egulatory Judgments are supposed to instill fear of compliance, Benefits of Timely review and process Rcorrection helps improve revenues and inculcates

transparency and clear ground rules to in house team and most importantly investors.

At a recent global compliance conference, one of the senior speakers from a large MNC broking house told the audience, "Traders are Passé, but Compliance is in Vogue," and that the biggest drivers of hiringis the enhanced need for Regulatory and Compliance professionals in response to the onslaught of new rules and regulations and I would add to it as broker inconsistencies in managing such Rules.

A quick tabulation highlighting major orders in terms of numbers were on the following regulations:• Synchronization, Self, Cross and Artificial volume,• Non-Compliance in the Brokers Regulation such as

failure to maintain segregation of own and client funds, Quarterly settlement failure, Fund transfer between clients and group entities, etc.

• Orders were also passed under insider trading regulation- in terms of number of orders-looks lowest!! Beware...Looks can be Deceptive!!

• The remaining were mainly orders for participating in trading activity without obtaining SEBI registration as an unauthorized intermediary, portfolio manager or investment advisory, Funds Misutilization, execution of trades for barred clients etc.

A second representation too gives a similar picture!!Action wise - Regulation wise - No. of orders - Maximum

Brokers need to ensure sanity check and internal

housekeeping relating to funds and stocks settlement

related and unregistered intermediary activities.

138 FORUM VIEWS - APRIL 2016

SEBI ORDERS ON BROKINGTRANSACTIONS -A SPECIAL FEATURE -FEB 2015 TO JAN 2016

By Rekha ShahFounderAnalyze N Control

“Traders are Passé, but Compliance is in Vogue, and that the biggest drivers of hiringis the enhanced need for Regulatory and Compliance professionals in response to the onslaught of new rules and regulations and I would add to it as broker inconsistencies in managing such Rules.”

139 FORUM VIEWS - APRIL 2016

FEATURE - SEBI ORDERS ON FEATURE - SEBI ORDERS ONBROKING TRANSACTIONS

20

19

10

6

2

0 5 10 15 20 25

Broker regulations(35.09 %)

Orders-PFUTP-Fraudulent(33.33 %)

Orders-PMS and investmentadvisory (17.54 %)

Orders-PFUTP-Synchronized/Circular Trading (10.53 %)

Orders-Insider Trading(3.51 %)

No. of Orders

Type

s o

f R

egul

atio

n

Regulation wise Orders

No

of o

rder

sPenalty Impounding

0 100 200 300

31.2

140.39

120.70

42

3.5

135.3

41.80

Orders-Broker Regulations(15.40%)

Orders-Insider Trading(2.52%)

Orders-PFUTP-Fraudulent(59.60%)

Orders-PFUTP-Synchronized/Circular Trading (20.74%)

Orders-PMS / InvestmentAdvisers Regulations (1.73%)

Millions

Regulation wise Penalty

10

4

2

2

1

1

1

1

1

1

1

3

1

3

5

1

4

2

1

1

1

1

1

1

1

1

2

2

3

2

0 2 4 6 8 10 12 14 16

Cease and desist till refund (Cease and Desist)

Warning without Exchange penalty (Warning)

Warning with Exchange penalty (up to 1 crore)

Suspension (more than 1 year)

Suspension (up to 1 year)

Impounding (1 crore and above)

Impounding (1 Lac to 1 crore)

Debarment (till further order)

Debarment (5 years and above)

Debarment (1 year to 5 years)

Penalty(1 crores and above)

Penalty(25 Lacs to 1 crore)

Penalty(1 Lac to 25 Lacs)

Broker Regulations Orders-Insider Trading Orders-Pfutp-Fraudulent

Orders-Pfutp-Synchronized/Circular Trading Orders-Pms And Investment Advisory

Action wise - Regulation wise -No of orders

As detailed above there were almost 25 penalty orders and some of the selective cases illustrated and tabulated, under each of the regulations are as follows:

I. Broad-Broad Overview-Regulation wise breakup of orders

no. of Penalty or Debarment orders were for PFUTP and Broker Regulations.

