On a list of Broker Rule Violations.

1. The SET fines Seamico Securities Public Company Limited an amount of one million baht plus an amount equal to the brokerage fees earned by the company during the 10 business days between March 10 23, 2000. These penalties have been imposed for violating Clause 12 of the Stock Exchange of Thailand Regulations Re: Brokerage or Agent's Fees for the Trading of Listed Securities (No.1), 1997 dated October 31, 1997.

In this case, on November 1998, the company, Mr. Nuprapat Snidvongs Na Ayudhaya, Mrs. Nitaya Vanichkulpitak and Mrs. Thiranutch Supanurak involved in paying money, giving assets or providing other benefits to customers, in connection with securities trading deals, beyond the normal provision of service to customers in the operation of a securities business.

2. The SET prohibits Mr. Nuprapat Snidvongs Na Ayudhaya from working as an executive of Seamico Securities Public Company Limited for a period of one year for participating in violating Clause 12 of the Stock Exchange of Thailand Regulations Re: Brokerage or Agent's Fees for the Trading of Listed Securities (No.1), 1997 dated October 31, 1997.

3. The SET prohibits Mrs. Nitaya Vanichkulpitak from working as an executive of Seamico Securities Public Company Limited for a period of one year for participating in violating Clause 12 of the Stock Exchange of Thailand Regulations Re: Brokerage or Agent's Fees for the Trading of Listed Securities (No.1), 1997 dated October 31, 1997. 4. The SET suspends marketing officer license and authorized officer registration of Mrs.Thiranutch Supanurak for a period of one year for violating Section 1 and 2 of Clause 7 of the Stock Exchange of Thailand Regulations Re: Marketing Officer License, Clause 12 of the Stock Exchange of Thailand Regulations Re: Brokerage or Agent's Fees for the Trading of Listed Securities (No.1), 1997 dated October 31, 1997 and Clause 1.1.4 of the Stock Exchange of Thailand Notification Re: Standards for Securities Business Operation Concerning Documentation and Operation Procedures dated January 18, 1996. In this case, this marketing officer participated with the company in making money payments, giving assets or providing other benefits to customers, in connection with securities trading deals, beyond the normal provision of service to the customer in the operation of securities business. This marketing officer also allowed another person to trade securities in place of a customer without possessing the customer's power of attorney.

5. The SET suspends marketing officer license and authorized officer registration of Mr. Sippakorn Kawsa-art, the officer of Adkinson Securities Public Company Limited from working as a marketing officer and an authorized officer for a period of nine months. This marketing officer is penalized for violation of the Stock Exchange of Thailand Regulations Re: Marketing Officer License dated August 15, 1994, Clause 1 and Clause 6 about the Principles of Members' Code of Conduct and Clause 5(2) and Clause 2.1.1 about the Core Rules of Members' Code of Conduct stipulated in the SET Board of Governors Notification dated January 12, 1995. In this case, the marketing officer transmitted trading orders by using trading information of customers for the benefit of other concerned persons, and thus caused the customers to lose benefits.

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An Insider View.

I hope the above has not rocked you to sleep, so here are some a more colorful passages written by a long experienced insider. This person has worked for many years as a local broker. He gave us the following observations on condition we not release his name. Here then are some open, frank and insightful comments by a seasoned insider:

"It is sad that Thailand is one country where the SEC and, to a lesser extent, the SET are comprised of bureaucrats who have no prior experience in financial markets - the very real danger is that the two bodies are not aware of the main pertinent issues affecting brokerage firms.

Let us first set the scene here in Thailand, before we discuss the issue

further: there used to be 50 full brokers, and up to 15 sub-brokers before 1997. The main source of the SET's income was derived from selling seats (last 5 seats were Bt300m each, the most expensive in the world at US$12m old money), and from a SET fee of 0.005% levied on every transaction, and paid by the broker from his commission income.

The SET was wealthy enough to plan its wonderful new Headquarter building next to the Queen Sirikit Convention Centre. SET officials had plenty of IPOs to approve….times were good indeed.

