Markets regulator Securities and Exchange Board of India (Sebi) has proposed an institutional mechanism that will require stock brokers to put in place systems for the detection and prevention of market abuse.
Sebi has issued a consultation paper in which market participants are asked to provide their thoughts on a proposal that would require senior management at brokerage firms to be accountable for the detection and prevention of fraud or marker abuse by establishing effective surveillance and control systems and ensuring that appropriate escalation and reporting mechanisms are in place.
In addition, this proposal enumerates a number of common market abuses that brokers must look for and seek to prevent, as well as the entities that ought to be monitored and the associated accountability.
Brokers are currently not required by any specific regulatory provisions to implement systems for the detection and prevention of market abuse or fraud.
The following is a minimum list of possible instances or indicators of market abuse or fraud that the broker’s system ought to be equipped to monitor:
a) Misleading trading appearances, b) Price manipulation, c) Front running, d) Insider trading, e) Misselling, f) Unauthorized trading, including the facilitation of “mule” accounts that serve as a front for unauthorized trading, g) Pump and dump, h) Spoofing, i) Trading activity that is disproportional to reported income/net worth, and j) Clients’ frequent changes in KYC.
According to Sebi’s proposal, the broker’s CEO, MD, Compliance Officer, Principal Officer, KMPs, Directors, or equivalents (senior management) should be in charge of maintaining robust, independent trade surveillance systems and internal control systems to ensure compliance with SEBI/stock exchanges and SEBI’s varying regulatory requirements for detecting, preventing, or reporting market abuse or fraud by its clients, promoters, employees (including senior management), Authorized Persons (APs), or equivalents
They will be held accountable for noncompliance and carelessness in the implementation of appropriate internal control and surveillance systems.
Additionally, the regulator has recommended that brokers have appropriate reporting and escalation mechanisms. The availability of whistle-blowing channels, procedures for raising concerns about suspected fraudulent, unfair, or unethical practices, violations of regulatory or legal requirements, and governance weaknesses, among other things, ought to be outlined in a well-documented policy that brokers issue.
A well-documented policy regarding the availability of whistle-blowing channels, the procedure for raising concerns about suspected fraudulent, unfair, or unethical practices, violations of regulatory or legal requirements, governance weaknesses, etc., must be developed, implemented, and maintained by the broker. by stakeholders, including employees, without fear of punishment or unfair treatment, and the procedures for handling complaints about whistleblowers and adequate protection for whistleblowers.
The facilitation of “mule” accounts that serve as a front for unauthorized trading, pump-and-dump, spoofing, disproportionate trading activity in relation to reported income, and frequent changes in KYC submitted by clients are all possible instances of unauthorized trading.
The proposals have been open for public comment by the Sebi until February 23.
In order to keep independent senior management apprised of any instances of potential fraud or suspicious trading, the escalation procedures should be properly documented and implemented.
The stock exchanges should be informed as soon as the broker discovers suspicious trading activities or trading patterns. A summary analysis and action taken report on instances of suspected fraud or market abuse should also be submitted to stock exchanges every half year.