Inspection of stock brokers by stock exchanges

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Jun 25, 2003 |

Circulars

GENERAL MANAGER

SECONDARY MARKET DEPARTMENT

E Mail: mdrao@sebi.gov.in

SEBI/SMD/DBA-1/CIR-27/2003/25.06.2003

June 25, 2003

The Managing Director/

Executive Director of all Stock Exchanges.

Dear Sir/Madam,

Sub: Inspection of stock brokers by stock exchanges.

This circular is being issued in exercise of powers conferred by section 11 (1) of the Securities and Exchange Board of India Act, 1992, read with section 10 of the Securities Contracts (Regulation) Act 1956, to protect the interests of investors in securities and to promote the development of, and to regulate the securities market.

Till now the stock exchanges were directed to inspect books and accounts and other documents of at least 10% of the active brokers of the stock exchange in a year and institute necessary disciplinary action against brokers whose books of accounts and other documents reveal malpractice. It has now been decided that the exchanges would carry out inspection of at least 20% of the active brokers every year beginning from the financial year 2003-2004. These inspections shall invariably include the subsidiaries of other stock exchanges registered as brokers of your exchange. Exchanges are also directed to work out a transparent criteria for selection of brokers for inspection as well as formulate their inspection policy. Please note that these inspections should not only be comprehensive but adequate follow up action should also be taken by the stock exchanges.

You are also directed to submit us a quarterly report on inspections of stock brokers carried out by your exchange by 10 th of every month immediately succeeding the quarter. The first report shall be submitted for the quarter ending June 30, 2003 on or before July 10, 2003 . The format of the report would be as follows:

Report on inspection of brokers carried out by stock exchanges:

Part A (Summary):

Total number of brokers

No. of active broker

Number of brokers inspected during the quarter

Cumulative number of brokers inspected during the current year

% of active brokers inspected during the year

Brief description of violations noticed

Action taken against inspected brokers

Part B (Comprehensive):

S No.

Names of brokers inspected

Date/ Period of inspection

Criteria of selection of broker for inspection

Violations observed during inspection

Action taken against the broker.

Follow up of Inspection

The above table (Part "B") will contain more comprehensive details about inspection and post inspection action in respect of brokers as per the information given in Part "A".

An illustrative list of possible violations is enclosed for your reference. Exchanges shall be required to cover these areas in detail during their inspection of stock brokers. Exchanges are advised to note that their inspections shall not be limited necessarily to areas listed in the list but also cover any additional areas where the exchanges may deem fit.

Yours faithfully,

S. V. MURALIDHAR RAO

Encl: As above.

List of illustrative violations (It may be noted that the list mentioned below is only inclusive and not exhaustive)

Sl . No.

Description

1.

Non maintenance or improper maintenance of prescribed books of accounts.

2.

Relating to Contract notes:

• Non issue of contract notes.

• Time stamping of contract notes not done.

• The contract notes issued not bearing the correct SEBI Registration number of the broker.

• Contract notes not being issued within 24 hours of trade execution.

• Appropriate stamps not being affixed on the contract notes/Appropriate stamp duty not paid by the stock brokers.

• Duplicates/counterfoils of the contract notes issued not being maintained.

• Duplicates of the contract notes issued not acknowledged by the client.

• The contract notes not signed by the broker or his authorised representative.

• Contract notes are not in the prescribed format

3.

Brokerage charged by the brokers exceed the limits prescribed.

4.

Charging the clients rates more than the prevailing market rates

5.

Non payment/not giving the deliveries to clients within prescribed time limit

6.

Not taking adequate steps for redressal of grievances of investors within one month from date of receipt of the complaint

7.

Non maintenance of client database (Client agreements and Registration forms)

8.

Non segregation of client funds and securities:

• The member should maintain a separate bank account for clients’ funds.

• There should be a clear segregation of the client’s and the broker’s moneys.

• The member should keep such records and books of accounts as necessary, to distinguish client’s securities from his own securities.

9.

The member is found involved in fund lending/borrowing activities- with the exception of those in connection with or incidental to or consequential upon the securities business.

10.

Non collection of margin from clients.

11.

Brokers indulging in unauthorised carry forward transactions.

12.

Non-compliance with provisions relating to spot / negotiated deals (special bargains only).

13.

Instances of trades entered into by the broker, which are not permitted.

14.

Instances of the broker/dealers/others connected with the broker, involved in front running.

15.

Instances of fictitious transactions entered into by brokers.

16.

Non submission of audit report within the prescribed time limit.

17.

Instances of broker dealing with unregistered sub-brokers.

18.

Instances of broker of a stock exchange acting through brokers of other exchanges for its clients without registering as a sub broker of these brokers.

19.

Broker involved in business other than the securities business.

20.

Non payment/ inadequate payment of SEBI registration fees.

21.

Instances of misuse of the exchange mechanism for securing financing transactions

22.

Not putting the unique client code of clients while placing orders in the trading system.

23.

The broker not informing the investors/general public about cancellation of registration of its sub broker(s).

24.

The broker granting the trading terminals at places other than the registered office, branch office or registered sub broker offices.

25.

Issue of advertisements by broker in contravention of the existing provisions.

26.

The provisions regarding net based trading not being complied by the broker.

27.

The broker is found guilty of creation of false markets

28.

The broker not taken prior permission from SEBI for change in status and constitution.

29.

Non appointment of compliance officer by the broker.

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