The crash changed everything - brokers collapsed, the market tanked, became marginalised in the emerging market context, volumes (and SET fees) plummeted, no IPOs were planned, no further seat sales could ever be imagined; dark times indeed.

A previously un-harnessed source of income was regulatory infringements, and this was to become very important going forward. At the same time the SEC was blamed for many of the brokers woes due to poor compliance control. In other words, the cowboy style of running Thai brokers had to change and now.

Both regulators looked abroad for inspiration, and came to adopt myriad rules and regulations that swelled compliance handbooks - new regulations quickly were adopted, often from various foreign exchanges, irrespective of local adaptability or suitability. This produced farcical situations that made many observers shake their heads.

Some examples :

1) Thailand was the only country in the world where a university degree was needed in order to be a broker - even a decade or two of experience was not important - a 20 year old graduate had a greater right to be a broker than a grizzled 50 year old veteran! There were some exemptions - you could be a full director, or have 7 years unbroken experience. In this example, "unbroken" is the key word - even one week between jobs at any time in those 7 years signified a "break". This archaic rule was dropped in the 2Q. ‘00 after much lobbying by foreign brokers who were not allowed to continue running some of their most experienced salesmen and traders.

(Thaistocks.com adds that in the US it is nearly impossible to be hired as a new broker unless a university degree is at hand. What is odd here is that they made it retroactive to all existing brokers.)

2) New compliance rules on account opening forms became insufferable: There had to be a hard copy of all signatories to an account - the global trend for many banks and larger funds is to provide a micro-fiche (micro-film) of all signatories. That is not acceptable to the SET. Furthermore, notarized passport copies of all signatories had to be provided - anyone living in Thailand knows the Thai fascination with passport copies, but in the international context to ask for personal passport copies of employees of limited companies is a joke - and quite correctly many clients steadfastly refuse to provide this very personal document.

The SET/SEC rationale for this request - it is the only way to prove that a signatory really exists!

Notarized copies of the Memorandum and Articles of Association had to be provided - if the client was a sovereign government investment vehicle, then these documents do not exist - the SET/SEC are not flexible enough to understand this. The broker gets fined for incomplete documentation. Even if a single document is not duly notarized (signed) then the entire account opening form is incomplete.

3) The "sales license" exam is required of all marketing officers - the test is administered by an external organization (Association of Securities Companies - ASCO), with no supervision from the SET/SEC. The Thai version was first offered in 1995. The marketing officer first show to have a university degree (in any subject!) before applying for the test - the degree requirement was recently dropped. The candidate then attends a week-long course, for which his/her company pays.

The exam then follows, and the required pass rate is 67%. The test may be repeated as many times as needed, but the candidate is not allowed to speak to any clients before he/she passes. That is fine so far, but a problem arises in the English language test, which was first offered in December 1998.

For the avoidance of doubt, I am the only foreigner that I am aware of that has passed the exam - correct me if I am wrong. The English exam was offered in December, but without a course, and without study materials - how I happen to pass, I just don't know! My firm was fined for me not having a sales license in 1998 – because I did not have a license until December.

We protested that the test in English was only available in December, and I was the first foreigner to do it in English. But the regulators maintained that the fact of the matter was that I did not possess a license in 1998, availability of the test aside, and therefore the fine was due. No appeal was allowed - fact was fact – no license meant a fine - their regulations were clear, they said.

As of August 2000 there is still no course, or materials, in English - the English exam is poorly translated with typos and gross grammatical errors, and worst of all, littered with inconsistencies. For example, when asked to comment on the correctness of a sentence or paragraph, the choices are: a) correct, b) false, c) all of the above, d) none of the above. A simple-minded person could even see that c & d are technically not possible. I hear that Nomura is going to challenge ASCO and the SET on the matter of poorly conducted exams.

