Sebi to put onus of detecting price rigging, insider trading on brokers

Asks brokers to maintain whistleblower policy, furnish action-taken report upon spotting fraud; top management to be held accountable for non-compliance

The Securities and Exchange Board of India (Sebi) is planning to put the onus on stock brokers for the identification and surveillance of fraudulent practices such as price manipulation, insider trading, front-running, and spoofing, among others.

Under a proposal floated by the capital market regulator, senior management of the stock broking firms will be responsible for ensuring trade surveillance in compliance with regulatory requirements. These surveillance and control systems will be used to detect, prevent or report fraud or market abuse by clients, promoters, employees or even analogous persons.

Stock brokers will have to assess factors like relations between clients based on KYC, matched trades that suggest pre-arrangement or circular trading, unusual price movements, timing of trades in sensitive period, change in client behaviour which may show huge gains before material announcements, among a dozen of other factors.

In a consultation paper issued on Tuesday, Sebi has said that the senior management, including CEO, MD, compliance officer and other key managerial people will be “held accountable for non-compliance and negligence”.

“The broker shall have in place well-defined processes that detect potential fraud or suspicious trading activities that need to be escalated,” said Sebi.

They will be held accountable for non-compliance and negligence in implementing appropriate  surveillance and internal control systems.

Under the proposed norms, brokers will have to submit a summary analysis and action taken report on instances of suspected fraud or market abuse on a half-yearly basis to stock exchanges.

Sebi has also recommended that brokers establish a whistleblower policy and channels for raising concerns about suspected unfair practices or regulatory violations.

At present, there are no specific regulatory provision requirements that cast responsibility on brokers to put in place systems for detection and prevention of fraud or market abuse.

The regulator earlier this week directed stock exchanges to issue the first list of qualified stock brokers which will be subject to more regulatory and governance measures as they have significant clients and volumes being traded. In the circular for QSBs, Sebi did specify their role in surveillance of client behaviour.

Public comments on the draft norms have been sought till February 21.