The Securities and Exchange Board of India (SEBI) has introduced significant amendments to the Stock Brokers Regulations of 1992, aimed at enhancing the framework for preventing and detecting fraud and market abuse in the securities market.
Systems for Surveillance and Internal Controls
Key managerial personnel and senior management, including Designated Directors, are required to implement robust systems for monitoring trading activities and internal controls to ensure regulatory compliance. These systems must be capable of detecting, preventing, and reporting potential fraud or market abuse by clients, employees, or Authorized Persons.
Obligations of Stock Brokers and Employees
Know Your Client (KYC) Systems: Stock brokers must maintain adequate KYC surveillance systems to verify client identities and monitor transactions.
Surveillance Systems: Adequate surveillance systems must be in place to monitor orders and trades to detect potential fraud or market abuse.
Documented Policies: Surveillance and internal control policies must be documented, defining employee roles, corrective actions, and reporting guidelines.
Customization: Surveillance systems should be tailored to the complexity of transactions and business activities.
Alert Thresholds: Reasonable thresholds for alert generation must be documented with clear rationale.
Periodic Review: The Board of Directors or equivalent authority must review and update systems at least annually.
Proprietary Accounts: Ensure proprietary accounts are used only for proprietary trades and comply with regulatory requirements.
Trading Terminals: Ensure trading terminals are used only by authorized employees or persons and are located at approved locations.
Detection Systems: Establish processes to detect potential mule accounts or suspicious activities.
Reporting Suspicious Activity: Employees must report any knowledge of fraud, market abuse, or suspicious activity to senior management.
Escalation and Reporting Mechanisms
Quarterly Review: The Audit Committee or equivalent authority must review compliance with the new framework quarterly.
Suspicious Activity Reporting: Stock brokers must report any suspicious activity to stock exchanges within 48 hours of detection.
Half-Yearly Reports: Submit summary analyses and action taken reports on suspicious activity, fraud, and market abuse to stock exchanges biannually.
Deviation Reports: Report any deviations in internal controls, risk management policies, and corrective actions to the appropriate authority and stock exchanges.
Guidance from Stock Exchanges: Seek guidance from stock exchanges on suspicious activities where violation of applicable law is unclear.
Whistleblower Policy
Confidential Channel: Establish a documented whistleblower policy providing a confidential channel for raising concerns about suspected fraudulent, unfair, or unethical practices.
Protection for Whistleblowers: Ensure adequate protection for whistleblowers.
Addressing Complaints: Complaints against the Board of Directors or key managerial personnel are to be addressed to the Audit Committee or equivalent body, while complaints against other employees are to be addressed to the Compliance Officer.
These amendments aim to strengthen the regulatory framework for stock brokers, ensuring a more robust mechanism for detecting and preventing fraud and market abuse in the Indian securities market.
