A major principle in securities markets law, provides that trading in the market shall take place only through licensed brokers. Trading shall be confined to licensed brokers to ensure that the business is undertaken by professional, qualified and trained bodies with the aim of protecting investors.
The law allows the competent authority to issue regulations governing matters related to brokerage activities including, inter alia, duties and qualifications of brokers. Duties are towards clients, markets and penalties are imposed in case of violations or malpractices.
Generally speaking, the relationship between a broker and his client is basically a matter of trust and confidence. Due to this fiduciary relationship, there is a presumption that the broker shall act professionally and ethically to achieve all good results.
Based on such relations, there is a practice under which brokers open an account in their names on behalf of certain clients. The account is known as “trust deposit”, wherein a client gives the broker money to be kept in an account under the name of the broker and to be used for trading in securities on behalf of the client. The “trust deposit” signifies the apex in this relation and puts big burden on the broker.
However, there are rules governing “trust deposits” to be followed and strictly observed by the broker and the client. The trust deposit should be opened in the name of the broker, be in favor of the client, be kept secret and not disclosed to anybody, be used for trading in securities as directed by the client, should always be kept separate from accounts of the broker and should not be affected by dissolution or bankruptcy. Normally, the broker is given general directives regarding the “trust deposit”. However, the technical details such as what type of security to deal in and when and why to sell or buy, shall be left to the discretion of the broker because this is his area of professionalism. The purpose of having the “trust deposit” is to locate a certain amount by the client and to give the broker a green signal to use this money whenever he feels that is advantageous to clients. However, in case there are specific directives by the client, the broker shall act within these directives. Otherwise, his acts will be deemed ‘ultra vires’ and legally questionable.