The list of anecdotes can go on for pages, but in the interests of brevity I will curtail them here. However, the fact remains that, as with so many things in Thailand, the idea is good, but the execution is poor. Real professional compliance is needed in this market, but it must be in an orderly, transparent, fair, and beneficial fashion.

The scene has changed much since the crash - there are now only 27 full brokers, and 2-3 active sub-brokers. 24 of the brokers are wholly or at least partially owned by foreigners - this fact is crucial in understanding this essay. Foreign firms generally are knowledgeable in the field of compliance, and the regulators do feel that the level of compliance is higher in foreign firms than the few remaining local firms. This is true.

However, this consequently means that the regulators in their quest to "improve" the compliance of brokers in Thailand start at the local firms. That is also fine. As mentioned above, the regulators are not staffed by market professionals, and this causes huge mis-communication during their audits of brokers.

There is a knowledge gap between the SET/SEC regulators and the brokers put quite simply: the auditors do not fully appreciate the terminology nor the business itself of brokers. Some more anecdotes:

1) There is a requirement to time-stamp, or record, orders as they come in and are executed. So, a buy order of 100 BBL is received at 3.45, and executed one minute later. Fine, no problem so far. However, institutional orders are large, and there exists in broker terminology the term "careful discretion" - that means spread out the order over the trading day, and gun for the average. So, the order may be received at 10.30, but the fact that the execution only happens up to 6 hours later has caused a problem, even with careful explanations. This is, to be fair, slowly being understood.

2) There is a need to have a record of every order, and so far the only two mediums for communicating orders was the phone (all calls should be taped), or fax (all orders must be kept safely). There was in the beginning no provision for emails (now this is ok), but there still exists no clear provision for verbal orders - if the client is in the office, or a marketing officer sees his/her client over lunch/dinner, there is no record of a given order, except in the marketing officer's memory - however, the regulators may maintain, and do, that the marketing officer is dealing in a discretionary manner on that account which then is punishable by a fine.

The regulators maintain that the marketing officer must request the client repeat the order expressly over an approved medium. In reality this is embarrassing and time-consuming (eg, "Thanks for the 10,000 BBL order, but can you call me again in 20 minutes to confirm.......")

3) New regulations split the roles and functions of a) retail marketing officers, b) Thai institutional officers, c) Foreign institutional officers. That is fine, although b&c should really be put together - institutional orders are executed in a similar fashion irrespective of whether they are Thai or Tanzanian! No officer is technically allowed to speak to another group - answering a colleague's phone is not permitted. This causes very real problems for a small broker.

4) When there is a late delivery of stock from a client, for whatever reason, there is a SET fine levied on the broker which must be passed onto the client. This may not be paid by the broker, as for example an interest charge for a late payment may be paid by a broker on behalf of a client (the broker merely "waives" the interest charge). Any attempt to pay the SET fine on behalf of clients is deemed a "rebate", which is adjudged a heinous offence, and subject to draconian fines. The brokerage industry is fiercely competitive, and in the interest of good clients relations brokers would like to accommodate the clients - this is true where the fine is so small that the transfer of funds and the relevant custodian bank charges are greater than the actual fine.

The two regulators should, and do, act independently of one another - consequently brokers can expect at least one audit from each body per year. Unfortunately, each body has a different understanding of code violations, and indeed they have differing codes. Also, they have differing schedules of fine and sanctions. The SEC has recently revamped their sanction and fines list, and being the senior of the two regulators, have higher fines, and the power to expel marketing officers, directors, and even whole firms.

The SET Board is comprised of 11 members, of which 5 are brokers and 1 is a mutual fund manager - thus the SET is subject to heavy lobbying by the market players, and is therefore more accommodative towards the industry.

There has at least been anecdotal evidence that the independent firms have been audited more swiftly and thoroughly by the regulators, and have borne a higher level of fines, as they are easier to audit, and compliance irregularities are easier to uncover. Certain international departments of larger brokers have yet to be audited at all - management steers the regulators away from the international departments and towards the larger local retail departments, and consequently the rebating phenomenon continues without respite at the larger brokers.

