Auditing & Compliances for Stock Brokers

While carrying out Auditing and Compliances related activities for the stock broker, Auditor is also expected to adhere to various pronouncements issued by Institute of Chartered Accountants of India (ICAI) and the guidance, procedures and requirements prescribed in applicable statutes under which these activities are being carried out.

The checklist and the various areas, which are enumerated hereunder, are specifically designed considering peculiar accounting systems and complex trading mechanism relating to stock broking activities.

CONTENTS

Books of Account to be maintained as per Securities & Exchange Board of India (SEBI) Stock Brokers & Sub-Brokers Rule, 1992.
Books of Account to be maintained as per Securities Contracts (Regulation) Rules,1957
The Audit Report to be submitted by the members should be in the format prescribed by Securities Contracts (Regulation) Act
Format of Half yearly Internal Audit Certificate prescribed by stock exchanges/SEBI
Checklist for Compliance Audit/Review relating to stock brokers

1. Books of account to be maintained as per Securities & Exchange Board of India (SEBI) Stock Brokers & Sub-brokers Rule, 1992

Following Books of Accounts are to be maintained by Stock Broker

Regulation – 17

Every stock broker shall keep and maintain the following books of account, records and documents namely: -
1. Register of transactions (Sauda Book);
2. Clients ledger;
3. General ledger;
4. Journals;
5. Cash book;
6. Bank pass book;
7. Documents register containing inter alia, particulars of securities received and delivered in physical form and the statement of account and other records relating to receipt and delivery of securities provided by the depository participants in respect of dematerialized securities;
8. Members’ contract books showing details of all contracts entered into by him with other members of the same exchange of counterfoils or duplicates of memos of confirmation issued to such other member;
9. Counterfoils or duplicates of contract notes issued to clients;
10. Written consent of clients in respect of contracts entered into as principals;
11. Margin deposit book;
12. Registers of accounts of sub-brokers;
13. An agreement with a sub-broker specifying the scope of authority and responsibilities of the Stock-Broker and such sub-broker.
14. Client Account Opening form in the format as may be specified by the Board.
Every stock broker shall intimate to SEBI the place where the books of account, records and documents are maintained.
Without prejudice to sub-regulation (1), every stock-broker shall, after the close of each accounting period furnish to the SEBI if so required as soon as possible but not later than six months from the close of the said period a copy of the audited balance sheet and profit and loss account, as at the end of the said accounting period:

Provided that, if it is not possible to furnish the above documents within the time specified, the stock broker shall keep SEBI informed of the same together with the reasons for the delay and the period of time by which such documents would be furnished.

Maintenance of books of account and records

Every stock broker shall preserve the books of account and other records maintained under regulation 17 for a minimum period of five years. Further, in case such documents are maintained in electronic form, provisions of Information Technology Act, 2000 in this regard shall be complied with. In case of books of account or any documents have been taken by CBI, Police or any other enforcement agency during the course of any investigation then original documents needs to be preserved till trial is completed.

2. As per Securities Contracts (Regulation) Rules, 1957, Stock broker is required to maintain the following books of account

Rule – 15

Books of account and other documents to be maintained and preserved by every member of a recognised stock exchange

Every member of a recognised stock exchange shall maintain and preserve the following books of account and documents for a period of five years:
1. Register of transactions (Sauda book).
2. Client’s ledger.
3. General ledger.
4. Journals.
5. Cash book.
6. Bank pass-book.
7. Documents register showing full particulars of shares and securities received and delivered.
Every member of a recognised stock exchange shall maintain and preserve the following documents for a period of two years:
1. Member’s contract books showing details of all contracts entered into by him with other members of the same exchange or counterfoils or duplicates of memos of confirmation issued to such other members.
2. Counterfoils or duplicates of contract notes issued to clients.
3. Written consent of clients in respect of contracts entered into as principals.

3. The Audit Report to be submitted by the members should be in the following format, as suggested by Securities Contracts (Regulation) Act, 1956

"We have audited the attached Balance Sheet of M/s ________________________ as at _____________________ and the Profit & Loss Account for the year ended on that date annexed thereto and reported that:

We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purpose of our audit.
In our opinion, proper books of account and records as specified in Rule 15 of the Securities Contracts (Regulation) Rules, 1957 have been kept so far as appears from our examination of such books.
The stock broker has complied with the requirements of the stock exchange, so far as they relate to maintenance of accounts and was regular in submitting the required accounting information to the stock exchange.
The Balance Sheet and the Profit & Loss Account referred to in this report are in agreement with the books of account.
In our opinion and to the best of our information and according to the explanations given to us, the said Balance Sheet and the Profit & Loss A/c read together with the notes thereon give a true and fair view insofar as it relates to the Balance Sheet, of the state of affairs of M/s _______________, and insofar as it relates to the profit and loss account, of the profit of M/s __________________ for the year ended on that date."