In the above scenario,

• The orders passed under penalty are comparatively more as compared to others type of action.

• Further segregation in penalty related orders clearly shows that major amount of penalty was levied on Brokers Regulation, PFUTP and Synchronized / Circular Trading & PFUTP Fraudulent Regulations.

• The penalty levied under these regulations were for Front Running, Synchronization, Self and artificial volume creation, Failure in Quarterly Settlement of Account, Failure to maintain segregation between own funds and client funds, etc.

• To explain debarment cases, the major orders passed under debarment for limited period, other than cases where it was till further orders:

›› Synchronization, Self and Artificial volume creation, Failure to maintain segregation between own funds and client funds, Price manipulation, Unregistered Portfolio Manager, Sub-broker and Investment Advisor.

Order Title-Penalty OrdersPenalty To

Entity TypesRegulations Penalty

SEBI - CHAIRMAN/ MEMBERS’ ORDERS WTM/PS/28/IVD/JULY/2015 -->Broker and its dealers trade in the accounts of entities, collectively referred to as "front-runners" or 'clients of broker', were in the nature of front-running the orders and trades of the "Sterling Group" and that the subsequent orders placed by the front-runners matched almost completely with the orders placed by the Sterling Group -->Noticee was found making illegal gains, while an amount totaling over Rs 14 crore would beimpounded from entities, includingindividuals and companies.

Broker and Front runners.

Orders-Insider Trading.

Impound the unlawful gains of a sum of Rs 13.53 Cr. on Front runners-Penalty Rs.0.51Cr. onBroker for prop front running.

SEBI - CHAIRMAN/ MEMBERS’ ORDERS ->WTM/PS/135/IVD/JAN/ 2016 -> Front-running of trades of Large AMC by itsDealer Group à Entities together made a huge gain--> 7 persons (including HUF account) had acted together for deriving undue profits-->AMC had lost the price advantage in these trades and the profit made by front runners was the loss of price advantage toAMC.

Unregistered Investment Advisor.

Orders- PFUTP-Fraudulent.

Impound the unlawful gains of Rs. 2.17 Cr. and Rs. 1.18 Cr. crore jointly and severally from the entities.

This was further emphasized when we were working on compilation of SEBI cases for the previous year, where penalties and debarment orders were handed out on broking related transactions for different regulations.

This feature has brought together a compilation of SEBI orders with special focus on violations on account of broking transactions in the last one year starting Feb 2015.

The chart reflects regulation wise total orders issued by SEBI from Feb. 2015 to Jan,2016. It prima facie indicates that higher numbers of orders were issued on Brokers and PFUTP Fraudulent Regulations as compared to other regulations.

The above compilation however has a limitation that it could give a skewed picture of SEBI action taken in terms of penalty and debarment with reference to number of orders but the scenario totally changes, if the above data is recalculated for impact of judgment that is classifying regulations for such SEBI orders with higher value of penalty or higher number of debarment orders.

And a completely new picture emerges!!!

II. Regulation wise penalty levied on account of Broking Transactions.

• The major penalty levied under Insider trading Regulations included penalty and impounding of gains (number of orders-2). The highest penalty amount levied under this Regulation was for front running which amounted to Rs.13.5 Crores approx.

• The Brokers regulations contain a lower amount o f p e n a l t y (comparatively!) but it contains the highest number of orders.

