Establishing an institutional mechanism to combat fraud and market abuse: Sebi to brokers

MUMBAI: Market regulator Sebi has asked stock brokers to put in place an institutional mechanism by August 1 that will help prevent and detect frauds and market abuses, helping the system build confidence in the securities market.

In a fresh circular amending the existing master circular, citing the provisions of Chapter IVA of the SEBI (Securities Brokers) (Amendment) Regulations, 2024, the Securities and Exchange Board (SEBI) on Thursday said the new mechanism should be introduced by August 1 for qualified securities brokers.

The Sebi circular said the new regulations will come into effect in a risk-based manner and in a phased manner to ensure smooth adoption by all stock brokers. Brokerages will be given sufficient time, depending on their size, to make necessary changes, it added.

The new circular is an update of the main circular issued on May 22, 2024 for stockbrokers, listing a number of issues such as registration, supervision and control, customer relations, insolvency regulations and investor grievance mechanisms. The latest circular calls on stockbrokers to establish an institutional mechanism to prevent and detect fraud or market abuse, and cites the provisions of Chapter IVA of the Stockbrokers Amendment Rules, 2024.

Other directions of development of new mechanisms include the implementation of a system of supervision over trading activities and internal control, drawing up a list of obligations of brokerage houses and their employees, implementing escalation systems and reporting mechanisms, and introducing a whistleblowing policy.

The effective implementation dates for individual brokerages depend on their client base: for those with more than 50,000 active clients, it is January 1, 2025, for those with between 2,001 and 50,000, it is April 1, 2025, and for those with up to 2,000 clients, it is April 1, 2026.

For qualified brokers, the effective date of the circular is 1 August this year, as they already fulfil extended obligations and responsibilities, such as management structure and processes and supervision of customer behaviour.

The circular also directs stock exchanges to bring these provisions to the notice of their broker-members and to make them available on their websites. Stock exchanges are also directed to amend their statutes and regulations to implement these provisions.