FOR ________________________

(Name of CA Firm)

Firm Registration number _____________

Partner / Proprietor

Membership number ______

Place____

Date____

4. Format of Half yearly Internal Audit Certificate prescribed by stock exchanges

CERTIFICATE FOR INTERNAL AUDIT

We have examined the relevant books of account, records and documents maintained by M/s. _______________, (name of the trading/clearing member) bearing SEBI registration number ______________________) a member of the National Stock Exchange of India Limited / BSE Ltd. / MCX-Stock Exchange / other Stock Exchange, for the following segments to fulfil the internal audit requirement as prescribed by SEBI vide Circulars dated 22nd August, 2008 & 21st October, 2008, for the half year ended _____________________.

Segment (Cash Segment/Derivatives Segment/Debt Segment/Currency
Derivatives/Securities Lending &
Borrowing segment)

Activity (Trading/ Clearing/Trading and Clearing)

SEBI
registration number

The purpose of this Audit is to examine that the processes, procedures followed and the operations carried out by the Trading Member/Clearing Member are as per the applicable Acts, Rules, Regulations, Bye-laws and Circulars prescribed by SEBI and the stock exchange(s).

We have obtained all the information and explanations, which to the best of our knowledge and belief were necessary for the purpose of this Internal Audit. In our opinion proper books of account, records and documents, as per the regulatory requirement have been maintained by the member, so far as it appears from examination of the books.

We have conducted the audit within the framework provided by SEBI/Stock Exchange for the purpose of this Internal Audit.

To the best of our knowledge and belief and according to the information and explanations given to us, no material fraud / non-compliance /violation by the Member is observed during the course of this Audit.

Based on the scrutiny of relevant books of accounts, records and documents , we certify that the Member has complied with the relevant provisions of SEBI Act, 1992, Securities Contracts (Regulation) Act 1956, Securities Contracts (Regulation) Rules 1957, SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 and various circulars of SEBI and with the Rules, Bye laws, Regulations of NSEIL/NSCCL/BSE and various circulars issued by the Stock Exchange and the Clearing Corporation / Clearing House except otherwise mentioned in the Annexure to this report.

We declare that we do not have any direct / indirect interest in or relationship with the member or its share holders / directors / partners / proprietors / management and also confirm that we do not perceive any conflict of interest in such relationship / interest while conducting internal audit of the said member.

In our opinion and to the best of our information and according to the explanations given to us by the proprietor/partner (s)/director (s)/ compliance officer, the Report provided by us as per the Annexure and subject to our observations, which covers the entire scope of the Audit, is true and correct.

__________________

Company Secretary/Cost and Management Accountant/ Chartered Accountant

(Seal & Signature)

(Name of the Proprietor/Partner)

Membership No. / CP. No.

Firm Registration number

Place:

Date:

Note: Guidelines and format of Internal Audit Report specifying the minimum scope to be covered are issued by exchanges from time to time and the same needs to be referred while issuing above certificate.

5. Checklist for Compliance Audit/Review relating to Stock Brokers

Books of Account:

Books of Account as per SCRA & SEBI (Stock Brokers and Sub-Brokers) Regulations are maintained.
Books of Account are maintained properly.
Books of Account are maintained properly for branch/ sub-broker.
Exchange wise separate books of account are maintained.
Securities Register, Margin Deposit Book, Grievance Register, etc. are maintained.
Analysis of financial reports / statements.

Client Registration:

