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[Podcast] Recommendations towards improving the law on stock brokerage activities in Vietnam

5 August, 2024

Keywords: securities, stock brokerage, stock market

Recently, in Vietnam’s stock market, there have been many disputes related to stock brokerage. Currently, the law on MGCK activities is relatively complete in terms of legal framework. Nevertheless, no matter how strict the law is, it cannot cover all cases. Within the scope of this article, the author has generalized stock brokerage activities in Vietnam. Through the method of analysis and synthesis in accordance with the current legal regulations, including laws, decrees, and circulars, this study evaluates the remaining shortcomings in the legal regulations of the MGCK profession. Thereby, a number of recommendations and solutions are provided to supplement and to improve regulations related to stock brokerage activities in our country.

Securities brokerage activities in Vietnam is one of the conditional business activities. In addition to providing securities trading services for individuals and organizations who desire to buy and to sell securities on the exchange, securities brokerage activities also connect investors, helping to attract and to circulate cash flow in the economy, improving the investment and business cultural environment and promoting new product development.

The exsisting inadequacies in legal regulations in stock brokerage activities

*Legal regulations on securities brokerage activities

In accordance with the current legal regulations, securities companies must both carry out business establishment registration procedures and register for securities business at the State Securities Commission according to the provisions of Article 71 of the Securities Law 2019 and Article 176. Decree 155/2020/ND-CP dated December 31, 2020. In the near future, the regulation should be amended: “When carrying out business registration procedures, securities companies only need to submit the securities business registration license issued by the State Securities Commission (SSC) along with an official dispatch to the business registration agency so that the business registration agency can update information on the National Information Portal”.

In addition, currently, in the Securities Law 2019, there is no official regulation on securities business conditions. Therefore, in order for the content of the securities legal system to be consistent, the Securities Law should supplement regulations on the conditions of securities brokerage business entities. Specifically, entities participating in securities brokerage activities must satisfy the following two mandatory conditions: “(1) Having a license to establish and operate securities business issued by the State Securities Commission, which clearly states that this entity is authorized to conduct securities brokerage operations, this license is also valid as a certificate of securities business registration, and (2) Having a legal representative with enough capacity and authority to sign contracts related to securities brokerage activities”.

*Legal regulations on charter capital of stock brokerage activities

In the current regulations on charter capital, securities companies that target to operate securities brokerage business on the basic stock market need a minimum charter capital of 25 billion VND whereas securities brokerage operations on the derivatives market need to have a minimum charter capital of VND 25 billion. The fact that the minimum charter capital is 800 billion VND is not enough to ensure risks for investors on the stock market.

Firstly, depending on the time, the fact that most of the stock market’s current daily liquidity averages from 10 to 15 trillion VND is quite small compared to the charter capital in current regulations. Secondly, the fact that the number of investors in the market continues to increase day by day indicates that the level of investor interest in the stock market in Vietnam is relatively large. Thirdly, Vietnam’s stock market is an emerging stock market, preparing to enter the frontier market. Market fluctuations will be strong, easily causing investors’ psychology. Therefore, a change in the direction of increasing the charter capital in the current Securities Law is necessary. The amount of increase needs to refer to many factors listed as: liquidity in the market, the number of non-professional investors and the actual situation of Vietnam’s stock market and so on.

*Legal regulations on stock brokerage contracts

Another problem is that the form of securities brokerage contracts on the stock market today is mainly a combination of paper contracts and electronic contracts. Regulations in the Civil Code recognize electronic contracts when considering electronic transactions as written transactions in Article 119 of the 2015 Civil Code. Those specialized laws should also have specific provisions in Securities Law regarding contract forms to avoid conflicts in securities brokerage relationships.

Consulting customers on opening MGCK contracts is not clear in the legal regulations. In accordance with the provisions of Article 13 of Circular 121/2020/TT-BTC dated December 31, 2020 of the Minister of Finance, securities companies must arrange securities brokerage staff to advise, to explain contracts and to carry out account opening procedures regarding securities transactions for customers. However, the content explaining the contract does not have any specific provisions on what to do; besides, there are no specific sanctions if this responsibility is violated.

In addition, Vietnamese law does not have regulations on model contracts for account opening and securities depository contracts. Many countries around the world are tending to apply model contracts in fields and industries where contract content has many complex regulations listed as securities, insurance, real estate, mergers and acquisitions (M&A) and so on. To deploy and to use model contracts in the securities sector in general and securities brokerage contracts in particular, it is necessary to develop and to have an appropriate implementation roadmap.

