REQUIREMENTS RELATING TO DEALINGS BETWEEN A CLIENT AND STOCK BROKER

[Mr. M. GOVINDARAJAN]

INTRODUCTION:

Trading in stock exchange is now common every where because of awareness on the same is brought to the minds of many people.  Securities and Exchange Board of India has complete control on trading on securities. Development in technology enables any person to trade securities online. SEBI has taken greater measure in regulating the trade. Even though on line trade can be done by any person the role of stock broker is essential in trading.  Vide Circular No. MD/SED/CIR/93/23321, dated 18.11.1993 the norms for regulation of transactions between clients and brokers were specified.  The model format for the Member Clients Agreements was specified by SEBI/MIRSD/DPS-1/Cir.31/2004, dated 26.08.2004.  Vide No. MRD/DoP/SE/Cir-20/2005, dated 8.09.2005 the conditions for issuing electronic contract notes were specified.

With a view to instill greater transparency and discipline in the dealings between the clients and the stock brokers, SEBI has issued Circular No. MIRSD/SE/Cir-19/ 2009, dated 3.12.2009, in which the requirements that shall be complied with the stock brokers are furnished.

REQUIREMENTS TO BE COMPLIED WITH:

The circular requires the stock broker to maintain the following types of documents:

§ Mandatory documents;

§ Non mandatory documents;

§ Running account authorization;

§ Authorization for Electronic Contract Notes;

Client Registration:

The stock broker shall register a client by entering into an agreement with him. He shall make availing a folder/book containing all the documents required for registration of a client. The folder/book shall have an index page listing all the documents contained in it and indicating briefly significance of each document. A copy of the signed shall be made available to the client.

Mandatory Documents:

The following are the mandatory documents to be maintained by the stock broker:

§ Member Client Agreement (MCA)/Tripartite Agreement in case sub broker is associated;

§ Know Your Client (KYC) form;

§ Risk Disclosure Document (RDD).

The above documents shall be executed in the format as prescribed by SEBI.

§ The client shall indicate the stock exchange as well as the market segment where he intends his trades to be executed.   He shall do in the KYC form in his own hand and sign against these;

§ The KYC form shall capture the identity and the address of the introducer instead of his MAPIN/UID. The KYC form shall be modified to this extent;

§ The stock broker shall have documentary evidence of financial details provided by the clients who opt to deal in the derivative segment. In respect of other clients, the stock broker shall obtain the documents in accordance with its risk management system;

§ The stock broker shall also capture details of action taken against a client by SEBI or other authorities during the last three years;

§ There shall be a mandatory document dealing with policies and procedures for each of the following under appropriate headings:

Ø refusal of orders for penny stocks;

Ø setting up client's exposure limits;

Ø applicable brokerage rate;

Ø imposition of penalty/delayed payment charges by either party, specifying the rate and the period;

Ø the right to sell clients' securities or close clients' positions, without giving notice to the client, on account of non payment of client's due;

Ø shortages in obligations arising out of internal netting of trades;

Ø conditions under which a client may not be allowed to take further position or the broker may close the existing position  of a client;

Ø temporarily suspending or closing a client's account at the client's request; and

Ø deregistering a client.

Non Mandatory Documents:

Any term or condition other than those stated in the mandatory part shall form part of non mandatory documents.  The clauses in the non mandatory documents shall not be in contravention of any of the clauses of the mandatory documents, as also the Rules, Regulations, Articles, Byelaws, Circulars, Directives of SEBI and stock exchanges.  Any such contravening clause will be null and void.

Running Account Authorization:

The settlement of funds/securities shall be done within 24 hours of the payout.   A client may specifically authorize the stock broker to maintain a running account.  Such maintaining a running account is subject to the following conditions:

§ The authorization shall be renewed at least once a year and shall be dated;

§ The authorization shall be signed by the client only and not by any authorized person on his behalf or any holder of Power of Attorney;

§ The authorization shall contain a clause that the client may revoke the authorization at any time;

§ For the clients having outstanding obligations on the settlement date, the stock broker may retain the requisite securities/funds towards such obligations and may also retain the funds expected to be required to meet margin obligations for next 5 trading days, calculated in the manner specified by the exchange;

§ The actual settlement of funds and securities shall be done by the broker, at least once a calendar quarter or month, depending on the preference of the client.   While settling the account, the broker shall send to the client a 'statement of accounts' containing an extract from the client ledger for funds and an extract from the register of securities displaying all receipts/deliveries of funds/securities.   The statement shall also explain the retention of funds/securities and the details of the pledge, if any;

§ The client shall bring any dispute arising from the statement of accounts or settlement so made to the notice of the broker preferably within 7 working days from the date of receipt of funds/securities or statement, as the case may be;

§ Such periodic settlement of running account may not be necessary for clients availing margin trading facility as per SEBI Circular and for funds received from the clients towards collaterals/margin in the form of Bank Guarantee/Fixed Deposit Receipts;

§ The stock broker shall transfer the funds/securities lying in the credit of the client within one working day of the request if the same are lying with him and within three working days from the request if the same are lying with the Clearing Member/Clearing Corporation:

§ There shall be no inter-client adjustments for the purpose of settlement of the 'running account';

§ These conditions shall not apply to institutional clients settling trades through custodians.  

Authorization for Electronic Contract Notes:

The stock broker may issue Electronic Contact Notes if specifically authorized by the client subject to the following conditions:

§ The authorization shall be in writing and be signed by the client only and not by any authorized person on his behalf of holder of the power of attorney;

§ The client shall create/provide his own e-mail-Id to the stock broker.   It shall not be created by stock broker;

§ The authorization shall have a clause to the effect that any change in the e-mail ID shall be communicated by the client through a physical letter to the broker.  In respect of internet clients, the request for change of e-mil-Id may be made through the secured access byway of client specific user Id and password.

General Points:

All the documents shall be printed in minimum font size of 11.  A copy of all the documents executed by the client shall be given to him, free of charge, within seven days from the date of execution.  The stock broker shall take client's acknowledgement for receipt of the same.

The stock brokers having their own web sites shall display all the documents executed by a client, client's position, margin and other related information, statement of accounts, etc., in the web site and allow secured access by way of client-specific user Id and password.

No term of the agreement, other than those prescribed by SEBI, shall be changed without the consent of the client.   Such change needs to be preceded by a notice of 15 days.  The stock broker shall frame the policy regarding treatment of inactive account which should, inter alia, cover aspects of time period, return of client assets and procedure for reactivation of the same. It shall display the same on its web site, if any.  

As on 31st March of every year, a statement of balance of Funds and Securities in hard copy and signed by the broker shall be sent to all the clients.

Implementation of Circular:

The stock brokers shall take necessary steps to implement this circular immediately and ensure its full compliance in respect of all clients-existing or new - at the latest by 31st March, 2010.  The Stock Exchanges are directed to-

§ bring the provisions of this circular to the notice of the stock brokers and also disseminate the same on their web sites;

§ make necessary amendments to the relevant bye laws, rules and regulations for the implementation of the above decision in co-ordination with one another to achieve uniformity in approach;

§ communicate to SEBI, the status of the implementation of the provisions of this circular in the Monthly Development Reports.