B Mirror Report: Investors in Bangladesh’s capital market remain vulnerable to fraud and financial irregularities as self-regulatory bodies representing brokerage firms and asset management companies struggle to ensure effective oversight of their members.

Despite allegations of misappropriation of investors’ funds against several brokerage houses and asset management firms, industry associations have been unable to play an effective role in preventing misconduct and protecting investors, market experts say.

They argue that self-regulation should go beyond promoting good practices and include the authority to enforce rules, investigate complaints and take disciplinary action against members involved in irregularities.

Bangladesh Securities and Exchange Commission (BSEC) Chairman Masud Khan has also stressed the need for associations to play a more active role, saying investor interests should take priority over those of their members.

The Association of Asset Management Companies and Mutual Funds in Bangladesh remains largely inactive, with many asset managers reluctant to join. Industry participants have raised concerns over its governance structure, under which each mutual fund has one vote, potentially giving greater influence to firms managing larger numbers of funds.

Some asset management companies have attempted to establish a new association, but the Ministry of Commerce has not approved the initiative. Khan said the BSEC would approach the ministry to seek an opportunity to establish an effective and active association for asset managers.

Fund managers, however, argue that alleged cases of fraud have mainly involved closed-end mutual funds. The number of such funds is gradually declining, while the regulator has stopped approving new closed-end funds.

They also say open-end funds offer investors greater flexibility, as units can be redeemed based on net asset value (NAV), reducing opportunities for misappropriation.

As of June this year, Bangladesh’s mutual fund industry managed assets worth around Tk 13,000 crore, of which Tk 9,330 crore was held in open-end funds. BSEC officials said the responsibilities of custodians had also been expanded under the existing mutual fund regulations.

The role of the DSE Brokers Association of Bangladesh (DBA), which represents brokerage firms, has also come under scrutiny. Despite the existence of the association, several brokerage houses, including Tamha Securities and Mashihur Securities, have faced allegations of misappropriating substantial amounts of investors’ money.

A BSEC official said brokerage associations in many countries perform a preliminary oversight role, but the DBA primarily focuses on protecting the interests of its members.

In the United States, the Financial Industry Regulatory Authority (FINRA) oversees brokerage firms, with investor protection and fair conduct in the securities industry among its principal objectives. The organisation has expelled firms over allegations involving fraud, unethical practices and misuse of customer assets.

DBA President Saiful Islam said the association does not have the authority to take disciplinary action against its members. According to him, a broker’s membership is suspended if its licence is suspended, but operational restrictions can become complicated until the regulator makes a final decision to revoke the licence.

Bangladesh also has an Investor Protection Fund, established in August 2000, to provide limited compensation to investors who suffer losses because of fraud or the misappropriation of money and securities by brokerage firms.

Under existing rules, brokers must contribute Tk 5,000 per quarter to the fund. In addition, 25% of the interest earned on deposits held in consolidated customers’ accounts must be transferred to the fund.

However, the maximum compensation available to an affected investor is Tk 5 lakh, which experts say may be insufficient to cover substantial losses.

Market experts believe stronger oversight, effective complaint resolution, meaningful disciplinary powers for industry associations and an expanded compensation mechanism are essential to restoring investor confidence in Bangladesh’s capital market.