SEBI Intermediaries Regulations 2008

SEBI Intermediaries Regulations 2008 (Part 1)

Introduction: The SEBI (Intermediaries) Regulations, 2008 were notified in the official gazette on 26th May 2008. These regulations have 6 chapters and 4 schedules.
Definition of Intermediaries: Intermediaries are defined as a person mentioned in sub-section 2 clauses (b) and (ba) of section 11, sub-section (1) and (1A) of section 12 of the SEBI Act, 1992. This includes asset management companies, clearing members, foreign portfolio investors, and trading members of derivatives or currency derivatives segments of stock exchanges.
Key Concepts:
- Obligations of Intermediaries: Intermediaries must provide a certificate of compliance to SEBI, display the certificate and compliance officer's details, maintain books and records, and redress investor grievances.
- Inspection and Disciplinary Proceedings: Intermediaries must cooperate with inspecting authorities, produce required documents, and allow access to premises.
- Action in Case of Default: SEBI may take action against intermediaries that fail to comply with regulations, including suspension or cancellation of registration.
- Code of Conduct: Intermediaries and their employees must abide by a code of conduct specified in Schedule III of the SEBI (Intermediaries) Regulations.
- Fit and Proper Criteria: Intermediaries must meet fit and proper criteria to operate in the securities market.
- ODR Framework: SEBI has introduced an Online Dispute Resolution (ODR) framework to resolve disputes between intermediaries and investors.
- Compliance relating to Cyber Security Framework: Intermediaries must comply with SEBI's cyber security framework to protect investor data and prevent cyber attacks.
- Compliance relating to Artificial Intelligence and Machine Learning: Intermediaries must comply with SEBI's guidelines on the use of artificial intelligence and machine learning in the securities market.

SEBI Intermediaries Regulations 2008 (Part 2)

Grounds for Initiation of Proceedings: The following are grounds for initiation of proceedings against a person:
- Failure to pay fees to SEBI or the specified body
- Inability to be traced at the physical address and email address available in SEBI's records
- Failure to submit periodic reports to SEBI for three consecutive periods or as specified
- Admission of violation of securities laws, directions, instructions, or circulars issued by SEBI
Notice and Opportunity to Respond: The competent authority shall issue a notice to the person, stating the grounds for initiation of proceedings and the alleged violations, and provide an opportunity to respond within 21 calendar days
Timeline for Response: The noticee may be granted an additional 15 calendar days to respond, but no further opportunity beyond this timeline shall be allowed
Passing of Order: The competent authority shall pass an order within 21 calendar days from the date of receipt of the written submissions or the expiry of the time period granted to file the written submissions
Conditions for Protection of Investors: The competent authority may impose conditions on the noticee to protect the interest of investors or the securities market, including:
- Arrangements for maintenance and preservation of records and documents
- Redressal of investor grievances
- Transfer of records, funds, or securities of clients
- Ensuring continuity of service to clients
- Defaults or pending action
Cancellation or Suspension of Certificate: The competent authority may pass an order for cancellation or suspension of the certificate of registration, and may also impose conditions to protect the interest of investors or the securities market
Surrender of Certificate: An intermediary may surrender its certificate of registration by making a request to SEBI, and SEBI may require the intermediary to satisfy certain factors, including arrangements for maintenance and preservation of records and documents, redressal of investor grievances, and transfer of records, funds, or securities of clients
Effect of Debarment, Suspension, Cancellation, or Surrender: The concerned person shall not undertake any new assignment or contract, cease to carry on any activity, allow clients or investors to withdraw or transfer securities or funds, make provisions for liability, and take other actions as required under the relevant regulations
Code of Conduct: Intermediaries and their directors, officers, employees, and key management personnel shall abide by the code of conduct specified in SEBI (Intermediaries) Regulations, 2008, which includes:
- Protecting the interests of investors and rendering the best possible advice
- Observing high standards of integrity, dignity, ethics, and professionalism
- Avoiding conflict of interest and making adequate disclosure
- Ensuring good corporate policies and corporate governance

SEBI Intermediaries Regulations 2008 (Part 3)

Definition: SEBI Intermediaries Regulations 2008 aim to ensure that intermediaries do not engage in fraudulent and manipulative transactions, unfair competition, or harm the interests of other intermediaries or investors.
Details: Intermediaries must maintain continuity in data and record-keeping, ensure up-to-date backups of electronic records, and not be a party to or instrumental in creating false markets, price rigging, or passing unpublished price-sensitive information.

