On June 27, 2024, the Securities and Exchange Board of India (SEBI) issued an amendment to the SEBI (Stock Brokers) Regulations, 1992. The new regulations, known as the Securities and Exchange Board of India (Stock Brokers) (Amendment) Regulations, 2024, were introduced under the authority of Section 30 of the SEBI Act, 1992. They came into effect upon publication in the Official Gazette. These amendments introduce a new Chapter IVA, focusing on the institutional mechanism for the prevention and detection of fraud or market abuse.
The new chapter defines key terms like “Designated Director,” “fraud,” “employees,” and “market abuse,” ensuring clarity in the regulatory framework. It mandates stock brokers to establish robust surveillance systems and internal controls to monitor trading activities and detect potential fraud or market abuse by clients, employees, or authorized persons. Stock brokers must document their policies and procedures, set reasonable thresholds for alert generation, and periodically review and update their systems to align with market developments and regulatory changes.
Furthermore, the amendments outline the obligations of stock brokers and their employees, emphasizing the importance of maintaining adequate Know Your Client (KYC) surveillance systems and reporting suspicious activities promptly. A whistleblower policy is also mandated, providing a confidential channel for reporting unethical practices or regulatory violations. Stock brokers are required to submit periodic reports on suspicious activities, fraud, and market abuse to the stock exchanges, ensuring ongoing compliance and transparency in their operations.
SECURITIES AND EXCHANGE BOARD OF INDIA
NOTIFICATION
Mumbai, the 27th June, 2024
SECURITIES AND EXCHANGE BOARD OF INDIA (STOCK BROKERS) (AMENDMENT) REGULATIONS, 2024
No. SEBI/LAD-NRO/GN/2024/186.—In exercise of the powers conferred under Section 30 of the Securities and Exchange Board of India Act, 1992 (15 of 1992), the Board hereby makes the following regulations to amend the Securities and Exchange Board of India (Stock Brokers) Regulations, 1992, namely: –
1. These regulations may be called the Securities and Exchange Board of India (Stock Brokers) (Amendment) Regulations, 2024.
2. They shall come into force on the date of their publication in the Official Gazette.
3. In the Securities and Exchange Board of India (Stock Brokers) Regulations, 1992 –
I. after regulation 18D, the following new chapter shall be inserted, namely, –
“Chapter IVA
INSTITUTIONAL MECHANISM FOR PREVENTION AND DETECTION OF FRAUD OR MARKET ABUSE
Definitions-
18E. For the purpose of this chapter, unless the context otherwise requires –
(a) “Designated Director” shall have the same meaning as assigned to it under the Prevention of Money-laundering (Maintenance of Records Rules), 2005;
(b) “fraud” shall have the same meaning as assigned to it under the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003;
(c) “employees” shall include key managerial personnel, senior management, Designated Directors, other employees and analogous or equivalent persons of the stock broker;
(d) “Key managerial personnel” shall have the same meaning as assigned to it under sub-section (51) of section 2 of the Companies Act, 2013;
(e) “market abuse” includes a manipulative, fraudulent and unfair trade practice including through a mule account which may contravene any of the provisions of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 or the Securities and Exchange Board of India (Prohibition of Insider Trading) Regulations, 2015 or Section 12A of the Act;
(f) “mule account” shall have the same meaning as assigned to it under the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003;
(g) “senior management” shall have the same meaning as assigned to it under the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015;
(h) “suspicious activity” shall mean a fraudulent or suspicious activity in respect of know your client requirements, suspicious order placing or trading activities.
Systems for surveillance of trading activities and internal controls.
18F. The key managerial personnel and senior management including Designated Directors and persons of other equivalent or analogous rank of the stock broker shall put in place adequate systems for surveillance of trading activities and internal control systems to ensure compliance with all the regulatory requirements as may be specified by the Board or the stock exchanges from time to time, for the detection, prevention and reporting of potential fraud or market abuse by its clients, employees or Authorised Persons.
Obligations of the stock broker and its employees.
18G. (1) The stock broker shall establish and maintain adequate know your client surveillance systems and shall obtain adequate information to determine and verify the identification of the clients who have or propose to have accounts with such stock brokers or conduct any transaction related to the securities market through the aid or agency of such stock broker.