Execution of Client Registration Form or maintaining complete client database.
Execution of Rights and Obligations document.
Risk Disclosure Document duly signed obtained from the client in SEBI prescribed format.
Ensure that mandatory section of the account opening kit include only account opening form, Rights and Obligation document, RDD, Policies and Procedure, Guidance note dealing with Do’s and Don’ts and tariff Sheet.
Proof of Identity, Proof of Address, PAN Card Copy, Bank Account Proof &Demat Account Proof are obtained in case of Individual Clients.
Proof of Address, Registration Copy, PAN Card Copy, Bank Account Proof &Demat Account Proof and other relevant proof as per category of client are obtained in case of Non-Individual Clients.
‘In Person’ verification is conducted for clients either by employee of the stock broker or by Sub-Broker or authorized person of the stock broker.
Systems and procedures put in place by Broker for verification of PAN before opening of account
Periodical review of client information is done.
Monitoring of Trading activity of the client with financial information provided.
Obtained documentary evidence in support of financial information provided by the client for equity derivatives segment.
Updated annual financial statements are obtained from non-individual clientsalong with latest shareholding pattern for corporate clients on annual basis.
The docket or folder is having two parts: (a) Mandatory and (b) Non-Mandatory. The folder / book is having an index page listing all the documents contained in it and indicating briefly significance of each document.
All the documents in both the mandatory & non-mandatory parts are printed in minimum font size of 11 and are legible for Investors to read.
Client has countersigned against stock exchange as well as market segment where he intends to trade in KYC form.
Authorizations from the client sought in non-mandatory document are separate & do have specific consent of the client.
Broker has displayed the set of standard documents / policies on its own website for information.
Ensure that there is proper storage of client registration documents and retrieval mechanism.
Broker has a specific policy regarding treatment of Inactive account and the same is displayed on the web-site of the broker.
Ensure that all the mandatory clauses as stipulated by SEBI/Exchanges have been included in Rights and Obligation document.
Ensure that any clause or document included in the account opening kit is not diluting responsibility of broker or is not in conflict with any of the clauses in mandatory documents, Rules, Bye-laws, Regulations, Notices, Guidelines & Circulars issued by SEBI & Exchanges or is not against the interest of the Investor.
No documentation shall give any exclusive right or control to the trading member or third party over the DP account or ledger account or bank account of the client except to the extent of and restricted to the client’s obligation to the broker in respect of the transactions done or to be done (like up-front margin) by the Broker on behalf of the client on the Exchange.
Dispatch of copy of Client Registration Documents along with UCC and email id of the client within 7 days from the day of upload of UCC to the exchange by the Broker.
Mandatory document dealing with policies and procedures for certain points are prepared and intimated to the clients (as per requirement of SEBI circular MIRSD/SE/Cir-19/2009 dated 3rd December, 2009) or included in account opening kit.
Ensure that Broker is adhering to all guidelines which are stipulated in policies and procedures.
Running account authorization which is taken by broker from client(s), should contain a clause which explicitly allows a client to revoke the said running account authorization at any time.
Running account authorization taken by broker from client should be signed by client only and not by his Power of Attorney holder.
Broker having website has prominently displayed a message on their websites informing their clients to update their Email ids & mobile numbers with it.
Broker has also displayed the documents relating to rights & obligations, uniform risk disclosure document, do’s & don’t in vernacular languages on its own website.
Broker has complied with the requirement of uploading the KYC information with the SEBI registered KRAs for all the clients on a continuous basis within the prescribed time limit as per SEBI circular MIRSD/Cir-26/2011 dated December 23, 2011 and MIRSD/Cir-5/2012 dated April 13, 2013 and complied with the provisions of the Circular and has downloaded KYC information from KRA system for new clients who are already registered with KRA.
Ensure that Broker has uploaded the KYC data with CKYCR in respect of all individual accounts opened on or after August 1, 2016 by October 31, 2016 and by December 31, 2016 for all individual clients registered prior to August 01, 2016.
Broker has taken reasonable measures to verify the identity of such persons who beneficially own or control the securities as per SEBI Circular CIR/MIRSD/2/2013 dated January 24, 2013
Broker hasreviewed their KYC and AML policies in line with SEBI Circular CIR/MIRSD/2/2013 dated January 24, 2013 and SEBI Circular CIR/MIRSD/1/2014 dated March 12, 2014
Ensure that Broker has made available the documents relating to rights & obligations, uniform risk disclosure document, do’s & don’t to the clients either in electronic or physical mode as per the preference of the client and has maintained appropriate logs in case these documents are sent electronically to the clients,.
Ensure that there are processes in place for verification of alerts with KYC details
The stock broker shall not enter into any tripartite agreement with clients/participants and the third party/associate/group company of the stock broker.

Unique Client Code:

Unique Client Code is assigned to all the clients.
UCC is registered with the Exchange.
Entered correct / unique client codes while placing the orders in the system / and mapping the client code with PAN/ Passport, etc. in the back office, and entering the client details on BOLT.
Separate code for buy and sell for NRI clients should be used.
Ensure that both email id and mobile number is updated in UCC for the clients.
Broker has uploaded the same E mail ID & the Mobile number of the client in the Exchange UCC records and in the Broker’s back office records and there are no variations.
If Clients do not have mobile number/email id then in such case, ensure that a declaration is obtained to this effect from the client and report the same in the UCI online by entering “notprovided@notprovided.com “in the email ID field and “6666666666” in the mobile number field.