FEATURE - SEBI ORDERS ON FEATURE - SEBI ORDERS ONBROKING TRANSACTIONS

140 FORUM VIEWS - APRIL 2016 141 FORUM VIEWS - APRIL 2016

Orders-Pfutp-Synchronized/Circular TradingOrders-Insider Trading

Orders-Pms And Investment Advisory

Orders-Pfutp-FraudulentBroker Regulations

Debarment (1year to 5 years)

Debarment (5years and

above)

Debarment (tillfurther order)

Suspension (upto 1 year)

Suspension(more than

1year)

10

9

8

7

6

5

4

3

2

1

0

2 21

5

1

4

1

1

1

2

2

3

No

. of

Ord

ers

Penal Action

Debarment and Suspension

Broker RegulationsOrders-Pfutp-FraudulentOrders-Pms And Investment AdvisoryOrders-Pfutp-Synchronized/Circular Trading

Orders-Insider TradingTotal Number Of Order

20

18

16

14

12

10

8

6

4

2

0

No

. of

Ord

ers

Type of Entity

Entity wise - Regulation wise

III. Regulation wise Debarment/Suspension levied on account of Broking Transactions • 18 of 25 orders of debarment or suspension were under

Broker Regulations and PFUTP Regulations (So Members please ensure Strong Surveillance and AML Systems!!) and

• 7 orders were under Orders-PMS and Investment Advisory (from 1 year till Further Orders).

IV. Issue wise and regulation wise number of ordersIt was important to understand which were the major sore points or what were the deviations done in the compiled orders?

The graph reflects details w.r.t. issue wise and regulation wise number of orders passed. • The major number of orders passed were about

Synchronization, Self and Cross and Artificial volumes with misleading corporate announcements-hence requirement of Surveillance again takes a centre stage.

• Numbers of orders in Insider trading/Front running, fund misutilization or transfers or quarterly settlement are minimal but it has substantial share of penalty.

• The major amount contributed to impounding for front running is Rs. 16.5 Cr and other than front running i.e. for synchronization, creation of artificial volume is Rs. 9 Cr.

SEBI - ORDERS ADJUDICATING OFFICER: EAD-2/DSR/RG/406-465/2015->Order against 60 entities in the matter of Richa Industries Ltd: Contributedsignificantly to LTP, created New High Price and entered into First Trades which further created higher LTP--> Difference between buy order time and sell order time was less than 60 seconds-->No difference between buy and sell order rates and buy order and sell order quantity. -->Circular transactions were such that one leg of the transaction was in off-market and other leg of transaction was on-market.

Company and Related entities.

Orders-PFUTP-Synchronized/Circular Trading.

Total Penalty of Rs.3.29 Cr.

SEBI - ORDERS ADJUDICATING OFFICER: AK/AO-21-22/2015 -> 2 Brokers in the matter of M/s. Sky Industries Limited--> Case of Self trades, Synchronization and artificial volume creation.

Broker Orders-Broker Regulations.

Penalty of Rs 0.50 Cr on two Noticees under PFUTP-2003 and Stock Broker Regulation,1992.

A Quick browse on some of the important debarment orders in each regulation:Some of the major issues for Debarment cases:• Failure to maintain segregation of Funds and Securities

within Client and Own accounts.• Artificial Volume based on Synchronization of trades

across members including off-market and circular-trades.

• Illiquid-Option trades.• Sub Broker case of Mis-utilizisation of client funds and

unauthorized acceptance of cash from clients and issueof receipts in favor of stock broker and mis-utilistion of demand drafts received from clients.

• Case of IPO large bids to inflate the bid book; create misleading appearance of vigorous bidding; and contribute towards manipulating the price at the highest price band.

• Unregistered SEBI Investment Advisory and Portfolio Management cases

• Acting as unregistered intermediary (Authorized person/Sub Broker) in Broking segment

Title-Debarment orders Penalty To Regulations Penalty

SEBI - CHAIRMAN / MEMBERS’ ORDERS -->WTM/RKA/NRO/133/2015 -> Broker failed to segregate clients & own funds and securities. The firm, indulged in fund-based activities involving personal financial liability. Trading terminals were disabled by the exchanges in Equity and Derivatives segments due to funds/ deposit shortage.

Broker Orders-Broker Regulations.

Debarment till further orders.

SEBI - CHAIRMAN / MEMBERS’ ORDERS -->WTM/RKA/EFD/DRA II/53/ 2015 -> Noticee had created artificial volumes by trading in a synchronized manner carrying out off-market transfers among themselves for the purpose of meeting settlement obligations of another and in turn contributed to the price rise.

