients with adequate and appropriate information about its business, including contact details, services available to clients, the identity and names of employees whom the client may have contact.
 

Stockbroker firms should undertake responsible ways and means of advertising
Communicating the services provided by a stockbroker firm to the public should be undertaken within the stipulated boundaries and limitations. Accordingly, advertising should be accurate and should not mislead or entail claims that are not externally verifiable. Furthermore, advertising strategies should not disrepute the industry in general.
It is rational for stockbroker firms to adopt innovative and effective means of advertising. However, investors should be able to critically grasp the message that is disseminated prior to making investment decisions.  
 

Money received on account of a client should be maintained in trust for the benefit of such client
As an investor you are generally expected to deposit money with the stockbroker firms when investing in stocks. Did it cross your mind to question what happens to the money? 
The money received on account of a client is held by the stockbroker firms for the benefit of the client. 
At any given point of time, a stockbroker firm is expected to be able to identify the amount of money belonging to each client separately and is not expected to commingle money received on account of a client with its own funds or use the money for any other person other than for the client. Withdrawal of money from the client’s account is subjected to limitations. 
 

Maintenance of a separate account with a commercial bank to deposit client’s money
A stockbroker firm is expected to maintain a separate account (client’s account) in a commercial bank to deposit the money given by the client. The money deposited in the account is held in trust by the stockbroker firm for the benefit of its clients and the bank cannot exercise any right-off/ set-off against the money for any debt owed by the stockbroker firms to the bank.
 

Investment of money received on account of clients
A stockbroker firm may invest money received on account of its client in government securities through a primary dealer or commercial bank. Such investments should be held in trust for the benefit of the client. However, the stockbroker firm should maintain accurate records on all the investments. 
 

All stockbroker firms should have a management information reporting system
Stockbroker firms should have management information reporting systems in place which entail the features of a client trade information system and an accounting system. Ideally, the accounting system should be integrated with the client trade information system. The client trade information system encapsulates the facility to track the serial numbers of bought notes set off against each client’s payment, status of debtors and creditors, ability to classify debtors, processing overdue interest, etc.

On the other hand, the accounting system has the ability to generate up-to-date accounting records at any given time and the ability to generate balance sheet and income statements through the system at any given time.
Investors should entail a vast knowledge on the scope of these systems when interacting with a stockbroker firm. The need for such knowledge is strongly felt at a point of discrepancies. For example, if you have not received a bought note but a purchase is indicated in the portfolio, you could request the stockbroker firm to refer the system.  
 

Automated trading system and execution of orders 
When you forward your orders to the investment advisor perhaps you might wonder how it is transmitted to the CSE. It is done through the automated trading system (ATS). The ATS is designed to match buy and sell orders placed by the member firms of the CSE. Bid and ask prices are entered into a central electronic order book. During trading hours, orders are matched according to fixed rules and execution prices are set. Price and volume details of all completed transactions are electronically communicated immediately to all the members involved. 

Usually the CSE provides connectivity to the stockbroker firm to access the ATS trading terminal. The trading terminal performs three functions: display of market data, display of trader’s orders and executions and acceptance of new orders, amendments and cancellation of orders. 

However, a stockbroker firm cannot extend the ATS network beyond the primary location to which connectivity has been provided by the CSE. Orders are entered by the brokers (investment advisors) through the ATS trading terminals, which are then transmitted online to the ATS.
Investors are not provided direct access to this system. It is important to bear in mind that the ATS system is different to the Internet trading facility provided to investors by most stockbroker firms. 
On one hand, stockbroker firms/investment advisors are expected to observe due diligence when entering the orders given by clients. On the other hand, investors should at all times provide precise and accurate instructions to the stockbroker firm.  
 

Compliance officer and client’s investment
For investors, correspondence with the stockbroker firm is limited to the investment advisor and at times the documentation division that would assist in paper work. However, it is important for investors to bear in mind that the compliance officer plays a salient and decisive role in your investment. The compliance officer is expected to comply with, implement and maintain appropriate measures and procedures to ensure compliance with the law, rules and regulations administered or issued by the SEC, CSE, Central Depositary System (CDS) and the requirements of any regulatory authority, which are applicable to the stockbroker firm. 

The compliance officer is also expected to be independent of trading and sales operations. Accordingly, if a dispute arises with an investment advisor or any other official an investor should refer the same in writing to the compliance officer within a period of three months from the date of the disputed transactions. 

The compliance officer is expected to deal with the complaint and ensure that it is resolved expeditiously and satisfactorily.
An informed decision-maker will be able to safeguard his/her portfolio from unwarranted risk and thereby maintain a profitable portfolio.
 It is undoubted that the areas discussed will enable you to be more vigilant and informed when interacting with the stockbroker firm and thereby sustain a profitable journey of investing in stocks.