Sub-Brokers, Remisiers & Branch offices:

Stock Broker is dealing with registered sub-brokers, authorised person and remisiers.
Sharing commission or brokerage with registered sub-broker/authorised person/remisiers with the exchange/SEBI.
Brokers of other exchanges, routing orders of their clients through trading terminals, after being registered as Sub-brokers with SEBI.
Verify there is no sharing of brokerage with another trading member or employee of another Broker or a person who has been suspended/expelled/ forbidden to do business.
Periodical inspection has been carried out and reports are maintained.
Internal controls with Sub-brokers and branch offices.
System and policy followed for opening/closing of branch offices.
Survey is conducted by the broker for opening / closing of branches
In case of closure of branch, advance notice of the same is sent to clients.
Monitoring mechanism in place to identify sudden increase / decrease in client level turnover from any specific branch.

Contract Notes:

Issuance of contract notes with the signature of the authorised signatory and which bear a running serial number or bear a serial number, which is initialized at the beginning of each financial year.
Common Contract Note is as per the format prescribed by the Exchange. (NSE Circular NSE/INSP/35036 dated June 05, 2017 and BSE Notice 20170616-28 dated June 16, 2017)
Board Resolution/Power of Attorney for signing of Contract Notes submitted to the Exchange.
Contract notes are issued to all the clients.
Contract notes are issued within 24 hours of trade execution.
Duplicates of the contract notes issued are acknowledged by clients/record of dispatch in case of dispatch through courier or post is maintained.
Duplicates of the contract notes are maintained in case of physical contract notes. Counter foils maintained are having adequate details.
The authorization for receiving electronic contract note should be in writing and should be signed by client only, and not by power of attorney holder.
The authorization of electronic contract note contains a clause that any change in the e-mail id shall be communicated by the client through a physical letter to the Broker.
Broker has collected physical letters from the clients who have opted for change in e-mail id.
In case of contract notes issued through electronic media, Log of ECN is maintained and ECN are signed digitally.
Details of the trade have been attached as an Annexure to the contract note (original/duplicate) issued, in case of consolidated trade shown in contract note.
All ECNs sent through the e-mail shall be digitally signed, encrypted, non tamperableand shallcomply with the provisions of the IT Act, 2000. In case the ECN is sent through e-mail as an attachment, the attached file shall also be secured with the digital signature, encrypted and non-tamperable.
The Broker shall clearly communicate to the client/in client registration documents executed with the client for this purpose that non-receipt of bounced mail notification by the broker shall amount to delivery of the contract note at the e-mail ID of the client.
In addition to the e-mail communication of the ECNs in the manner stated above, inorder to further strengthen the electronic communication channel, the broker shall simultaneously publish the ECN on his designated web-site in a secured way and enable relevant access to the clients.
In order to enable clients to access the ECNs posted in the designated website in a secured way, the broker shall allot a unique user nameand password for the purpose, with an option to the client to access the same and save the contract note electronically or take a print out of the same.
Provision for printing of PAN of the broker and PAN of the constituents. It is compulsory to obtain PAN proof of the client and the same printed on the Contract Note issued to client.
Dealing Office and Registered Office Details are printed on the contract notes.
Details of Compliance officer like his name, telephone number and e-mail address are displayed prominently on Contract Notes.
Brokerages charged are within the permissible limits
Brokerage for option contracts are charged on the premium amount at which the option contract was bought or sold and not on the strike price of the option contract. Brokerage on options contracts shall not exceed 2.5% of the premium amount or Rs 100/- per lot whichever is higher.
Client code, Market Rates, Order Time, Order ID, Trade ID, etc. of the Contract Notes are matching with trade file.
Transactions for Institutions/custodian are properly reported through STP.
Broker has not created/provided e-mail ids for clients.
In cases wherein broker has generated e-mail id for clients, whether broker had taken duly signed physical confirmation letter confirming the e-mail id and exercising choice to receive documents on that e-mail id from clients.
As per Regulations, the contract notes shall be numbered with unique running serial numbercommencing from one which shall be reset only at the beginning of every financial year. Financial year for the purpose of resetting the serial number of contractnote is April to March.
Broker may use the brand name / logo of its group companies, it must display more prominently its name as registered with SEBI, its own logo, if any, its registration number, and its complete address with telephone numbers, the name of the compliance officer, his telephone number and e-mail address in contract notes issued to the clients.
Broker may, if it so desires, issue contract note cum bills without diluting the form prescribed for contract note.
Ensure that, in case facsimile signatures are used on physical contract notes, Broker has maintained well-documented & approved policy regarding its use.
Ensure that Broker has sent text of Regulation 19 & 20 of SECC Regulations, 2012 to clients dealing with listed Stock Exchanges along with the contract notes and text of Schedule II of the SEBI (Intermediaries) Regulations, 2008 to clients dealing with listed depositories along with the contract notes.