(2) The stock broker shall, having regard to the nature of business and the size of its operations, establish and maintain adequate surveillance system for monitoring the orders and trades and internal control procedures, in order to detect potential fraud or market abuse by its clients, employees or Authorised Persons.
(3) The policies and procedures relating to the surveillance systems and internal controls shall be clearly documented and shall define the roles and responsibilities of its employees, the corrective actions to be taken and the guidelines for reporting of activities as specified under regulation 18H of this Chapter.
(4) The stock broker shall customize its surveillance systems and internal controls in a manner that is commensurate with the complexity of the transactions being undertaken by it and its business activities.
(5) The thresholds for generation of alerts for various scenarios shall be set at a reasonable level and be documented along with clear rationale for the same.
(6) The Board of Directors or persons of other equivalent or analogous rank of the stock broker shall review and update the systems, processes, and control procedures on a periodic basis and in any case not less than once in a calendar year, to keep pace with the developments in the securities market and regulatory changes, including the progressive adoption of automated know your client procedures and the order and trade surveillance systems to enhance the monitoring of trading activities.
(7) The stock broker shall have adequate systems in place to ensure that its proprietary accounts are used only for the purpose of carrying out proprietary trades and that its operations are in accordance with the requirements as may be specified by the Board or the stock exchanges from time to time.
(8) The stock broker shall ensure that its trading terminals are used only by its employees and/or Authorised Persons and only at locations approved by the stock exchanges and that such terminals shall not be used by its clients in any form or manner.
(9) The stock broker shall establish and maintain documented processes and systems to detect potential mule accounts or suspicious activity.
(10) Any employee of the stock broker, upon having knowledge of any fraud, market abuse or suspicious activity shall forthwith inform the same to the senior management.
Escalation and reporting mechanisms.
18H. (1) The Audit Committee or the Board of Directors or persons of other equivalent or analogous rank of the stock broker, shall review the compliance with the provisions of the framework under this Chapter of these regulations not less than once in a quarter and shall verify the adequacy and efficiency of the systems for internal control and reporting by analysing the relevant data.
(2) The stock broker shall on the detection of any suspicious activity, inform the same along with the details to the stock exchanges, as soon as reasonably possible, but in any case not later than forty eight hours from such detection, in such manner as may be specified by the Board or the stock exchanges from time to time.
(3) The stock broker shall submit a summary analysis and action taken report on instances of suspicious activity, fraud and market abuse or a ‘nil report’ where no such instances were detected, on a half-yearly basis to the stock exchanges.
(4) Any deviation in adherence to internal controls, risk management policy, surveillance policy, policy for on-boarding of clients along with the proposed corrective actions for such deviation shall be placed before the appropriate Committee, Board of Directors or such other equivalent or analogous bodies of the stock broker at regular intervals and such deviations shall also form a part of the report to be submitted by the stock broker to the stock exchanges in terms of sub-regulation (3) of this regulation.
(5) The stock broker shall obtain guidance from the stock exchanges on any suspicious activity which were identified by it, but the violation of the provisions of any applicable law in respect of such activity could not be ascertained due to the limited information available with the stock broker.
Whistle blower policy.
18I. (1) The stock broker shall establish, implement and maintain documented whistle blower policy providing for a confidential channel for employees and other stakeholders to raise concerns about suspected fraudulent, unfair or unethical practices, violations of regulatory or legal requirements or governance vulnerability.
(2) The policy should establish procedures to ensure adequate protection of the whistle blowers.
(3) The complaints under this regulation against the Board of Directors including those against the Managing Director, Chief Executive Officer, key managerial personnel, Designated Directors or Promoter shall be addressed to the Audit Committee or other analogous body of the stock broker and the complaints against other employees shall be addressed to the Compliance Officer.”
BABITHA RAYUDU, EXECUTIVE DIRECTOR
[ADVT.-III/4/Exty./219/2024-25]
Footnotes:
1. Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) Regulations, 1992, the Principal Regulations, was published in the Gazette of India on October 23, 1992 vide S.O. No. 780 (E).
