SEBI Proposal: Brokers May Soon Be Expected To Detect, Prevent Fraud

Stock brokers must set up a strong surveillance system to detect and prevent fraud or market abuse, the market regulator has proposed in a consultation paper.

To ensure prevention and detection of fraud or market abuse, the Securities and Exchange Board of India has proposed an institutional framework for stock brokers.

The SEBI paper observes that when it comes to the growth and well-being of the securities market and the protection of investors' interests, brokers play a crucial role. Currently, there are no specific rules that require brokers to implement appropriate safety measures to make sure that the securities market is secure and safe.

Fraud and other forms of market abuse distort information, threaten market integrity, and erode investor trust in the securities market. Therefore, the market regulator has proposed an institutional framework for brokers to make sure that specific mechanisms are in place for identification and prevention of fraud or market abuse.

A committee on Fair Market Conduct was constituted in 2017 to address the issues related to market manipulation and fraud, insider trading, etc. The committee had also recommended that certain mechanisms must exist to prevent market abuse or fraud.

Basis the committee’s inputs, SEBI has now proposed some changes at the institutional level, so that fraud and market abuse can be detected and averted by the stock brokers themselves.

Here are the key proposals in SEBI's consultation paper:

• Senior management of the broker, such as the CEO or MD, shall be in charge of making sure that there are strong, independent trade surveillance systems and internal control systems in place to ensure all regulatory requirements set by SEBI or stock exchanges are met. 

• The broker must have strong trade surveillance systems and internal control procedures that are appropriate for the type and size of its business. The broker must ensure that appropriate systems are in place to ensure that their proprietary accounts are used only for the purpose of carrying on proprietary trades. There shall be no ‘lending’ of any proprietary accounts for facilitation of any unauthorised trading.  

• The broker must have well-defined systems in place that can spot any possible fraud or suspicious trading that needs to be reported. Further, if the broker finds suspicious trading or worrying trading patterns, they must tell the stock exchanges as soon as possible.

• The broker shall create, implement, and keep a well-documented policy that explains how stakeholders, including employees, can raise concerns about suspected fraudulent practices, violations of regulatory or legal requirements, governance weaknesses, etc., without fear of punishment or unfair treatment. Additionally, procedures must also be established for protecting such whistleblowers and handling their complaints.

The regulator has asked the stakeholders to submit their comments till Feb. 21, 2023.