Also, the larger the broker, the harder it is for sweeping reform to take hold - there is a requirement to actually split the dealing room into three separate sections for retail, local institutions, and foreign institutions - small brokers are pressured aggressively into immediate compliance, and fined if not compliant, however, the larger brokers with their bull-market vintage dealing floors would find it impossible to comply, and so do not. One particular broker has an atrium dealing room with a viewing gallery that clearly cannot physically be split with concrete walls.

The solution? Swallow the fine, if it should come to that - for a larger broker it matters very little that small fines are payable. Some firms even happily pay the fines pertaining to lack of sales licenses, as they feel the fine is small relative to the worth of keeping the salesman on the desk, rather than being absent for study leave - this is especially true in the case of foreign firms, where there exists no chance of passing the exam anyway, or the salesman is not permitted to take the test due to lack of university degree.

For a small firm 10 infringements, and the fines they bring are a huge cost - for a large firm, 20 fines are small in relation - one can assume that the bigger the firm, the more infringements are undiscovered. The larger broker has, simply put, more clout to stand up to the regulators.

Witness the phenomenon of license-less marketing officers at the larger houses, and the incidence of rebating at the larger houses - those infringements are endemic, yet with relatively few exceptions, the bigger brokers escape punitive fines. Hyperbole?

Consider this: for the 2^nd quarter of FY2000, one of the top five brokers had an average commission of 0.248% - that is calculated by their market share (disclosed by the SET), the volume traded on the SET for that period (disclosed by the SET), and the P&L (announced by the SET) - the firm's volume divided by the brokerage income points to the average commission - the significance? Well, the mandated minimum commission rate as stipulated by the market regulators is 0.3% for institutions and 0.5% for retail investors.

So, for this broker there is heavy rebating going on. That is illegal. However, there seem to be no sanctions forthcoming against this broker. So far this year Asset Plus was the first audit by regulators, then ZMICO, then ASL. I am not sure what the order was after that - they only audit one at a time due to personnel constraints.

I guess I was making the point that the regulators will be aggressive and inflexible with everyone, and I cannot imagine that SONE or AST or any of the big boys will escape any fines - I tried to show how easy it was to get fined - but I must stress that it is easy to audit, say example Asset Plus, with only about 12 people in the dealing room, and 500 securities accounts, rather than SONE with many offices, 600 employees, and 20,000 accounts.

Look, everyone has small infringements - I expect that ALL brokers will be on the fines list by the end of the year - however, I doubt that any big broker is going to get nabbed for rebating - for one, the brokers are hiding all the evidence, and secondly, the regulators would just not know where to start looking.

Without expressly being called double-standards, there certainly is a warm feeling of comfort and invincibility about being a larger broker. This is the situation at the current moment in time, but it will be increasingly difficult to maintain the status quo, even for the larger firms, as compliance regulations and audits are stepped up. One can only hope that the regulators do not snuff out commonly accepted business practices in their quest to maximize fine revenue at the expense of brokers.

Perhaps a more aggressive move to liberalize all facets of the Thai stock market will be a panacea for most of the market's ills. However, that is another story...."

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We are not surprised that the SET is going after the easy targets, instead of exercising their powers on violators of transparency like D-Mark or pushing for real changes in regulations like share-buybacks (treasury stock) it is much easier to nit-pick brokers, and they have an incentive as it provides a badly needed new revenue scheme.

Yet….

We would not overreact to this dire account on how things seem to be "grinding" inside this industry. Perhaps this is too close of a look…perhaps we go too deep here by publishing this? Just remember, you are not buying or investing or even considering working in this industry! But you are hopefully investing in the many secondary "value shares" we have written about extensively again and again at our site. The broker is just to be "used" to get you these shares; you are neither marrying them nor the SET/SEC. Any comments are most welcome.

Best Regards to all our Valued Subscribers,

Paul A. Renaud.

www.thaistocks.com