SEBI now wants to put the onus of prevention and detection of fraud and market abuse on the stock brokers. In a consultation paper, it has proposed to enact regulations and fix the responsibility on the brokers to detect, prevent market misconduct by their employees, associates and clients.
Experts say this would tremendously increase the cost of running operations for stock brokers and small players will go out of business.
According to SEBI, the list of probable instances and indicators of fraud or market abuse, which a broker’s system should be equipped to monitor, should include creation of 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, disproportionate trading activity vis-à-vis reported income, net worth, and frequent changes in KYC submitted by clients.
In SEBI’s view ,the MD and CEO, Compliance Officer, Principal Officer, key management person, Directors or analogous persons of the broker (“senior management”) should be held responsible to ensure robust, independent trade surveillance systems and internal control systems to ensure compliance with the regulatory requirements as may be prescribed by SEBI/ stock exchanges from time to time, to detect/ prevent/ report fraud or market abuse by its clients, promoters, employees (including senior management), authorised persons (APs), or analogous persons.
They shall be held accountable for non-compliance and negligence in implementing appropriate surveillance and internal control systems, SEBI has said. Further, the Audit Committee and board of brokerage or such other analogous bodies of the broker should review compliance with the provisions of this framework at least once a quarter and verify that the systems for internal control and reporting are adequate and are operating effectively.
According to SEBI, brokers should customise their trade surveillance systems and internal controls in a manner which is commensurate with the complexity of cases in question as well as its business activities. The thresholds for alerts for various scenarios should be set at a reasonable level and should be documented with clear rationale. SEBI has prescribed many other such stringent checks and balances.