Broker Orders-PFUTP-Synchronized/Circular Trading.

Debarment for 6 years. Under Regulation 11 of SEBI PFUTP Regulations, 2003.

SEBI - CHAIRMAN / MEMBERS’ ORDERS -->WTM/RKA/EFD/ 04 /2016 -> In the matter of Well Pack Papers and Containers and Gemstone Investment Limited -->Noticee created artificial volumes by trading in a synchronized manner carrying out off-market transfers among themselves for the purpose of meeting settlement obligations of another and thus contributing to the price rise in these scrip's --> The entities were connected and had traded significantly in the scrip of WPPCL during 2008, 2009 and 2010 and had done manipulations in the scrip.

Company and Related entities

Orders-PFUTP-Synchronized/Circular Trading.

Debarment till 5-7 years respectively.

Group of Entities

Orders-PFUTP-Fraudulent.

Debarment till further orders.

options displayed an unreal picture of market activity to other investors but also defeated the basic premise of a screen-based electronic trading system and price discovery mechanism, by repeated execution of pre-decided reversal trades at irrational/arbitrary prices - Brokers to ensure internal surveillance and AML systems cover such Alerts to ensure better risk management.

SEBI - CHAIRMAN / MEMBERS’ ORDERS -->WTM/RKA/ISD/ 25/ 2016 -> In the matter of Illiquid Stock Options --> SEBI found a systemic tax evasion scheme. Low-value illiquid stocks in the options segment saw concentrated volumes in IlQ options at irrational prices far away from fair value, unsubstantiated by adequate open interest --> The misuse of stock

SEBI - CHAIRMAN / MEMBERS’ ORDERS -->WTM/SR/SEBI/MIRSD/201 /12/2015 Broker was mis-utilizing funds of clients and unauthorized trades -->Noticees accepted cash from clients and issued receipts in favor of its stock broker and mis-utilized demand drafts received from clients --> Also allegedly executed unauthorized trades and failed to provide contract notes to clients.

Sub Broker Orders-Broker Regulations.

Debarment of 5 years.

SEBI - CHAIRMAN / MEMBERS’ ORDERS WTM/SR/ SEBI-SRO: BLO/IMD/ 143 /07/2015 --> Entities were acting as investment advisers without obtaining registration from SEBI and therefore violated SEBI Investment Advisers Regulations -- > Solicited and induced investors to deal in securities on the basis of their investment advices, stock trade tips, guaranteeing returns.

Unregistered Investment Advisor

Orders-PMS / Investment Advisers Regulations.

Debarment with refund along with interest + fees, charges or commissions till further orders.

V. Entity wise and Regulation wise number of orders

I. A study of entities which have maximum number of orders, reflects that although obviously Brokers account 33%, it is interesting to note different types of other entities involved and predictability of transaction pattern against each group.

• The chart indicates Entity type wise number of orders, penalty and debarment.

Broker(33.33%), Broker and Related entities (3.51%), Broker and Front runners(1.75%) and Broker and Un--registered Intermediaries(1.75%)

Group of Entities (22.81%) and Company and Related entities (7.02%)

Unregistered Investment Advisor(14.04%), Unregistered Portfolio Manager (7.02%),Front running - AMC (1.75%), Unregisteredintermediaries (5.27%)

>Sub Broker related (1.75%)

Types of Entity (% in Bracketsin table-is % of no of orders)

TotalNumberof Order

PenaltyNo.

orders

Penaltyvalue (incl

Impounding)(Rs. In Cr)

DebarmentNo. orders

DebarRange

Debar tillfurther orders

5 to 6 years

1 month to7 years.1 year to5 years.

5 years

till furtherorders.

till furtherorders.

till furtherorders.