Terminal Operations and Systems:

Terminals are provided in head office, branch office or the office of sub-brokers.
Terminals are operated by approved users or approved persons with valid certification.
Correct user name, login id, terminal location, etc. are reported to the exchange.
CTCL / IML facility has been used only with the prior approval of the exchange.
Internal controls relating to expiry of user certificates.
Half Yearly / Yearly / Once in two years as applicable, System Audit for CTCL and IBT and submission of report to NSE.
Yearly System Audit for IML, IBT and submission of report to BSE.
Updated version of software is used.
Back up facilities are in place and followed by the broker.
Sufficient system for data security is in place.
Broker has adequate systems to capture IP details of trades done using the IBT/wireless technology platform.
Broker has ensured that all approved users and sales personnel have valid NISM Series - IV certification (as applicable for Currency Derivatives and IRF Segment vide SEBI notification LAD-NRO/GN/2010-11/12/10230 dated June 29, 2010).
In case where Broker who has opened terminals abroad, whether it has complied with the provisions pertaining to ‘Terminals Abroad’ as given under Exchange Circular no. NSE/MA/22732 dated February 13, 2013.
Broker has implemented appropriate checks for value and / or quantity based on the respective risk profile of their clients as per the provisions of SEBI Circular CIR/MRD/DP/34/2012 dated December 13, 2012.
Broker has put-in place a mechanism to limit the cumulative value of all unexecuted orders placed from their terminals to below a threshold limit set by them as per the provisions of SEBI Circular CIR/MRD/DP/34/2012 dated December 13, 2012.
Broker has taken adequate steps as specified by Exchange circular NSE/INSP/28434 dated December 24, 2014 to review & monitor the Trading Terminals mapped to its Branch/AP/Sub Broker.
Broker has ensured that associated persons functioning as compliance officer employed has obtained NISM series III A certification:

- Within one year from the date of his/her employment after March 11, 2013.

- By March 10, 2015 for compliance offices employed as on the date of SEBI notification (i.e. March 11, 2013)

Broker has ensured that all associated person as defined in SEBI Notification LAD-NRO/GN/2010-11/21/29390 dated December 10, 2010 have valid NISM series VII certification – (Securities Operations and Risk Management Certification Examination).

Transactions done without executing on Trading Terminal (BOLT/NEAT):

All trades are needs to be executed on the BOLT/NEAT except for off-market trades allowed in BSE, which is required to be reported to the exchange within prescribed time limit.
Ensure that contract notes are not issued for transactions in securities not listed /permitted on the Exchange.
Taken written consent from the client for principal to principal transactions.
Contract Notes are issued in prescribed Form ‘B’ for principal to principal transactions (off market transactions). (in case of BSE)
Transactions done on a spot basis are reported to the Exchange within the prescribed time limit. (Applicable where such transactions are allowed).

Client Monies:

Client’s funds are routed through designated ‘Client Account’ only.
Proper Segregation of own and client transactions in separate bank account.
Use of Client account only for purposes allowed by the exchange/SEBI.
Payments to clients should not be made from own bank account.
Ensure that clients’ funds are not used for own purposes / are not misutilised/are not transferred from one client’s account to another client’s account.
Payments to clients are made within the prescribed time limit.
Payment of dividend amounts to clients and reconciliation of dividend account.
Running Account of the client is settled as per preference (monthly/quarterly) selected by the client in Running Account authorization letter.
Periodicity of actual settlement of funds/securities is not more than 3 months/1 month in cases wherein client has consented for quarterly/monthly settlement respectively.
Broker should not deal with clients in cash.
Internal controls while dealing in dormant client account.
System for verification of third party cheque.
In case where aggregate value of banker’s cheque / demand draft/ pay order is of Rs. 50,000 or more per client per day, then the same are accompanied with name of bank account holder and number of bank account debited, duly certified by issuing bank as per the provisions of SEBI Circular CIR/MIRSD/03/2011, dated June 9, 2011.
Broker maintains audit trail of the funds received through electronic fund transfers to ensure that the funds are received from their respective clients only.
Statement of accounts for funds sent to client should contain an extract from the client ledger for funds displaying all receipts/deliveries of funds while settling the account explaining retention of funds.
Statutory levies /fee / charges such as STT, Service Tax, SEBI Turnover fees, Exchange Transaction charges collected from clients should not be in excess of actual.
To remit with interest immediately to clients, excess STT collected and retained by the Broker for FY 2013-14 and preceding years as on 31.03.2014. (NSE Circular NSE/FATAX/31632 dated January 27, 2016)
If debit balances arise out of client’s failure to pay such amount for more than fifth trading day reckoned from date of pay-in, broker may allow further exposure to clients to the extent of availability of excess of client's fully paid securities over his debit balance, deposited with the Broker. if no further exposure is granted to client (not having Margin) from the sixth trading day reckoned from the date of pay-in, such debitbalance would not be construed as violation relating to funding. (NSE)
Funding by the broker to its clients in contravention to Exchange/SEBI requirement. (Exchange’s circular no. NSE/MEMB/261 dated 27-May-97 and NSE/INSP/20638 dated Apr 26, 2012 and Exchange notice no. 20150515-1 dated May 15, 2015 and 20151029-34 dated October 29, 2015)).
Ensure that the funds & securities available in the client bank/s and client beneficiary account/s together with balances available with clearing Broker and funds with clearing corporation are not less than the funds and securities payable to the client at all times.
Verify that Broker is not operating any assured returns schemes and mobilizing deposits from investors.
Payment for own trades (PRO) are not made from client bank accounts.
Ensure that Broker has not transferred funds from client bank account to any third party or any other non-client account. Also verify that Broker has not transferred funds to its Group companies/ Associates from client bank accounts.
Ensure that Broker has undertaken tagging of Bank accounts as mentioned in the NSE NSE circular NSE/INSP/31912 dated March 07, 2016 and BSE notice no. 20160309-21 dated March 9, 2016.
Broker has credited the funds raised against the pledged client securities only to client bank account of the Broker. Also ensure that funds raised by pledging client securities were utilised for respective client only.
The statement of Account for funds to be sent within five days from the date when the account is considered to be settled and should contain transactions / MTM / margins debited and reversed /pay in and pay out of funds for the period from the date of last settlement done till the current settlement date.
Ensure that, while settling the client accounts, funds have been transferred to the clients through electronic transfer mode only except where the electronic payment instructions have failed or have been rejected by the bank.
Ensure that in case of any transfer of funds between client account/s & proprietary account/s for legitimate purposes, Broker has maintained a daily reconciliation statement clearly indicating the details of funds transferred.

