Market regular SEBI has proposed a mechanism for brokers to ensure the detection and prevention of fraud or market abuse by way of amendment to the broker regulations. In this regard, SEBI has floated a consultation paper, which puts the responsibility on stock brokers to identify and keep a check on fraudulent practices.
The consultation paper has sought views from market participants on a proposal, which requires broking firms and their senior management to be accountable for fraud or market abuse. SEBI says that currently there are no specific regulatory provisions that cast responsibility on brokers to put in place systems for the detection and prevention of fraud or market abuse.
Indicators of such frauds that the broker’s system should be equipped to monitor, as per SEBI, are the creation of the misleading appearance of trading, price manipulation, front running, insider trading, mis-selling, unauthorised trading, including facilitation of ‘mule’ accounts that act as a front for unauthorised trading, pump and dump, spoofing, among others.
Under the proposed regulatory framework, SEBI says senior management i.e. CEO, MD, compliance officer, principal officer, KMPs, directors or analogous persons of the broker will be responsible to ensure robust, independent trade surveillance systems and internal control systems. "They shall be held accountable for non-compliance and negligence in implementing appropriate surveillance and internal control systems," says the regulator.
The audit committee and board of the broker, or such other analogous bodies, will review compliance with the SEBI framework, at least once a quarter and will verify that the systems for internal control and reporting are adequate.
The broker will also have in place robust trade surveillance systems and internal control procedures to detect potential fraud or market abuse by its senior management. Standard operating procedures (SOPs) will document trade surveillance policies and procedures, roles and responsibilities and guidelines.
It says the board or equivalent of it will review and update the systems, processes, and control procedures regularly, including the adoption of automated trade surveillance systems to enhance the monitoring of trading activities. The broker also will have appropriate systems in place to ensure proprietary accounts are used only for the purpose of carrying on proprietary trades, says the regulator. “There will be no ‘lending’ of any proprietary accounts for facilitation of any unauthorised trading, says the market regulator.”
Besides, the broker will set up a well-documented policy that sets out the availability of whistle-blowing channels, the process for raising concerns about suspected fraudulent, unfair or unethical practices, violations of regulatory or legal requirements, governance weaknesses, etc, by stakeholders, including employees without any fear of punishment or unfair treatment and procedures to ensure adequate protection of whistleblowers, and the procedures to handle whistleblowing complaints, says SEBI.
