SEBI mandates stock brokers to implement systems to prevent market abuse

The Securities and Exchange Board of India (SEBI) has established a new institutional mechanism requiring stock brokers to implement systems for detecting and preventing market abuse. Previously, there were no specific regulatory provisions mandating brokers to have such preventive systems.

Preventive Systems

Under this new framework, both broking firms and their senior management are now accountable for identifying and preventing fraud or market abuse. They are required to establish robust surveillance and control systems, along with appropriate escalation and reporting mechanisms.

SEBI has outlined various instances of potential market abuse that brokers' systems must be capable of monitoring. These include creating a misleading appearance of trading, price manipulation, front running, pump and dump schemes, insider trading, mis-selling, unauthorized trading, and facilitating mule accounts. Brokers must report any detected suspicious activity to the stock exchanges within 48 hours of detection.

Additionally, brokers are required to submit a summary analysis and action taken report on suspicious activities, fraud, and market abuse on a half-yearly basis. This report must be submitted even if no such instances are detected, in the form of a 'nil report'.

Deviations in adherence to internal controls, risk management policies, surveillance policies, and client onboarding procedures must be reported to the appropriate committee or board of directors. These deviations should also be included in the half-yearly report to the stock exchanges.

SEBI mandates that stock brokers establish and implement a whistleblower policy, providing a confidential channel for employees and stakeholders to report suspected fraudulent or unethical practices. The policy must ensure adequate protection for whistleblowers.

The regulator has also tightened rules to curb trading through mule accounts, which are trading accounts controlled by another person. Transactions through mule accounts for manipulative or fraudulent practices are deemed to fall under the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) norms.

These amendments to the stock brokers and PFUTP rules became effective on June 27.

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