Sebi issues inspection guidelines for brokers

New Delhi: Markets regulator Sebi on Monday came out with annual inspection guidelines for brokers to improve the effectiveness of supervision.

The exchanges and clearing corporations have been asked to continuously assess the risks posed by their members and review the policy of annual inspection, as and when required, in consultation with Sebi.

Besides, the regulator said brokers having adverse observations in the internal audit report on high-risk issues like wrong reporting of margins, transfer of trades, pledging of client securities and dealing with unregistered intermediaries would be inspected irrespective of the fact of when they were last inspected.

Also, special purpose inspections would be carried out based on any triggers like patterns found during investor complaint resolution/arbitration, complaints on specific malpractices of a broker or references from various authorities.

In addition, exchanges would have to establish an information-sharing mechanism with one another on the important outcome of inspection of members who hold multiple memberships of bourses.

The move would improve the effectiveness of supervision and also bring cases of repetitive or serious violations to the notice of Sebi, the regulator said in a circular.

Apart from annual inspection, Sebi said that brokers can be inspected in situations including getting disabled on account of funds shortages on more than three times in a month as well as those facing overnight disablement due to margin shortage for more than two days.

Among other scenarios, top 25 brokers in terms of investor complaints and arbitration cases filed by investors would be inspected and top 25 brokers paying high penalties for non-reporting or short reporting of margin or any other similar high risk compliance issue would be scrutinised.

Brokers who do not fall under any of these categories would be inspected by the exchanges at least once in three years.

The exchanges would have to frame internal policy for selection of stock brokers for inspection based on alerts from 'risk based supervision'.

"Clearing activity undertaken by stock brokers for other stock brokers shall be inspected by clearing corporations. Other activities of stock brokers shall be inspected by stock exchanges.

"If stock exchanges and clearing corporations so desire, they can conduct joint inspections of stock brokers. Where clearing corporation has not been set up, stock exchange shall inspect all activities of stock brokers including activity of clearing for other stock brokers," Sebi said.