*Legal regulations on issuance of practice certificates

In the current regulations on securities brokerage practitioners, two following issues need to be considered: individuals who are granted securities brokerage practice certificates have professional qualifications in securities and the rights of securities brokerage practitioners at securities companies. The regulation of securities expertise only for individuals practicing securities brokerage is not completely clear. The situation of securities brokerage employees on the stock market operating without one securities brokerage practice certificate, leading to insufficient knowledge to perform consulting work for investors, and not being able to grasp essential information regarding the business to notify customers promptly, or lack of professional ethics in consulting, causing unfortunate consequences, are gaps that need to be overcome. Therefore, securities brokerage must be someone who clearly understands the Securities Law, understands the market and has professional ethics, which requires deeper regulations on professional qualifications.

*Regulations on ethics of stock brokerage practice and liability for compensation for damages

Regarding the ethics of securities brokerage practice, the current regulations have not been focused on by the law because the development of the content of the code of professional ethics in general and the code of MGCK practice in particular depends on the securities company according to the regulations. In Article 4 of Circular 121/2020/TT-BTC, the law only regulates basic responsibilities. This can cause professional ethical rules between securities companies to be different, causing a loss of uniformity on the stock market. Therefore, the Securities Law and sub-law documents should consider issuing a separate professional ethics document for securities business activities, including MGCK activities, financial analysis and fund management.

Regarding liability for compensation, most frauds in the stock market have a certain sophistication in the way they are carried out, take place quickly and result in high damage. However, the current methods are only performed at overcoming consequences when there is a violation, there are no regulations for preventive actions or measures to minimize damage in case of violations in securities brokerage. Therefore, in the coming time, the Government may consider stipulating a customer’s right to apply temporary emergency measures in civil and criminal proceedings to promptly limit risks and consequences in the future. In addition, there should be specific guidance documents as a reference basis to calculate compensation for investors in determining criminal and administrative signs of violations. Authorities and agencies performing judicial appraisal rely on it to quantify crimes of manipulation, insider trading or other violations on the stock market.

*Legal regulations on technical facilities

The regulations on physical facilities are an important condition for a securities business entity to be granted a license to establish and trade securities. However, the content of regulations for technical facilities has been rather sketchy. In the Securities Law 2019, specifically in Article 74, there is only a general regulation that the securities company has sufficient physical, technical, equipment, office equipment, and technological systems in accordance with the professional process of operations. Securities trading activities and periodically report facilities to the State Securities Commission. It must be affirmed that the securities and securities brokerage industry is one of the professions that requires various complex techniques in the process before, during and after making transactions. Therefore, in the content of Circular 121/2020/TT-BTC, there should be more detailed regulations on the minimum technical facilities that securities companies need to have to perform securities brokerage operations.

*Legal regulations on handling violations of stock brokers

One responsibility of a securities company is to arrange securities brokerage staff to advise, to explain contracts and to carry out procedures for opening securities trading accounts for customers according to the provisions of Article 13 of Circular 121/2020/TT- BTC. However, there has been no regulations on handling violations of irresponsible behavior in consulting and explaining contracts.

In Decree 156/2020/ND-CP dated December 31, 2020, there is only one content regulating a violation if not signing a written contract with the customer when providing services to the customer or signing a contract with customers does not have full content according to the law in Article 27; however, this is a regulation for securities investment fund management companies and branches of foreign fund management companies in Vietnam. Therefore, the relevant decree and circular can be considered to supplement administrative sanctions for irresponsible behavior in consulting and explaining contracts, with fines ranging from 50,000,000 to 70,000,000 VND.

The authority to handle violations has been procedural and not timely. The current reality demonstrates that the State Securities Commission does not have strong, highly enforceable powers listed as the right to summon subjects for confrontation. On the other hand, inspection and examination activities are functions of management agencies; therefore, inspection and examination are limited to subjects under the management of the State Securities Commission. However, for the violation of stock price manipulation in Article 211 of the 2015 Penal Code, the real violators may not be the investors who directly open accounts but rather the entities behind the provision of money, securities with the purpose of manipulating stock prices, providing information for stock trading, these subjects may not be domestic organizations and individuals but may be foreign organizations and individuals. Due to limited authority, the State Securities Commission must coordinate closely with the police to verify, to clarify and to handle manipulation and insider violations in the market. Therefore, it is necessary to give the State Securities Commission some methods to prevent violations.

Some recommended solutions to improve the law on stock brokerage activities in Vietnam

Not only does it play an important role in the economy in general and the stock market in particular, securities brokerage is also a necessary intermediary in transactions between issuers, securities companies and investors in the market. Through analyzing the regulations on MGCK activities in Vietnam, the authors have pointed out the remaining shortcomings in the policy, making recommendations to improve legal policies on securities brokerage activities in the upcoming time.

