SEBI mandates institutional mechanism for fraud prevention in stock broking

The Securities and Exchange Board of India (SEBI) on Thursday issued a circular requiring stock brokers to establish an institutional mechanism for prevention and detection of fraud or market abuse in a bid to protect the interest of investors in the securities market.

The circular mandates the implementation of systems for the surveillance of trading activities and internal controls and the introduction of a whistle-blower policy, among other obligations.

These requirements are part of SEBI (Stock Brokers) (Amendment) Regulations, 2024, which aim to ensure higher standards of market integrity and investor protection.

The standards for implementation of the same, including operational modalities will be formulated by the broker’s Industry Standards Forum (ISF), in consultation with the Securities and Exchange Board of India (Sebi), the regulator said in the circular.

The implementation will be based on the size of the stock brokers. Brokers with more than 50,000 active Unique Client Codes (UCCs) are required to comply by January 1, 2025.

Further, those with 2,001 to 50,000 active UCCs have to comply by April 1, 2025, and brokers with up to 2,000 active UCCs must comply by April 1, 2026.

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Additionally, qualified stock brokers must comply with these requirements by August 1, 2024, considering their existing obligations for governance and client behaviour surveillance.

SEBI directed the stock exchanges to bring the provisions of this circular to the notice of stock brokers and also disseminate the same on their websites.

It also directed them to amend their bylaws and ensure that brokers notify the obligation/requirement to the stock brokers to follow the standards adopted by the ISF, and issue a joint notice which indicates the date of applicability of the circular to various stock brokers based on the criteria.

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, to make necessary changes, SEBI said.