31 march 2008
PROPOSED POLICY FOR IMPROVEMENT IN SALES PRACTICE BY THE
MEMBERS OF THE STOCK EXCHANGES
Introduction
SEBI has received suggestions for further improvement in sales practices
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 the bye laws/circulars/rules/regulations of the
exchanges lay down guidelines in respect of sales practices.
The matter was discussed with the Stock exchanges. It is felt that there is a need
to enhance the regulatory framework and also to create a sense of awareness
among investors in this regard. Accordingly, based on the suggestions received
from exchanges, it is proposed that brokers adopt the guidelines prescribed
below:
1. Strengthening KYC Norms
a) The Exposure/Turnover limit given by the trading members should be
commensurate with the financial details of the clients reported in the
KYC. The said limit to be specified in the KYC and strictly adhered to
or the details in KYC to be suitably modified.
b) Only person with financial standing at least comparable to that of the
client he is introducing should be accepted as introducer. The
documents such as PAN Card, Income Tax Return / Proof of residence
etc to be maintained alongwith the KYC of the client to whom he is
introducing.
2. Work history & background of the Trading Member
a) Trading Members may be required to inform the clients (upfront at the
time of entering into Member-Client agreement) about work history &
background of their firm.
b) Actions against the trading member for non-compliance/breach of
regulatory requirements, investor grievances & arbitration cases filed,
pending etc. may be disclosed.
3. Sales practices
a) Trading members owe their clients a duty to provide suitable
investment advice in the best interest of the clients. The basis of sales
efforts should reasonably represent fair treatment for the persons
towards whom the sales efforts are directed.
b) While recommending purchase or sale of any security / derivatives
contract to a client, trading member shall have reasonable grounds for
believing that the recommendation is suitable for such client on the
basis of the facts disclosed by such client as to his / her financial
position, other security holdings, past investment experience & pattern
and investment needs.
c) Prior to the execution of transactions on behalf of a non-institutional
client, trading member shall make reasonable efforts to obtain the
following information regarding the client
• Financial status
• Investment objectives
• Past investment experience & pattern
• Risk appetite of the client.
• Such other information considered to be reasonable by the
trading member
d) Trading members shall not recommend to any client any transactions
unless they have reasonable grounds for believing that the entire
recommended transaction is not unsuitable for the client, based on the
information provided by the client and after reasonable enquiry by the
trading member.
e) Trading members shall ensure that the client is adequately informed of
the nature and the implication of the recommended transactions and
the facts or circumstances which the client needs to know in order to
make informed purchase or sale decision.
f) Trading members shall also assure themselves that the client
understands the risks involved in such orders and has sufficient
networth to be able to assume the risks and bear the potential losses if
such orders result in trades.
g) Trading members shall not recommend to their clients securities or
derivative 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 such
transactions of their clients so as to ensure best available price for the
client.
4. Excessive trading activity
a) Trading members shall not encourage or induce excessive trading or
speculative activity in a client’s account which is not in accordance with
the objectives, risk appetite and financial situation of the client
involved.
5. Fair dealing with customers with regard to derivative products or new
financial products
a) Trading members shall ensure fair dealing with customers when
making recommendations or accepting orders for derivatives contracts
and new financial products.
b) As new products are introduced from time to time, it is imperative that
trading members make every effort to familiarize themselves with each customer’s financial situation, trading experience, and ability to meet
the risks involved with such products and to make every effort to make
customers aware of the pertinent information regarding such products.
c) The clients may be required to have certain minimum amount of networth
(e.g.5 lacs) for trading in Derivative Segment. A net-worth
certificate from a practicing Chartered Accountant or acknowledgement
for I.T. return filed should be accepted in this regard.
d) While registering any client for Derivative Segment, apart from signing
a Risk Disclosure Document, the trading member also should ensure
that adequate training vis-à-vis risk associated (including margin
requirement) with Derivative Segment is imparted to the clients.
6. Conflicts of interest
a) Trading members must maintain Chinese wall among its various
activities such as proprietary trading, investment banking, research etc.
b) No trading member may directly or indirectly offer favorable research
or a specific price target to a company as consideration or inducement
for the receipt of business or compensation.
c) Trading members shall ensure that no research analyst may purchase
or sell any security issued by a company that the research analyst
follows or derivative of such security, for a period beginning 30
calendar days before and five calendar days after the publication of a
research report concerning the company.
d) Trading member shall ensure that no research analyst may purchase
or sell any security or derivative of such security in a manner
inconsistent with the research analyst’s recommendation as reflected
in the most recent research report published by the member.
e) A member must disclose in research reports and a research analyst of
the trading member must disclose in public appearances:
(a) if the research analyst or a member of the research analyst’s
household has a financial interest in the securities of the subject
company, 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 trading
member or research analyst of which the trading member knows
or has reason to know at the time of publication of the research
report.
7. Record Keeping
a) Trading members shall establish and maintain procedures to ensure
that sufficient information is recorded and retained about their business and clients for enabling themselves to justify the risk profiling of their
clients and the suitability of any advice given.
8. General obligations
a) Fictitious accounts: Trading members shall not allow establishment of
fictitious accounts in order to execute transactions which otherwise
would be prohibited or to disguise such transactions.
b) Unauthorized transactions: Trading members shall not cause to
execute transactions which are not explicitly authorized by the client
concerned.
c) Misuse of customers’ funds or securities: Trading members shall not
use clients’ funds and / or securities otherwise than as prescribed in
the rules, bye-laws, regulations and circulars issued there under.
d) Front running: Trading members shall not execute transactions for own
account in securities ahead of making recommendations to their clients
in such securities. Trading members shall also have adequate systems
in place to maintain the confidentiality of the information about their
dealing by their clients.
e) Trading members or their representatives shall not indulge in any
fraudulent activities, such as forgery, non-disclosure or misstatement
of material facts, manipulations and various deceptions. Making,
directly or indirectly, any false or misleading advertisement or any
untrue statement of a material fact, constitutes a fraudulent, deceptive
or manipulative act on the part of trading members.
Comments/suggestions are invited on the above proposals.
Comments/suggestions may be sent to the address mentioned below to Mr.
Susanta Kumar Das, Assistant General Manager, Integrated Surveillance
Department, SEBI before April 15, 2008.
Integrated Surveillance Department
SEBI Bhavan, 6th Floor, A-Wing
Plot No.: C4-A, “G” Block
Bandra Kurla complex
Mumbai-400 051
Comments/suggestions may also be emailed to susantad@sebi.gov.in or to
sunilk@sebi.gov.in before April 15, 2008.
http://www.sebi.gov.in/commreport/sales.pdf
Wednesday, April 2, 2008
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