2. The Principal Regulations were subsequently amended on:
a) November 28, 1995 by the SEBI (Payment of Fees) (Amendment) Regulations, 1995 vide S.O. No. 939 (E).
b) January 5, 1998 by SEBI (Stock Brokers and Sub-Brokers) (Amendment) Regulations, 1998 vide S.O. No. 13 (E).
c) January 21, 1998 by SEBI (Stock Brokers and Sub-Brokers) (Second Amendment) Regulations, 1998 vide S.O. No. 75 (E).
d) December 16, 1998 by SEBI (Stock Brokers and Sub-Brokers) (Third Amendment) Regulations, 1998 vide S.O. No. 1078 (E).
e) July 6, 1999 by SEBI (Stock Brokers and Sub-Brokers) (Amendment) Regulations, 1999 vide S.O. No. 541 (E).
f) March 14, 2000 by SEBI (Stock Brokers and Sub-Brokers) (Amendment) Regulations, 2000 vide S.O. No. 234 (E).
g) March 28, 2000 by SEBI (Appeal to Securities Appellate Tribunal) (Amendment) Regulations, 2000 vide S.O. No. 278 (E).
h) August 30, 2000 by SEBI (Stock Brokers and Sub-Brokers) (Second Amendment) Regulations, 2000 vide S.O. No. 787 (E).
i) May 29, 2001 by SEBI (Investment Advice by Intermediaries) (Amendment) Regulations, 2001 vide S.O. No. 476(E).
j) November 15, 2001 by SEBI (Stock Brokers and Sub-Brokers) (Amendment) Regulations, 2001 vide S.O. No. 1128 (E).
k) February 20, 2002 by SEBI (Stock Brokers and Sub-Brokers) (Amendment) Regulations, 2002vide S.O. No. 220 (E).
l) September 27, 2002 by SEBI (Procedure for Holding Enquiry by Enquiry Officer and Imposing Penalty) Regulations, 2002 vide S.O. No. 1045 (E).
m) September 23, 2003 by the SEBI (Stock Brokers and Sub-Brokers) (Amendment) Regulations, 2003 vide S.O. No. 1095 (E).
n) November 20, 2003 by the SEBI (Stock Brokers and Sub-Brokers) (Second Amendment) Regulations, 2003 vide F. No. SEBI /LAD /20795 /2003.
o) March 10, 2004 by the Securities and Exchange Board of India (Criteria for Fit and Proper Person) Regulations, 2004 vide S.O. No. 398(E).
p) August 1, 2006 by the SEBI (Stock Brokers and Sub-Brokers) (Amendment) Regulations, 2006 vide S.O. No. 1235 (E).
q) September 7, 2006 by the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) (Second Amendment) Regulations, 2006 vide S.O. No. 1447 (E).
r) September 25, 2006 by the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) (Third Amendment) Regulations, 2006 vide S.O. No. 1600(E).
s) May 26, 2008 by the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 vide Notification No. LAD-NRO/GN/2008/11/126538.
t) August 11, 2008 by the Securities and Exchange Board of India (Stock Brokers and Sub Brokers) (Amendment) Regulations, 2008 vide Notification No. LADNRO/GN/2008/20/134766.
u) June 29, 2009 by the Securities and Exchange Board of India (Payment of Fees) (Amendment) Regulations, 2009 vide Notification No. LADNRO/ GN/2009-10/11/167759.
v) November 19, 2009 by the Securities and Exchange Board of India (Stock Brokers and Sub-
Brokers) (Amendment) Regulations, 2009 vide Notification No. LADNRO/GN/2009-10/21/183853.
w) April 13, 2010 by the Securities and Exchange Board of India (Stock Brokers and Sub Brokers) (Amendment) Regulations, 2010 vide Notification No. LADNRO/GN/2010-11/06/1097.
x) April 6, 2011 by the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) (Amendment) Regulations, 2011 vide Notification No. F. No. LAD –NRO/ GN/ 2011 – 12/01/11486.
y) April 19, 2011 by the Securities and Exchange Board of India (Change in Conditions of Registration of Certain Intermediaries) (Amendment)Regulations, 2011 vide Notification No. LAD/NRO/GN/2011-12/03/12650.