NANote % in Bracket in picture is % of monetary penalty value in total penalty

23

18

16

1

17

9

1

0

4.4

20.46

3.35

NA

6

9

15

1

FEATURE - SEBI ORDERS ON FEATURE - SEBI ORDERS ONBROKING TRANSACTIONS FEATURE - SEBI ORDERS ON FEATURE - SEBI ORDERS ON

BROKING TRANSACTIONS

Rekha Shah is a founder of Analyze N Control which is actively involved in providing solutions to the Capital Markets.Her work experience in Broking industry spans for more than 21 years including employment upto 2002 and then as service provider/software development through ANC.

She has done her Business Management from Jamnalal Bajaj Institute of Management Studies.

She has been invited by various forums including workshops and training held by SEBI (Securities Exchange Board of India), NSE (The National Stock Exchange of India), BSE Brokers forum and ANMI (Association of National members of India) for presiding on the panel with regulators and presenting in seminars especially emphasizing on corporate governance, process reengineering, and compliance, efficiency and risk management.

AnalyzeNControl also has comprehensive state of the art software’s catering to Broking Industry related Surveillance, Anti Money Laundering and Regulatory Compliances related search engine.

142 FORUM VIEWS - APRIL 2016 143 FORUM VIEWS - APRIL 2016

To explain the entity wise table-and type of orders against respective entities

housekeeping relating to funds and stocks settlement related and unregistered intermediary activities

• Front Running and Insider trading are important control points that need monitoring.

• Finally it is critical to note that the maximum penalty or debarment are for unregistered investment advisory and portfolio management and hence Brokers must advise internal teams with necessary audit trails and train their business partners to ensure complete regularization as per latest regulations.

have also clarified that they have not expressed any opinion on the case and all contentions on both sides are kept open.

c) Prohibited to take up new assignments for a period of 5 w o r k i n g d a y s - - > W T M / S R / S E B I / E F D -DRA2/09/02/2016 ->Broker allegedly manipulated in the shares of Adani Exports Ltd and facilitated its clients to execute structured and self-trades which created volumes in the scrip of AEL, hence violated certain provisions of PFUTP Regulations and SEBI (Stock Brokers and Sub-brokers) Regulations.

d) Debarment cases --> Four scrips in SME Segment --> The companies, their promoters, directors, preferential allotees, Pre IPO Transferees, Funding Group entities and Trading Group and other allotees artificially increased the volume & price of the scrip and misused the securities market system for making illegal gains and to convert illegitimate gains into genuine one to avail fictitious long term capital gains.

e) Debarment --> In the matter of Castor Seed Contracts -->4 TMs+12 Clients -->huge concentration and lack of liquidity in the contract, position of their clients who had been holding dominant open positions without appropriate financial capabilities to meet obligations.

f) Penalty of Rs 20Lakhs --> AK/AO-01/2016 ->Broker case-Inadequate control over the operations of its staff and not maintaining proper records of complaints received from all sources and at the outlets level--> the Noticee’s inability to take appropriate and adequate steps for redressal of investor grievances had been found to be of repetitive nature--> They had taken more than 30 days to reply/act upon 54 out of 281 complaints.

To summarize in a picture, the impact on each type of entity in terms of monetary penalty and type of debarment /suspension, warning, etc (% in bracket reflects % in terms of penalty and impounding total value).

Conclusion-• Highest Penalty or debarment cases-The % share is for

Group Entities or Companies with related entities. • Brokers need to be highly alert on orders or transactions

by group of entities who make the entire business vulnerable and track patterns of artificial volume creation, synchronization, cross trades or any orders or trades at unreasonable or irrational prices. Surveillance and AML Risk management does take a centre-stage spotlight and it cannot be ignored.

• Brokers need to ensure sanity check and internal

Broker, Broker in combination with Related entities, Front Runners in Broker or Broker with Unregistered intermediary (40%) • Self-trades, Cross, Synchronization with artificial price

and volume creation including on illiquid options order.• Execution of trades for a barred client.• Failed to settle Quarterly running settlements and

issuing statements.• Failed to maintain segregation of own and client funds.• Allegedly transferred funds between the clients and the

group companies of Cash Equity and commodities segment.

