Observing a rise in the investor complaints against unauthorized trading by the stock brokers, SEBI has recently issued new measures to tackle the menace. Unauthorized trading means trading conducting by a broker on the client’s account, without the latter’s authorization. It not only leads to erosion of wealth, but also investor confidence in the stock markets. While several steps, such as periodic running account settlement, post transaction sms/email by exchanges/depositories, ticker on broker/DP websites, etc, were put in place by SEBI to check such trading, they were evidently not completely successful.
Through a circular, which will come into effect from January 01, 2018, SEBI has now mandated all brokers to execute trades of clients only after keeping evidence of the client placing such orders. This can be in the form of physical record written and signed by client, telephone recording, email, internet logs, SMS records or such other methods. Further, the burden of proof to produce these records lies on the broker in case of any dispute. While the circular does not specify the time period for which such documentation has to be preserved, the time period of five years specified for the maintenance of books of accounts and records under the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 might probably apply in this case.
A multitude of cases involving unauthorized trading have been observed in the recent past. The dispute resolution process is lengthy and involves various levels of appeal, beginning from Investor Grievance Redressal Panel (IGRP) to the Appellate Arbitration Panel of the stock exchanges. This new step will undeniably lead to a substantial reduction in such cases of unauthorized trading.
SEBI has issued a clarification circular, dated November 30, 2017, after brokers expressed operational difficulties in maintaining the records. SEBI directed the brokers to maintain the abovementioned records for the limitation period provided under arbitration, which currently is three years, or till the final resolution in case any dispute is raised. It further clarified that the burden of proof on the broker to produce the records can be relaxed in cases of justifiable technical failures, and in such cases other appropriate evidence shall be considered.