SEBI Issues Parameters for Qualified Stock Brokers

SEBI Issues Parameters for Qualified Stock Brokers

Market regulator Securities and Exchange Board of India (SEBI) has issued a guideline for enhanced obligations and responsibilities on qualified stock brokers (QSB).

The enhanced monitoring of QSBs will be carried out by Market infrastructure institutions (MIIs) from 1 July 2023. The SEBI board in December, 2022 had approved amendments to stock broker regulations for defining QSBs and making enhanced norms applicable to them.

In the circular issued on 6 February 2023, SEBI says "the stock broker designated as a QSB shall be required to meet enhanced obligations and discharge responsibilities to ensure appropriate governance structure, appropriate risk management policy and processes, scalable infrastructure and appropriate technical capacity, the framework for orderly winding down, robust cyber security framework, and investor services including online complaint redressal mechanism."

As stated in the circular, a stock broker's eligibility to be designated as a QSB depends on the number of active clients, the assets of those clients, the trading volume of the broker, and the end-of-day margin obligations of all clients, excluding the broker's proprietary responsibility in all segments.

The procedure for assigning the score is that the number of active clients will be divided by the aggregate number of active clients of all stock brokers, and the total score will be determined by adding the individual scores of all parameters.

According to SEBI, stock brokers with a total score greater than or equal to five based on the number of active clients, assets, and other parameters will be identified as QSB. Following consultation with SEBI, the stock exchanges will publish a list of QSBs based on the scores calculated annually. Brokers who are no longer listed on the revised list are still required to comply with responsibilities for an additional three-year period.

According to the guidelines, QSBs must have a board of directors or audit committee, risk management committee, information technology (IT) committee, cybersecurity committee, and any other committee mandated by the market regulator. These boards or committees should review and be vigilant of incidents and activities that can affect the functioning of the QSB in the securities market and investor protection, including data security breaches that can affect investor data.

The chief financial officer (CFO) or an equivalent individual of the QSB shall be responsible in submitting details in respect of the financial status of the entity, disclosure of any related party transactions, inter-corporate loans and investments, internal financial controls and risk management systems, compliance with listing and other legal requirements relating to financial statements, adherence to regulatory provisions to the audit committee.

Further, SEBI, has specified the framework on cybersecurity and cyber resilience to be followed by all stock brokers for Robust cyber security framework and processes. However, QSBs handle sensitive data of many the investors in the securities market and any cyber-attack on the systems of a QSB can compromise the confidentiality and integrity of such data.

Hence, QSBs shall have additional features in their cyber security framework which would be commensurate with the amount of data handled by them. The cyber security committee of the QSB shall review the framework on half-yearly basis and review the instances of cyber-attacks, if any, and take steps to strengthen the cyber security framework of the QSB. The QSBs shall have a dedicated team of security analysts, which may include domain experts in the field of cyber security and resilience, network security and data security.

Moreover, an Investor Services including online complaint redressal mechanism is being set up and the complaints redressal mechanism must be investor friendly and convenient for engaging with clients, responding to investor queries and seamless facility for filing complaints by investors and clearly defined escalation procedures are being established.