Brokers to get alerts on suspicious trades in client accounts

Leading bourses BSE and NSE have put in place a mechanism that will generate automated alerts for stock brokers whenever suspicious transactions are detected in their clients' accounts.

The alerts will be generated in case of unusual changes in the trading pattern of the clients, sudden trading in dormant accounts as also in suspected cases of circular trading, 'pump-and-dump', front running and 'wash-sale' activities.

In market parlance, 'pump-and-dump' involves sudden sale of shares after creating huge volumes with significant buying activities, while in 'wash-sale' transaction, an investor sells a losing security to claim a capital loss, only to repurchase it again for a bargain.

Trading members have also been asked to analyse the trading activity of clients on the basis of transactional alerts and can seek explanations from them for entering into such transactions.

They can seek documentary evidence such as bank statement and demat transaction or any other documents from the clients, as per the alerts triggered by their trading activities.

Besides, the stock brokers have also been asked to conduct their due diligence procedures for the clients on a continuous basis.

The decisions have been taken in consultation with the market regulator Sebi and the two bourses have asked their members to put in place the required procedures, policies and processes after proper approvals of their relevant authorities latest by May 15.

The move will help in facilitating effective surveillance mechanisms at the member level.

The exchanges said that trading members are required to ensure that key KYC (Know Your Customers) parameters are updated on a periodic basis as well as latest information of the client is updated in UCC (Unique Client Code) database of the bourses.

"Trading Members are required to carry out the due diligence of client(s) on a continuous basis," the two exchanges said in a similar worded statement.

While BSE and NSE have provided for more than a dozen transactional alerts, the trading members can also formulate their own alerts.

The transactional alerts can be downloaded through member portal with effect from April 2 and trading members can give their feedback to the exchange regarding it.

"The period for such statements may be at least +/- 15 days from the date of transactions to verify whether the funds/securities for the settlement of such trades actually belongs to the client for whom the trades were transacted," the exchanges said.

In case of adverse observations, trading member would report all such instances to the bourses within 45 days of the alert generation. The trading member can also seek extension of the time period from the bourses if required.

For effective monitoring and reporting, trading members should frame a surveillance policy covering, receipt of alerts generated at member's end, time frame for disposition of alerts.

The surveillance policy of the trading member should be approved by its board.

Trading members are required to submit a quarterly report to their board on the number of alerts pending generated and disposed of during the quarter. Besides, reasons for pendency would be discussed and appropriate action taken would be taken regarding it.

Internal auditor of trading member would review the surveillance policy, its implementation, effectiveness and review the alerts generated during the period of audit. Internal auditor would record the observations regarding the same in their report.