India: Prevention Of Unauthorized Trading By Stock Brokers

Introduction:

The Securities and Exchange Board of India (hereinafter referred to as 'SEBI'), vide circular no. CIR/HO/MIRSD/MIRSD2/CIR/P/2017/124¹, dated November 30, 2017, has clarified that stock brokers are now compulsorily required to keep record of orders placed by clients for a minimum period of 3 years in order to prevent unauthorized trading activities. Further, in cases where dispute has been raised, such records shall be kept till the dispute is resolved.

Background:

Earlier in the year, the SEBI, vide circular no. CIR/HO/MIRSD/MIRSD2/CIR/P/2017/108², dated September 26, 2017, had inter-alia specified that brokers shall execute trades of clients only after keeping evidence of the client placing such order in the form of:

a) Physical record written & signed by client,

b) Telephone recording,

c) Email from authorized Email ID,

d) Log for internet transactions,

e) Record of SMS messages,

f) Any other legally verifiable record.

Further, SEBI made it mandatory to use telephone recording system to record client instructions and maintain telephone recordings wherever the order instructions are received from clients through the telephone.

Clarification circular dated November 30, 2017:

In furtherance of the SEBI circular dated September 26, 2017, it has now been clarified that the brokers shall maintain the above specified records specified for a minimum period for which the arbitration accepts investor complaints as notified from time to time (currently three years). However, in cases where dispute has been raised, such records shall be kept till final resolution of the dispute unless SEBI desires that specific records be preserved then such records shall be kept till further intimation by SEBI.

The burden of proof will be on the broker to produce the records for the disputed trades but in case of technical failure if broker fails to produce evidences, he will have to justify with reasons for the same and depending upon merit of the same, other appropriate evidences like post trade confirmation by client, receipt/payment of funds/ securities by client in respect of disputed trade shall also be considered.

Remarks:

This is not the first time SEBI has tried to tackle the issue of unauthorized trading. Periodic Running Account Settlement, Post transactions SMS/email by exchanges/Depositories, Ticker on broker/DP websites etc. are examples of some of the significant steps taken by SEBI to deal with unauthorized trading activity. The mandate on stock brokers to compulsorily keep record of orders placed by clients shall be effective from 1 January, 2018, and will be another significant step in the same direction. This mandate by SEBI seems to strengthen the regulatory provisions against unauthorized trades and also seeks to harmonize the requirements across markets.

Footnotes

1 Circular No.: CIR/HO/MIRSD/MIRSD2/CIR/P/2017/124, dated November 30, 2017. Available at: http://www.sebi.gov.in/legal/circulars/nov-2017/clarification-to-circular-on-prevention-of-unauthorised-trading-by-stock-brokers_36775.htm1.

2 Circular No.: CIR/HO/MIRSD/MIRSD2/CIR/P/2017/108, dated September 26, 2017. Available at: http://www.sebi.gov.in/legal/circulars/sep-2017/prevention-of-unauthorised-trading-by-stock-brokers_36079.html

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