Executive Summary:
This circular, issued by SEBI on July 4, 2024, outlines measures to instill confidence in the securities market by establishing an institutional mechanism for stock brokers to prevent and detect fraud or market abuse, as required by the Securities and Exchange Board of India (Stock Brokers) Amendment Regulations, 2024. The implementation is staggered based on the number of active UCCs of the stockbroker, with deadlines ranging from August 1, 2024, to April 1, 2026. Stock Exchanges are directed to bring the provisions of this circular to the notice of stock brokers and also disseminate the same on their websites.
Key Points / Main Content:
Institutional Mechanism for Fraud/Market Abuse Prevention:
* Stock brokers must establish an institutional mechanism for prevention and detection of fraud or market abuse, as laid down in Chapter IVA of the Broker Regulations.
Obligations and Mechanisms for Stock Brokers:
* Implement systems for surveillance of trading activities and internal controls.
* Define obligations for the stock broker and its employees.
* Establish escalation and reporting mechanisms.
* Implement a Whistle Blower Policy.
Standards and Formulation:
* The Brokers Industry Standards Forum (ISF), in consultation with SEBI, will formulate standards for implementation, including operational modalities.
Applicability and Effective Dates:
* Implementation will be risk-based and staggered.
* Effective dates are determined by the number of active UCCs of the stockbroker:
* 50,000: January 01, 2025
* 2,001 to 50,000: April 01, 2025
* Up to 2,000: April 01, 2026
* For Qualified Stock Brokers (QSBs), the effective date is August 01, 2024, irrespective of the number of UCCs.
Stock Exchange Directives:
* Notify stock brokers of the circular's provisions and disseminate it on their websites.
* Amend relevant byelaws, rules, and regulations for implementation.
* Issue a joint notice indicating the applicability date for various stock brokers.
* Notify stock brokers of the obligation to follow standards adopted by the ISF, in consultation with SEBI.
* Communicate the implementation status to SEBI in their monthly development report.
Impact Analysis:
Stock Brokers:
Impact: Required to establish and implement an institutional mechanism for fraud and market abuse prevention, including surveillance systems, internal controls, employee obligations, escalation processes, reporting mechanisms, and a Whistle Blower Policy. Compliance deadlines vary based on the number of active UCCs, with QSBs having the earliest deadline.
Action Required: Implement the specified mechanisms and systems according to the defined timelines and standards formulated by the ISF in consultation with SEBI.
Stock Exchanges:
Impact: Responsible for disseminating the circular's provisions to stock brokers, amending internal regulations, and monitoring/reporting on the implementation progress.
Action Required: Notify stock brokers, amend relevant regulations, issue a joint notice on applicability dates, and communicate the implementation status to SEBI.
Key Entities Referenced
Securities and Exchange Board of India (SEBI): Regulatory body for the securities market in India, responsible for investor protection and market regulation.
Securities and Exchange Board of India Act, 1992: The governing law that establishes SEBI and defines its powers and functions.
SEBI Stock Brokers Regulations, 1992: Regulations pertaining to the operations and conduct of stock brokers under SEBI's purview.
Securities Contracts Regulation Stock Exchanges and Clearing Corporations Regulations, 2018: Regulations related to stock exchanges and clearing corporations.
Broker Regulations: Refers to the Securities and Exchange Board of India (Stock Brokers) Amendment Regulations, 2024 which mandates institutional mechanisms for fraud prevention and market abuse detection.
Brokers Industry Standards Forum (ISF): An industry body responsible for formulating implementation standards and operational modalities in consultation with SEBI.
Qualified Stock Brokers (QSBs): Stock brokers with enhanced obligations and responsibilities, including governance structure, processes, and client behavior surveillance.
Recognized Stock Exchanges: Stock exchanges that are recognized and regulated by SEBI.
CIRCULAR
SEBI/HO/MIRSD/MIRSD-PoD-1/P/CIR/2024/96 July 04, 2024
To
All Recognized Stock Exchanges
Stock Brokers through Recognized Stock Exchanges
Dear Sir/Madam,
Subject: Measures to instil confidence in securities market – Brokers’
Institutional mechanism for prevention and detection of fraud or market abuse
1. Chapter IVA of the Securities and Exchange Board of India (Stock Brokers)
(Amendment) Regulations, 2024 (hereinafter referred to as the “Broker
Regulations”) requires stock brokers to put in place an institutional mechanism
for prevention and detection of fraud or market abuse. Accordingly, it has been
decided that stock brokers shall comply with the following obligations /
mechanisms as laid down in Chapter IVA of the Broker Regulations:
1.1. Systems for surveillance of trading activities and internal controls
1.2. Obligations of the stock broker and its employees
1.3. Escalation and reporting mechanisms
1.4. Whistle Blower Policy
2. The standards for implementation of the same including operational modalities
shall be formulated by the Broker’s Industry Standards Forum (ISF), in
consultation with SEBI.
3. Applicability:
3.1. The provisions of this circular shall come into force in a risk-based,
staggered manner to ensure smooth adoption and effective implementation
for all the stock brokers by providing enough time for stock brokers, based
on their size, for making necessary changes.
Page 1 of 33.2. Based on the above, the effective date for implementation for different stock
brokers has been prescribed in the table below:
Number of active UCCs* of Applicability of Operational /
stockbroker working Modalities &
Guidance Note
> 50,000 January 01, 2025
2,001 to 50,000 April 01, 2025
upto 2,000 April 01, 2026
* -as on last day of the preceding month of the date of issuance of the
circular
3.3. In case of Qualified Stock Brokers (QSBs), considering that enhanced
obligations and responsibilities such as governance structure and
processes and surveillance of client behaviour are already being followed
by them, the effective date for implementation of the circular for QSBs
(irrespective of number of UCCs) is August 01, 2024.
4. Stock Exchanges are directed to:
4.1. bring the provisions of this circular to the notice of stock brokers and also
disseminate the same on their websites;
4.2. make amendments to the relevant bye-laws, rules and regulations for the
implementation of the above provisions;
4.3. issue a joint notice clearly indicating the date of applicability of the circular
to various stock brokers based on the criteria mentioned above;
4.4. notify the obligation/requirement on the stock brokers to follow the
standards adopted by the ISF, in consultation with SEBI.
4.5. communicate to SEBI, the status of the implementation of the provisions of
this circular in their monthly development report.
5. This circular is issued in exercise of powers conferred under Section 11(1) of
Chapter IV of the Securities and Exchange Board of India Act, 1992, read with
Regulation 30 of Chapter VII of SEBI (Stock Brokers) Regulations, 1992 and
Regulation 51 of Chapter IX of Securities Contracts (Regulation) (Stock
Exchanges and Clearing Corporations) Regulations, 2018, to protect the
Page 2 of 3interests of investors in securities and to promote the development of, and to
regulate the securities market.
6. This circular is available on SEBI website at www.sebi.gov.in under the category
"Circulars".
Yours faithfully,
Aradhana Verma
General Manager
Tel. No.: +91-022 26449633
Email: aradhanad@sebi.gov.in
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