The Securities and Exchange Board of India (Sebi) on Tuesday proposed to introduce a new institutional mechanism for brokers, which would require them to ramp up checks and balances to prevent frauds and market abuse.
In a consultation paper, the regulator said there is no such provision mandating brokers to put in place systems to check malpractice, such as front-running, price manipulation, insider trading, spoofing, and mis-selling, among others.
The proposed norms require top management, including the MD, CEO, compliance officer and directors to be responsible for ensuring strong internal control and surveillance systems, and be held accountable in case of any lapses. This includes a strong whistle-blowing policy.
“Broker shall have appropriate systems in place to ensure their proprietary accounts are used only for the purpose of carrying on proprietary trades, which are in line with various regulatory requirements as have been laid down by SEBI/Stock Exchanges from time to time. There shall be no ‘lending’ of any proprietary accounts for facilitation of any unauthorised trading,” read the notification.
“The broker shall customise their trade surveillance systems and internal controls in a manner 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,” it added.
Brokers will be required to keep independent senior management up to date with observations, and any instances of suspicious activity has to be brought to the notice of the stocks exchanges immediately.
In addition, they shall be required to submit a summary analysis and reports on action taken to the bourses on a half-yearly basis.
Sebi has sought comments on the consultation paper by February 21.
