In a move to bring greater transparency and discipline among market participants, the Securities and Exchange Board of India (Sebi) on Thursday put out mandatory requirements related to dealings between investors and stock brokers (including trading members). The move gives brokers the right to take actions against clients. The deadline for implementing the norms is March 31, 2010.
Sebi said stock brokers should register clients by entering into an agreement with them that must contain documentary evidence of financial details of the investors. The mandatory documents include a member-client agreement or a tripartite agreement in case a sub-broker is associated, a know-your-client form, and a risk disclosure document.
The broker shall have documentary evidence of financial details provided by clients who opt to deal in the derivatives segment. In respect of other clients, the stock broker shall obtain the documents in accordance with its risk management system,” said Sebi.
In addition to this, Sebi said the broker should capture details of action taken against clients by the market regulator or other authorities during the last three years.
From brokers’ perspective, it is a welcome move as it gives them a legal stand against clients, besides power to demand information and de-register them.
The note said there should be mandatory documents for refusal of orders for trading in penny stocks and clients’ exposure limits. More importantly, the note gives brokers the right to sell clients’ securities or close positions on account of non-payment of dues without notice. However, this will be limited to the extent of the settlement and margin obligation. The move gives legal validity to squaring off of a client’s position without notice.
On running account authorisation, Sebi said a client might specifically authorise the broker to maintain a running account. However, this will be subject to the condition that the authorisation is renewed at least once a year. Further, settlement of funds and securities in running accounts should be done at least once in a quarter or month, depending on the preference of the client. Brokers said putting this into practice would be difficult. However, these conditions will not apply to institutional clients who settle trades through custodians.
The regulator said brokers should transfer funds and securities lying in the credit of the client within one working day of the request if these were lying with him and within three working days in case these were with clearing members or corporations.