Firstly, review and synchronize legal regulations on securities brokerage activities. In particular, unify current regulations on securities brokerage in laws and by-law documents, especially regulations on handling violations of law in the Civil Code, Penal Code, Civil Procedure Code, Criminal Procedure Code, Law on Handling of Administrative Violations and related decrees.

Secondly, the law on securities and securities brokerage can consider proposing additional methods for exercising rights as follows: “Requiring agencies, organizations and individuals to provide information and documents related to subjects showing signs of violation, requesting credit institutions to provide information of bank account transactions of subjects showing signs of violation, request relevant organizations and individuals to assess this violation better”. These methods will contribute to increasing timeliness in limiting damage to victims.

Thirdly, increase charter capital of securities companies. Currently, the actual charter capital of securities companies is approximately 3,000-5,000 billion VND. For some large securities companies on the stock market, the charter capital can be up to 8,000-15,000 billion VND (Figure 1).

Figure 1. Top 20 securities companies with the largest charter capital on the Vietnamese stock market. Source: Ho Chi Minh City Stock Exchange 2021.

Increasing the charter capital will promote the improvement of competitiveness of securities companies, especially securities brokerage business activities, contributing to the sustainable development of the stock market. Besides, increasing charter capital contributes to making the market more transparent, attracting domestic and foreign cash flow.

Fourthly, regulatory solutions in new product development, including products on futures contracts and options contracts. Vietnam’s stock market in general and other derivative market in particular have a lot of room to develop new products. The interest of investors on the stock market in derivative products will be an important premise to continue building and deploying the next derivative securities products such as stock index option contracts, gradually diversifying products on the market. Therefore, the Ho Chi Minh City Stock Exchange (HOSE) and relevant authorities in the coming period need to continue to research and to develop new products, with specific regulations on securities brokerage consulting with these products before officially launching transactions on the market.

Fifthly, the issue of compensation for damages due to the fault of securities companies and securities brokerage employees in causing the loss of investors’ assets is very difficult to determine in reality as the value of securities on the market is constantly changing. The law should have regulations on methods of determination and should not limit compensation ceilings for violations in the field of securities because it will limit the rights of victims and the deterrence of the law. In addition, to protect their rights, investors should proactively read the regulations in the contracts signed with securities companies when registering to open a securities trading account, and proactively request careful instructions on the terms and conditions. unclear clause in the contract, especially the issue of compensation for damages caused by the securities company or securities brokerage employees.

Sixthly, change and improve the training and testing for securities brokerage practice certificates: First, adjust the training program framework to be appropriate and closely follow the actual work that arises. It focuses on imparting basic knowledge regarding securities brokerage business law and securities brokerage practice ethics.

Second, include the mandatory content of completing the training program of the Center for Scientific Research and Securities Training to obtain a professional certificate in order to take the exam to obtain the securities brokerage practicing certificate into the Securities Law as a prerequisite.

Seventhly, in general, currently, the subjects and those subjects that organize and carry out acts of violating the law in the field of securities are often educated individuals and organizations with a certain level of knowledge; A large number of long-time investors have extensive knowledge and are experts in finance, securities, and information technology; deepening social relationships. Therefore, criminal methods are carried out in a sophisticated manner, taking advantage of loopholes in the management, inspection and supervision of the stock market to commit violations. This is considered a hidden crime, taking place over a long period of time. When discovered, it causes great damage to the state budget; concurrently, it causes diverse difficulties in the process of detecting, investigating and handling cases by authorities. Therefore, there are two solutions: First is to recognize messages in securities brokerage groups as important evidence in cases of price manipulation and manipulation on the stock market. Second, there need to be regulations in developing competent and qualified securities brokerage human resources to prevent and stop securities violations in general and securities brokerage in particular.

Eighthly, the laws of some countries around the world have mandatory regulations for the development of securities investor protection funds on the stock market. Competent authorities can plan to build a securities investor protection fund as a special preventive solution for securities investors in Vietnam.

Please refer to Recommendations towards improving the law on stock brokerage activities in Vietnam HERE.

Author group: MSc. Nguyen Hoang Nam, Dr. Duong Kim The Nguyen – University of Economics Ho Chi Minh City (UEH)

This is an article in a series of articles spreading research and applied knowledge from UEH with the message “Research Contribution For All – Research For The Community”, UEH respectfully invites dear readers to look forward to the upcoming UEH Research Newsletter Insights #130 .

News and photos: Author group, UEH Department of Marketing and Communications