Exclusive: SEBI raises concern over authorised persons and renting of prop terminals

Market regulator Securities and Exchange Board of India (SEBI) has raised concerns over non-monitoring of Authorised Persons (APs) and misuse of prop trading terminals. According to sources, the issue was raised by top SEBI officials during the meeting with broker representatives at the first anniversary of the Brokers Industry Standards Forum (ISF), which was organised in Mumbai. Authorised persons are sub-brokers, who are linked to brokers. Prop trading is the trading that brokers do for their own investments.

SEBI’s concern has emerged from past complaints and its own inspections where authorised persons have been found to be involved in pushing unregulated products and running illegal advisory businesses. There have been instances where trading terminals have been found at locations different from those reported to the stock exchange. Also, authorised persons have been doing activities that were outside the regulatory scope of SEBI. According to sources, SEBI had discussed a plan last year with stakeholders to review the regulations for authorised persons. SEBI, in its paper, shared with stakeholders and raised concerns on various issues. “Such increase in the number of APs has also led to the increasing number of complaints against APs such as unauthorised trades carried out by APs or assured returns being provided by APs for the sole purpose of onboarding clients as well inducing them trade in segments such as F&O," it read. 

सब-ब्रोकर के कामकाज की निगरानी और प्रॉप ट्रेडिंग के दुरुपयोग पर सेबी की ब्रोकर्स को चेतावनी, लेकिन ISF के कामकाज की तारीफ। पूरी खबर बता रहे हैं ब्रजेश कुमार...@OfficialAnmi @bbfIndia @cpaiindia @BrajeshKMZee @SandeepKrJainTS @ashumadan4 pic.twitter.com/gq3Kgtn0cD

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According to the plan, it was proposed to cap the number of authorised persons a stock broker can associate with, based on the clientele of the broker. Also, it was envisaged that brokers would have to restitute/refund the losses incurred to clients because of their authorised person activities. Capping on the amount of referral amount/commission and types of referral incentives given to authorized persons such as vouchers/cash backs etc was also to be curbed, besides strict monitoring and inspection mechanisms.

The plan is still at the discussion stage only, meanwhile, exchanges issued some circulars to deal with the authorized person's related concerns, like enhanced due diligence to be done by the Trading Members before onboarding, enhanced effectiveness of the supervision and Inspection through revising the criteria for scope of inspection of authorised persons.

Recently SEBI has passed orders against many brokers after finding various lapses during inspections.  However, brokers find it easy to appoint authorized brokers for the expansion of business and reach out to smaller towns. In the past SEBI has asked exchanges and brokers to enhance the monitoring mechanism but with the growing number of authorized persons, they find it difficult to inspect each and every authorised person, as many of them are based in far-flung areas of the country.
 
Top SEBI officials also raised the issue of misuse of proprietary trading (Prop trading) terminals, because such terminals are many times given on rent, which is not allowed as per SEBI regulations. The trend of renting proprietary trading terminals is prevalent in a few cities because users who take it on rent are not required to pay client margins, as their trade is done from a broker account. Usually, there is a deal of some sort of profit sharing or fixed monthly rent, for such terminals.

At various points, SEBI had thought of plans to directly intervene using technology and more policy measures, including restricting the idea of prop broker concept but so far it has refrained and wants brokers themselves to deal with the issue. SEBI initially conceived the idea of a device identifier, which was tested also internally, this can help regulator and exchanges to track exactly who is doing the trade. There were instances where prop terminals were found hundreds of kilometers away and dozens of log- ins are created. Experts wonder, how can this be called a prop trading with so much of log-in ids.  They say, something is grey and the regulator must look into the issue.
 
SEBI top management has asked broker ISF to look into the matter of authorised persons and prop terminal referred to the Brokers Industry Standards Forum (ISF), a body comprising various brokers associations to help regulator in setting standards for implementation of various regulatory directives issued from time to time.

Over the last year, the Brokers ISF has met 38 times and taken up around 150 agenda items that have been referred to it by the regulatory bodies/MIIs or the member associations/industry bodies.