MUMBAI - INDIA :-)
Securities and Exchange Board of India today proposedadditional guidelines for trading members of stock exchanges toimprove their sales practises.
Among key proposals, SEBI has sought to strengthen Know YourClient norms, provide suitable investment advice in the best interestof clients,and avoid conflict of interest among various activitiessuch as proprietarytrading, investment banking, research, etc.
The capital market regulator has invited comments and suggestionson these proposals before Apr 15.
INTRODUCTION
SEBI has received suggestions for further improvement in salespractices followed by the trading members of the Stock Exchanges.
It is observed that the code of conduct mentioned in the SEBI(Stock-brokers and Sub-brokers) Regulations, 1992 as well as thebyelaws/circulars/rules/ regulations of the exchanges lay downguidelines inrespect of sales practices.
The matter was discussed with the Stock exchanges. It is felt thatthereis a need to enhance the regulatory framework and also to createa sense of awareness among investors in this regard.
Accordingly, based on the suggestions received from exchanges, itis proposed that brokers adopt the guidelines prescribed below:
1. STRENGTHENING KYC NORMS
a) The Exposure/Turnover limit given by the trading members should becommensurate with the financial details of the clients reported in theKYC. The said limit to be specified in the KYC and strictly adhered toor the details in KYC to be suitably modified.
b) Only person with financial standing at least comparable to that oftheclient he is introducing should be accepted as introducer. Thedocuments such as PAN Card, Income Tax Return / Proof of residenceetc to be maintained along with the KYC of the client to whom he isintroducing.
2. WORK HISTORY & BACKGROUND OF THE TRADING MEMBER
a) Trading Members may be required to inform the clients (upfront atthe time of entering into Member-Client agreement) about work history&background of their firm.
b) Actions against the trading member for non-compliance/breach ofregulatory requirements, investor grievances & arbitration casesfiled,pending etc. may be disclosed.
3. SALES PRACTICES
a) Trading members owe their clients a duty to provide suitableinvestment advice in the best interest of the clients. The basis ofsalesefforts should reasonably represent fair treatment for the personstowards whom the sales efforts are directed.
b) While recommending purchase or sale of any security / derivativescontract to a client, trading member shall have reasonable grounds forbelieving that the recommendation is suitable for such client on thebasis of the facts disclosed by such client as to his / her financialposition, other security holdings, past investment experience &patternand investment needs.
c) Prior to the execution of transactions on behalf of a non-institutionalclient, trading member shall make reasonable efforts to obtain the following information regarding the client Financial statusInvestment objectivesPast investment experience & patternRisk appetite of the client.Such other information considered to bereasonable by the trading member.
d) Trading members shall not recommend to any client any transactionsunless they have reasonable grounds for believing that the entirerecommended transaction is not unsuitable for the client, based on theinformation provided by the client and after reasonable enquiry by thetrading member.
e) Trading members shall ensure that the client is adequately informedof the nature and the implication of the recommended transactions andthe facts or circumstances which the client needs to know in order tomake informed purchase or sale decision.
f) Trading members shall also assure themselves that the clientunderstands the risks involved in such orders and has sufficientnetworth to be able to assume the risks and bear the potential lossesifsuch orders result in trades.
g) Trading members shall not recommend to their clients securities orderivative contracts on such securities in a concentrated manner,which represents a subjective or arbitrary supply of information.
h) Trading members shall also ensure timely execution of suchtransactions of their clients so as to ensure best available price fortheclient.
4. EXCESSIVE TRADING ACTIVITY
Trading members shall not encourage or induce excessive trading orspeculative activity in a client's account which is not in accordancewiththe objectives, risk appetite and financial situation of the client involved.
5. FAIR DEALING WITH CUSTOMERS WITH REGARD TO DERIVATIVE PRODUCTS ORNEW FINANCIAL PRODUCTS
a) Trading members shall ensure fair dealing with customers whenmaking recommendations or accepting orders for derivatives contractsand new financial products.
b) As new products are introduced from time to time, it is imperativethat trading members make every effort to familiarize themselves witheach customer's financial situation, trading experience, and abilityto meet the risks involved with such products and to make every effortto make customers aware of the pertinent information regarding suchproducts.
c) The clients may be required to have certain minimum amount ofnetworth(e.g.5 lacs) for trading in Derivative Segment. A net-worthcertificate from a practicing Chartered Accountant or acknowledgementfor I.T. return filed should be accepted in this regard.
d) While registering any client for Derivative Segment, apart fromsigning a Risk Disclosure Document, the trading member also shouldensure that adequate training vis-a-vis risk associated (includingmargin requirement) with Derivative Segment is imparted to the clients.
6. CONFLICTS OF INTEREST
a) Trading members must maintain Chinese wall among its variousactivities such as proprietary trading, investment banking, researchetc.
b) No trading member may directly or indirectly offer favorableresearchor a specific price target to a company as consideration orinducementfor the receipt of business or compensation.
c) Trading members shall ensure that no research analyst maypurchaseor sell any security issued by a company that the researchanalystfollows or derivative of such security, for a period beginning30calendar days before and five calendar days after the publication of aresearch report concerning the company.
d) Trading member shall ensure that no research analyst may purchaseor sell any security or derivative of such security in a mannerinconsistent with the research analyst's recommendation as reflectedin the most recent research report published by the member.
e) A member must disclose in research reports and a research analystofthe trading member must disclose in public appearances:
(a) if the research analyst or a member of the research analyst'shousehold has a financial interest in the securities of the subjectcompany, and the nature of the financial interest (including,without limitation, whether it consists of any option, right,warrant, future, long or short position)
(b) any other actual, material conflict of interest of the tradingmember or research analyst of which the trading member knowsor has reason to know at the time of publication of the researchreport.
7. RECORD KEEPING
Trading members shall establish and maintain procedures to ensurethat sufficient information is recorded and retained about theirbusinessand clients for enabling themselves to justify the risk profiling oftheirclients and the suitability of any advice given.
8. GENERAL OBLIGATIONS
a) Fictitious accounts: Trading members shall not allow establishmentoffictitious accounts in order to execute transactions which otherwisewould be prohibited or to disguise such transactions.
b) Unauthorized transactions: Trading members shall not cause toexecute transactions which are not explicitly authorized by the clientconcerned.
c) Misuse of customers' funds or securities: Trading members shall notuse clients' funds and / or securities otherwise than as prescribed inthe rules, bye-laws, regulations and circulars issued there under.
d) Front running: Trading members shall not execute transactions forownaccount in securities ahead of making recommendations to theirclients in such securities. Trading members shall also have adequatesystemsin place to maintain the confidentiality of the informationabout theirdealing by their clients.
e) Trading members or their representatives shall not indulge in anyfraudulent activities, such as forgery, non-disclosure or misstatementof material facts, manipulations and various deceptions. Making,directly or indirectly, any false or misleading advertisement or anyuntrue statement of a material fact, constitutes a fraudulent,deceptiveor manipulative act on the part of trading members.
Regards,
Allies Financial Services
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