Key Responsibilities of Intermediaries

Maintenance of Records: Intermediaries must maintain adequate and necessary steps to ensure continuity in data and record-keeping.
Electronic Records: Intermediaries must ensure that up-to-date backups of electronic records are always available.
Prohibited Activities: Intermediaries must not be a party to or instrumental in:
- Creation of a false market for securities
- Price rigging or manipulation of prices of securities
- Passing of unpublished price-sensitive information
- Any activity that distorts market equilibrium or affects the smooth functioning of the market

Fit and Proper Criteria

Definition: The fit and proper criteria refer to the competence, capability, and financial soundness of an intermediary.
Applicability: The fit and proper person criteria apply to the applicant or intermediary, principal officer, directors, compliance officer, key management persons, promoters, and persons holding controlling interest.
Disqualifications: A person may be disqualified if they have a criminal complaint or information filed against them, a charge sheet filed, an order of restraint or debarment passed, recovery proceedings initiated, or an order of conviction passed for an offence involving moral turpitude.

Usage of Artificial Intelligence

Responsibility: Any person regulated by SEBI who uses artificial intelligence and machine learning tools is solely responsible for the privacy, security, and integrity of investors' and stakeholders' data.
Compliance: The person regulated by SEBI must comply with applicable laws in force and ensure that the output arising from the usage of such tools and techniques is accurate and reliable.

Verification of Past Risk and Return Metrics

Applicability: The provisions of this chapter apply to Investment Advisers, Research Analysts, Algo Providers, and intermediaries permitted by SEBI to provide these services.
Verification: The persons referred to in this chapter must verify their risk-return metrics through a credit rating agency recognized by SEBI.

Online Resolution of Disputes, Cyber Security, and Resilience Framework

Online Dispute Resolution (ODR) Portal: SEBI has directed Market Infrastructure Institutions (MIIs) to establish a common ODR portal for resolution of disputes arising in the securities markets.
Cyber Security and Resilience Framework: SEBI has strengthened the existing cyber security and cyber resilience framework of MIIs with new guidelines, including maintaining offline, encrypted backups of data and regularly testing these backups.

SEBI Intermediaries Regulations 2008 (Part 4)

Data Backup and Recovery: Market Infrastructure Institutions (MIIs) should backup their data at least on a quarterly basis to ensure confidentiality, integrity, and availability. They should also explore the possibility of retaining spare hardware in an isolated environment to rebuild systems in case of a disaster.
Business Continuity Drills: MIIs should regularly conduct business continuity drills to check the readiness of the organization and the effectiveness of existing security controls to deal with ransomware attacks.
Vulnerability Scanning: MIIs should conduct regular vulnerability scanning to identify and address vulnerabilities, especially on internet-facing devices, to limit the attack surface. They should also implement a cybersecurity user awareness and training programme to guide employees on how to identify and report suspicious activity.
Multi-Factor Authentication (MFA): SEBI has directed MIIs to implement MFA for all services, as they are systematically important institutions that provide the infrastructure necessary for the smooth functioning of the securities market.
Artificial Intelligence and Machine Learning (AI & ML) Compliance: SEBI has directed market intermediaries to meet prescribed reporting and disclosure requirements regarding AI & ML applications and systems offered and used by them.

Case Study: SEBI v/s Vrise Securities Pvt Ltd

Facts of the Case: Vrise Securities Pvt Ltd, a member of BSE and NSE, was alleged to be involved in dabba trading activities. SEBI directed BSE and NSE to conduct surprise inspections, which revealed that Vrise had violated various circulars and regulations.
Violations: Vrise failed to upload CTCL terminals, did not cooperate with exchange officials during inspections, and failed to exercise control over its branch operations.
Order: The adjudicating officer prohibited Vrise from registering new clients for a period of 6 months due to violations of Regulation 27 of Brokers Regulation.

Review Questions

SEBI can direct an intermediary to refund money or securities collected from investors with or without interest: (a) True
An applicant who is not found to be a 'fit and proper person' cannot get a registration certificate under SEBI (Intermediaries) Regulations 2008: (b) No
All employees, directors, etc. of the intermediary need to strictly adhere to the Code of Conduct as prescribed in the SEBI Regulations: (a) True
A common order can be passed in respect of a number of noticees where the subject matter in question is substantially the same or similar in nature: (a) Yes