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Monday, December 29, 2008

SEBI's clause call: No misuse of client funds by brokers

The Securities and Exchange Board of India (SEBI) will consider revamping key clauses in the client-broker agreement to prevent stock brokers from misusing client funds.
The dramatic crash in the stock market at the beginning of this year and the ensuing liquidity crisis led to misuse of client funds by many broking firms. Acting on this, SEBI had formed an informal committee — comprising senior officials from both exchanges, brokers, and investors’ representatives — in June 2008 to address the issue. “The committee has sent its recommendations to SEBI to make the agreement more investor-friendly and less cumbersome. It is very likely that some changes will come through,” said a person familiar with the development. In the current structure, an account opening form, known as ‘Individual Client Registration Form’, has boxes which the investor has to tick depending on whether he wants to trade in cash, derivatives or debt markets. There have been instances, where brokers have ticked the derivatives option after the client has filled in the form, and then used his account to punt in the market. To curb this practice, SEBI is considering introducing different colour pages in the form so that the investor knows what he is applying for, and the broker will not be able to make changes later on. The committee has proposed reducing the number of signatures to be done by clients in the agreement. If implemented, the agreement will henceforth require just half-a-dozen signatures as opposed to nearly 20 signatures at present. After the agreement is signed, brokers will be required to give the copy of the agreement, signed by both parties, to clients. Currently, the form has a section titled “adjustment of balance in family accounts”, which gives a room to the broker to adjust the outstanding balance of two family members against each other without the consent of the other client. That will no longer be possible, once the new agreement comes into effect. The committee has recommended a provision to have a prior consent from the member on the form to do so. Further, the committee has said that the broker should be compulsorily required to make the account ‘zero balance’ every quarter by exchange of cheques so that disputes don’t go beyond three months. This should be accompanied by a balance confirmation from the client with signature at the end of every financial year. It is also recommended that there should be separate forms — one having mandatory requirements by SEBI and other with optional conditions stipulated by the broker. Currently, stipulations are mixed in one form, which also includes certain conditions not mandated by regulator, but incorporated by the broker as a safeguard against potential legal action by the client. Sources said that initially, brokers on the SEBI panel were resisting these moves, as these would involve more time and costs, besides making them more accountable to their clients. But due to increasing cases of client-funds misuse coming to light, brokers had to bow down to pressure from other committee members.


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