z) August 17, 2011 by the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) (Second Amendment) Regulations, 2011 vide Notification No. LAD-NRO/GN/2011-12/19/26273.
aa) April 5, 2013 by the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) (Amendment) Regulations, 2013 vide Notification No. LAD-NRO/GN/2013-14/01/8129.
bb) September 27, 2013 by the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) (Second Amendment) Regulations, 2013 vide Notification No. No. LADNRO/GN/2013-14/25/24775.
cc) May 23, 2014 by the Securities and Exchange Board of India (Payment of Fees) (Amendment) Regulations, 2014 vide Notification No. LAD-NRO/GN/2014-15/03/1089.
dd) October 8, 2014 by the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) (Amendment) Regulations, 2014 vide Notification No. LAD-NRO/GN/2014-15/15/1671.
ee) September 8, 2015 by the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers)(Amendment) Regulations, 2015 vide Notification No. LAD -NRO/GN/2015-16/017.
ff) March 6, 2017 by the Securities and Exchange Board of India (Payment of Fees and Mode of Payment) (Amendment) Regulations, 2017 vide Notification No. LAD-NRO/GN/2016-17/037 read with March 29, 2017 by the Securities and Exchange Board of India (Payment of Fees and Mode of Payment) (Amendment) Regulations, 2017 vide Notification No. LAD-NRO/GN/2016-17/038.
gg) July 13, 2017 by the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers)(Amendment) Regulations, 2017 vide Notification No. LAD -NRO/GN/2017-18/005.
hh) March 13, 2018 by the Securities and Exchange Board of India (Stock Brokers and Sub-Brokers) (Amendment) Regulations, 2018 vide Notification No. SEBI/LAD-NRO/GN/2018/03.
ii) July 30, 2018 by the Securities and Exchange Board of India (Stock Brokers and Sub- Brokers)(Second Amendment) Regulations, 2018 vide Notification No. SEBI/LAD-
NRO/GN/2018/27.
jj) March 22, 2019 by the Securities and Exchange Board of India (Payment of Fees) (Amendment) Regulations, 2019 vide Notification No. SEBI/LAD-NRO/GN/2019/03.
kk) April 17, 2020 by the Securities and Exchange Board of India (Regulatory Sandbox) (Amendment) Regulations, 2020 vide Notification No. SEBI/LAD-NRO/GN/2020/10.
ll) May 08, 2020 the Securities and Exchange Board of India (Payment of Fees) (Amendment) Regulations, 2020vide Notification No. SEBI/LAD-NRO/GN/2020/011.
mm) March 30, 2021 by the Securities and Exchange Board of India (Stock Brokers) (Amendment) Regulations,2021 vide Notification no. SEBI/LAD-NRO/GN/2021/14.
nn) May 05, 2021 by the Securities and Exchange Board of India (Payment of Fees and Mode of Payment) (Amendment) Regulations, 2021 vide Notification no. SEBI/LAD-NRO/GN/2021/23.
oo) August 03, 2021 by the Securities and Exchange Board of India (Regulatory Sandbox) (Amendment) Regulations, 2021 vide Notification no. SEBI/LAD-NRO/GN/2021/30.
pp) February 23, 2022 by the Securities and Exchange Board of India (Stock Brokers) (Amendment) Regulations, 2022 vide Notification no. SEBI/LAD-NRO/GN/2022/73.
qq) January 17, 2023 by the Securities and Exchange Board of India (Stock Brokers) (Amendment) Regulations, 2023 vide Notification no. SEBI/LAD-NRO/GN/2023/116.
rr) February 7, 2023 by the Securities and Exchange Board of India (Payment of Fees and Mode of Payment) (Amendment) Regulations, 2023 vide notification No. SEBI/LAD-NRO/GN/2023/121.
ss) July 24, 2023 by the Securities and Exchange Board of India (Stock Brokers) (Second Amendment) Regulations, 2023 vide Notification no. SEBI/LAD-NRO/GN/2023/140.
tt) August 16, 2023 by the Securities and Exchange Board of India (Facilitation of Grievance Redressal Mechanism) (Amendment) Regulations, 2023 vide Notification no. SEBI/LAD-NRO/GN/2023/146.
