Putting in place an enhanced supervisory framework for stock brokers, market regulator Securities and Exchange Board of India has issued a detailed set of guidelines to monitor their financial strength and detect any misutilisation of clients’ funds.
Besides, stock brokers will now have to follow a uniform nomenclature for “naming/tagging of bank and demat accounts” and reporting of such accounts to stock exchanges and depositories.
Guidelines have been issued for “monitoring of clients funds lying with the stock broker by stock exchanges through a sophisticated alerting and reconciliation mechanism to detect any misutilisation”.
Exchanges have been asked to have the mechanism within three months for monitoring such funds lying with the stock broker to generate alerts on any misuse.
These guidelines have been issued following recommendations made by a SEBI-set up panel on ‘Enhanced Supervision of Stock Brokers’. Representatives from stock exchanges, depositories and brokers were part of the committee.
Among others, changes have been made in the existing system of internal audit for stock brokers and depository participants in terms of various aspects, including “appointment, rotation of internal auditors and formulation of objective sample criteria”.
According to SEBI, there would be measures to monitor the financial strength of stock brokers by the exchanges “so as to detect any signs of deteriorating financial health of stock brokers and serve as an early warning system to take pre-emptive and remedial measures”.
In case of non-compliance with any requirement, uniform penal action will be taken against stock brokers and depository participants by exchanges and depositories.
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