• Front-running.

Groupof Entities (23%) -> are individual group not related to company and Company and Related Entities (7%) -> are Company involved with related entities. Such entities were mainly violating PFUTP Fraudulent Regulations for• In these cases, Pattern has been very predictable, which

includes Self-trades, Cross, Synchronization with artificial price and volume creation including misuse of Unpublished Price Sensitive Information (UPSI) oravoiding LTCG.

Unregistered Investment Advisors, Unregistered Portfolio Advisors and Front Runner in AMCs (28%):• Unauthorized investment tips and acting as an

Investment Adviser or Portfolio Advisor or Authorized person without obtaining registration, assisting in artificial volume creation and Front running.

Sub Broker Case (2%)• Noticees accepted cash from clients and issued

receipts in favor of its stock broker and mis-utilized demand drafts received from clients --> Also allegedly executed unauthorized trades and failed to provide contract notes to clients.

Broker, Broker and Related entities,Broker and Front runners and Broker

and Un--registered Intermediaries [Debarment from 5 to 6 years &

till further Orders]

Broker(18.22%), Broker and Related entities (4.98%), Broker and Front

runners(76.80%) and [Penalty & Impounding of Rs. 4.40 Crores]

Unregistered Investment [Penalty Rs. 3.35 Crores]

Group of Entities and Companyand Related entities [Debarment from 1 month to7 years & till further Orders]

Unregistered Investment Advisor,Unregistered Portfolio Manager,Front running - AMC,Unregiatered internmediaries [Debarment from 1 year to5 year & till further Orders]

Sub Broker related [Debarment of 5 years]

Group of Entities (71.22%) and Companyand Related entities (28.79%) [Penalty & impounding Rs. 20.46 Crores]

VI. To update on the latest -given is Snapshot of important orders from Feb, 2016 to March 5, 2016 (not covered in analysis above):

a) Impounding of Rs. 2 Cr over unlawful gains jointly and severally from the entities.--> WTM/PS/152/IVD/FEB/ 2016 -> Group Entities while possessing price-sensitive information and allegedly made unlawful gains, and hence violated the PIT norms.

b) Restrained from securities markets, except as a stock broker for their existing clients in the cash segment --> In respect of Members for Illiquid Stock Options -->Noticees allegedly made illicit gains through manipulating illiquid stocks options by trading far away from intrinsic values and at concentrated positions --> Through reversal trades in the stock options segment generated a total loss to the tune of Rs 1,273 Crores and total profit to the tune of Rs 1,303 Crores --> Brokers to ensure use of appropriate surveillance and AML systems which helps them track such Red Flags where such transactions make broker businesses vulnerable-Further update in this case on 25th Feb, 2016, the SEBI order was quashed for 8 appellants by SAT as the genuin-ness of clients whose trades are still under investigation and WTM of SEBI has deemed it fit not to take any action against those clients. Hence SAT although quashed and set aside the impugned order ,

g) Debarment of 3 years- WTM/PS/182/EFD/MAR/2016 ->Noticee-a proprietary firm was instructed to cease and desist from acting as an investment advisor and portfolio manager, and to refund the funds raised from investors.

So What Now ????The above clearly reflects the importance and need of effective Compliance and Surveillance“If a Broker feels investing in Compliance team or in Surveillance/AML systems is expensive, then such Brokers to review the cost in terms of Penalties and debarment given"

A snapshot of some of the latest important orders on broking transactions detailed in section-VI above, once again emphasis that -if Compliance is considered as expensive - cost of Non-Compliance is not only monetary but impacts reputations costs, investor confidence and thereby incremental growth in business.

FEATURE - SEBI ORDERS ON FEATURE - SEBI ORDERS ONBROKING TRANSACTIONS FEATURE - SEBI ORDERS ON FEATURE - SEBI ORDERS ON

BROKING TRANSACTIONS