Clients Securities:

Securities due to the clients should not be transferred to the Brokers’ beneficiary account.
Client’s securities received as margin should not be deposited in own beneficiary account.
Delivery of securities to client should not be made from own beneficiary account.
Securities due to one client should not be transferred to another client or Securities due to the clients should not be used for meeting the pay-in obligation of the broker/other client.
Collaterals of clients were not pledged with banks / other entities for raising funds. If funds are raised by pledging client securities, then ensure that funds were utilised for respective client only.
Pledge of client securities is done only through Depository system in compliance with Regulation 58 of the SEBI (Depositories and Participants) Regulations, 1996.
Broker has pledged securities of only those clients who have a debit balance in their ledger and has sent statement of pledge & funds raised to clients as and when their securities are pledged/unpledged.
Broker should not accept securities from third party account for pay-in obligation of the client and should not deliver securities to third party account for pay-out obligation of the client.
Complete ‘Statement of Accounts’ for funds and securities with error reporting clause and also the clause that ‘the running account authorization would continue until it is revoked by clients’ has been sent to the clients within 30 days on every Calendar quarter.
Error reporting clause in statement of accounts for funds and Securities should not be less than 7 days.
Inter-client adjustment for the purpose of running account settlement is not allowed.
The statement of Account for securities to be sent within five days from the date when the account is considered to be settled and should contain an extract from the register of securities displaying all receipts/deliveries of securities along with the statement explaining retention of securities for the period from the date of last settlement done till the current settlement date.
Ensure that Broker has not taken securities from any client for purposes other than margin or meeting the client's obligation.
Reconcile client beneficiary account/s and the register of securities on a quarterly basis and maintain complete audit trail & documentation of such reconciliation.
Ensure that Broker has undertaken tagging of DP accounts as mentioned in the NSE NSE circular NSE/INSP/31912 dated March 07, 2016 and BSE notice no. 20160309-21 dated March 9, 2016.
Ensure that In case of any transfer of securities between client account/s & proprietary account/s for legitimate purposes, Broker has maintained a stock transfer register clearly indicating the day-wise details of securities transferred.
Broker has reported all its Bank account details to the Exchange as required by SEBI circular dated September 26, 2016 & BSE notice no. 20161027-1 dated October 27, 2016 and Notice No 20161017-17 dated October 17, 2016 and 20161122-24 dated November 22, 2016.
Broker has named/tagged its Bank accounts details to the Exchange as required by SEBI circular dated September 26, 2016, June 22, 2017 & BSE notice nos. 20160927-41 dated September 27, 2016, 20161221-20, dated December 21, 2016 & 20170623-14 dated June 23, 2017.

