Under the institutional mechanism, broking firms as well as its senior management will be accountable for detection and prevention of fraud or market abuse, by setting up robust surveillance and control systems, according to a notification.
Further, brokers need to frame appropriate escalation and reporting mechanisms.
Sebi has also listed out probable instances of fraud or market abuse which a broker’s system needs to be equipped to monitor. The probable instances can include creation of misleading appearance of trading, price manipulation, front running, pump and dump, insider trading and mis-selling and unauthorised trading, including facilitation of ‘mule accounts’.
In its notification dated June 27, the stock broker 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,” Sebi said. The stock broker 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 stock broker or a demat account or bank account linked with such trading account, which is controlled by another person.
To give these effects, the Securities and Exchange Board of India (Sebi) has amended stock brokers and PFUTP rules that became effective from June 27.
