The Hindu Business Line : ‘Don’t trade in F&O on recommended stocks’

In the proposal
Trading members to ensure minimum net worth of clients.
Should not allow fictitious accounts to execute transactions.
Clients’ funds or securities must be used only as prescribed.

Our Bureau

Mumbai, March 31 Trading members (brokers and brokerages) must ensure that no research analyst may purchase or sell any security issued by a company that the research analyst follows or transacts in the derivatives of such securities for a specified time period.

This is one of the directives in SEBI’s draft proposals for “improvement in sales practice” by members of stock exchanges.

In addition, the research analyst should not purchase or sell any security or derivative in a manner inconsistent with the research analyst’s recommendation as reflected in the most recent research report published by the member.

The analyst must also disclose in research reports and public appearances whether he or a member of his household has a financial interest in the securities of the subject company, and the nature of the financial interest.

Exposure limits

One of the other proposals is that exposure and turnover limits given by trading members should be commensurate with the financial details of the clients reported under KYC.

Trading members must ensure that their clients have a certain minimum net worth for trading in the derivatives segment. Proof of networth in the form of a networth certificate from a practising Chartered Accountant or acknowledgement of IT returns filed, would be required. Activities such as proprietary trading, investment banking, and research must be watertight activities for trading members, according to the proposals.

The markets regulator has also suggested that trading members should not allow establishment of fictitious accounts in order to execute transactions which otherwise would be prohibited or to disguise such transactions. Also, they should not execute unauthorised transactions nor use clients’ funds or securities otherwise than as prescribed.

In addition, trading members should not indulge in front running, which means that they should not execute transactions in their own account in securities ahead of making recommendations to their clients in such securities.

Information regarding their dealings with clients should be kept confidential by trading members.

Fair dealing

Trading members should ensure fair dealing with customers when making recommendation or accepting orders for derivatives contracts and new financial products.

Further, trading members shall not encourage or induce excessive trading or speculative activity in a client’s account which is not in accordance with the objectives, risk appetite and financial situation of the client involved.

Brokers agreed that these proposals are for the larger good, but the additional procedures required to be put in place would mean some loss of business in the short term. “This will put an end to a lot of risky speculative activity,” said one broker. SEBI has said that comments and suggestions on these proposals be made before April 15.