Collection of Margins:

Collection / Maintenance of Initial Margins are properly accounted and reported to exchange in case of Derivative segments.
Compliances related to Margin Trading Facility (MTF) is adhered to.
Risk Management Policy is well documented in case of cash segment.
Whether Client Margin information is given to clients on day-to-day basis.
Whether records relating to receipt of collateral from client is maintained.
If the broker has passed on the penalty to the clients on account of failure on part of client to pay the required margins in equity derivatives segment, then whether the broker has provided the relevant supporting documents to the clients.
Daily Margin statement is issued to the respective clients with the details as specified and within the time limit prescribed by the exchange. Verify whether Proof of delivery / dispatch is maintained.
Brokers can lodge their own securities only to the Clearing Corporation and not the clients’ securities. Where Broker has accepted securities with appropriate hair cut for margin purpose, but has to deploy his funds for meeting margin requirements of the client at the Exchange, Brokers may levy interest or delayed payment charge on debit balance as per the terms consented by the client.
Broker has reported all its DP account details to the Exchange as required by SEBI circular dated September 26, 2016 & BSE notice no. 20161027-1 dated October 27, 2016 and Notice No 20161017-17 dated October 17, 2016 and 20161122-24 dated November 22, 2016.
Broker has named/tagged its DP accounts details to the Exchange as required by SEBI circular dated September 26, 2016, June 22, 2017 & BSE notice nos. 20160927-41 dated September 27, 2016, 20161221-20, dated December 21, 2016 & 20170623-14 dated June 23, 2017.

Advertisement:

Prior written approval obtained from the exchange for advertisement to be made for business purposes or issue circular or other business communications to persons other than Broker’s own constituents.
In respect of advertisements, if any, the stock broker shall comply with the provisions contained in SEBI Circular MIRSD/9/2010 dated November 04, 2010 and the clauses A(5), C(4)&(5) of Code of conduct specified in Schedule II under Regulation 9 of SEBI (Stock Brokers and Sub-brokers) Regulations, 1992, BSE notice no. 20151217-17 dated December 17, 2015 and NSE Circular NSE Circular NSE/COMP/31391 dated December 18, 2015.
Undertaking to be submitted pursuant to the Exchange circular ref. no. NSE/COMP/18438 dated June 25, 2011 to facilitate advertisement requests in compliance with the Code of Advertisement and to expedite approvals for draft advertisements.
Ensure that the Broker, its Group companies/ third party or its associate has not offered any schemes/ leagues/ competitions and has not issued any advertisement for the same. Further, broker has not carried out advertisements in which celebrities form part of the advertisement.

Prevention of Money Laundering:

Appointment of Principal Officer for ensuring Compliance of the provisions of the PMLA (Prevention of Money Laundering Act).
Appointment of a Designated Director and intimating its details to FIU-IND and provide compliance status of the same by sending an email to respective Exchanges in which Broker is registered.
Registration on the FINnet Gateway Portal at https://finnet.gov.in/ to submit the reports and exchange information with FIU-IND by the Broker.
Existence of adequate Anti-Money Laundering Policy.
Compliances of Guidelines on Anti-Money Laundering Standards.
Categorization of clients as per risk perception.
Adequate system to generate alerts for suspicious transactions.
Adequate system in place to scrutinize the alerts and arrive at suspicious transactions
Adequate system and procedures in place to ensure screening of employees while hiring
Appropriate procedures in place for reporting of suspicious transactions to FIU
Ongoing training programme is conducted for employees for adequately trained them in AML and CFT procedures.
Adherence to SEBI Circular CIR/MIRSD/1/2014 dated 12th March’ 2014 and necessary modifications are made in PMLA Policy as per the said circular.
Ensure that Broker has complied with the requirements of the various FATF public statements and updated UNSC lists which are circulated by the exchanges.

Others:

Appointment of Compliance Officer as per SEBI (Stock Brokers and Sub Brokers Regulation 18A (1992).
Details regarding appointment of Compliance Officer and changes, if any, should be informed to the exchange.
One client code for order entry for each client should be maintained.
Modifications to client code post trade execution should be made only in case of genuine error or wrong data entry made by broker.
System should be put in place to monitor/prevent the use of client code modification facility for purposes other than correcting mistakes arising out of client code order entry.
If broker is doing pro trading, whether broker has disclosed this information to his clients.
If broker is doing pro trading from multiple locations, whether broker has obtained prior approval from the exchange in this regard.
SEBI Fees based on Turnover is paid to SEBI.
Business done on behalf of suspended/defaulter/ expelled members without obtaining prior permission of the exchange.
Maintenance of Securities Register, Margin Deposit Book, Investor’s Grievance Register, Dividend Ledger.
Net worth is within the limit prescribed by the exchange.
Permission of Exchange & SEBI is taken for change in shareholding pattern, Directors, Dominant Promoters Group, mergers and amalgamations.
Code of conduct as prescribed by SEBI adhered to.
Display of Notice Board & SEBI Registration Certificate.
Information about the grievance redressal mechanism as specified by SEBI circular CIR/MIRSD/3/2014 dated August 28, 2014 is displayed at all the offices of the Broker for information of the investors.
Broker has displayed prominently the following details in its portal /web site, if any, notice / display boards, advertisements, publications, account opening kit –

