The Securities and Exchange Board of India has introduced a new institutional mechanism, mandating stockbrokers to establish systems for detecting and preventing market abuse.
Previously, there were no explicit regulatory requirements placing responsibility on brokers to implement such systems. Under the new framework, broking firms and their senior management will be held accountable for preventing fraud and market abuse by establishing strong surveillance and control systems, as per a recent notification.
Further, brokers need to frame appropriate escalation and reporting mechanisms.
The market regulator has outlined specific instances of fraud or market abuse that brokers' systems must monitor. These include activities such as creating misleading trading appearances, price manipulation, frontrunning, pump and dump schemes, insider trading, mis-selling, and unauthorised trading, including the facilitation of 'mule accounts'.
In its notification dated June 27, SEBI said the stockbroker will have to inform details pertaining to detection of any suspicious activity to the stock exchanges within 48 hours from such detection.
Further, they will have to 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.
"Any deviation in adherence to internal controls, risk management policy, surveillance policy, policy for onboarding 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," the SEBI said.
The stockbroker will have to establish and implement whistleblower policy providing for a confidential channel for employees and other stakeholders to raise concerns about suspected fraudulent, unfair or unethical practices. The policy should establish procedures to ensure adequate protection of whistleblowers.
Also, the regulator has tightened rules to curb trading through the mule accounts.
In its notification, SEBI said that transactions through mule accounts for indulging in manipulative, fraudulent and unfair trade practice shall be and shall always be deemed to have been included in Pfutp (Prohibition of Fraudulent and Unfair Trade Practices) norms.
Mule account is a trading account maintained with a stockbroker or a demat account or bank account linked with such trading account, which is controlled by another person.
To give these effect, SEBI has amended stockbrokers and PFUTP rules that became effective from June 27.
(With inputs from PTI.)
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