name of the broker as registered with SEBI,

its own logo, if any,

its registration number and

its complete address with telephone numbers

Broker has displayed prominently the following details on contract notes, statement of funds and securities, daily margin statement/ information and correspondences with the clients –

name of the broker as registered with SEBI,

its own logo, if any,

its registration number,

its complete address with telephone numbers,

the name of the Compliance Officer, his telephone number and e-mail address

Adherence to Prohibition of Insider Trading Regulations.
Exclusive e-mail id of the grievance redressal division / compliance officer has been designated and informed to the exchange about the same.
Power of Attorney executed in favour of Broker should be only limited purposes allowed as per regulatory provisions.
Power of Attorney executed should be revocable any time without notice.
Duplicate copy of Power of Attorney (POA) should be provided to client(s) after execution.
Verify whether Flagging of POA has been undertaken in the UCC with respect of all clients registered after February 13th, 2015 by the Broker.
Broker has not undertaken or was not party to or has not facilitated any fund based activity through financier.
Broker has adequate systems and checks in place to ensure that SEBI debarred entities are unable to trade.
STT statement is provided to clients on annual basis unless otherwise required by the client.
Prior Permission obtained for Securities Lending and Borrowing Scheme from the exchanges.
Submission of Annual Compliance Report, Annual Returns to exchanges.
Submission of half yearly Internal Audit Report / certificate to the exchanges.
Proper internal code of conduct and controls should be put in place.
Employees/temporary staff/voluntary workers, etc. employed/working in the Offices of market intermediaries do not encourage or circulate rumours or unverified information obtained from client, industry, any trade or any other sources without verification.
Employees should be directed that any market related news received by them either in their official mail/personal mail/blog or in any other manner, should be forwarded only after the same has been seen and approved by the concerned Intermediary’s Compliance Officer. If an employee fails to do so, he/she shall be deemed to have violated the various provisions contained in SEBI Act/Rules/Regulations etc. and shall be liable for action. The Compliance Officer shall also be held liable for breach of duty in this regard.
Broker has not outsourced their core business activities and compliance functions.
In case the Broker has outsourced any activities (other than core business activities and compliance functions), whether it has adhered to the provisions of SEBI circular CIR/MIRSD/24/2011 dated 15th December’ 2011.
In cases where broker is acting as investment advisers, whether it has complied with INVESTMENT ADVISERS REGULATIONS, 2013 (SEBI Notification No. LAD-NRO/GN/2012-13/31/1778 on 21st January 2013)
Broker has prepared Surveillance Policy based on parameters provided by the exchanges and the same has been approved by Board of Directors of the stock broker.
Broker has analyzed the alerts provided by the exchanges and reported in case of any suspicious transaction is noticed based on the parameter set by the exchanges and also set by the broker internally.
Broker has put in place systems for dealing with conflict of interest as per SEBI circular CIR/MIRSD/5/2013 dated August 27, 2013.
Disclosure by the broker or its group entities holds more than 1% of share capital of a listed company, thenthe same has been disclosed to the Exchange as per circular No. NSE/INVG/25130 dated November 29, 2013
Broker has properly documented and disclosed to their clients details of schemes where funds are being collected in advance from them towards brokerage and other allied services as per NSE Circular No NSE/INSP/ NSE/INSP/26252 dated March 24, 2014.).
Submission of Net worth Certificates within time limit and at frequency as prescribed by Exchanges.
Broker has uploaded correct details relating to Risk Based Supervision within time limit as prescribed by SEBI / Exchanges.
Broker has submitted the correct details to Exchange within prescribed time limit regarding Monitoring of Client assets under Enhanced Supervision framework as per SEBI circular SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016.
Broker has submitted the correct & complete details to Exchange within prescribed time limit regarding Client funds & securities under Enhanced Supervision framework as per SEBI circular SEBI/HO/MIRSD/MIRSD2/CIR/P/2016/95 dated September 26, 2016.
“Self-Trade Prevention” mechanism shall be introduced in F&O segment with effect from trade date September 07, 2015 and in Capital Market segment with effect from trade date October 12, 2015. (NSE/FAOP/29751 dated May 19, 2015 and NSE/CMTR/30879 dated October 1, 2015).
Ensure that whether the broker has obtained written confirmation from the client that the client shall not have recourse to dispute redressal mechanism/arbitration mechanism/investor protection schemes of the Stock Exchanges/SEBI in case the client avails services under schemes/leagues/competitions etc. offered by any third party/group company/associate of the broker. (NSE Circular NSE/COMP/31391 dated December 18, 2015)