The set-up for a stock broker can be broadly classified into: a. Front-office (Client Relation Team & Dealing Desk)
40 The typical flow of activities for a stock broker is illustrated in the chart below:
41
The manual attempts to demystify the activities of a stock broker process-wise. Further, the regulatory requirements for each of them are laid down and against them the relevant check points for audit.
3.1 Client Registration
A broker should take reasonable steps to assess the background, genuineness, financial soundness and investment objectives of the client when establishing relationship with a new client. It is expected that the brokers of Stock Exchanges know their clients through a proper introductory procedure and exercise due precaution while dealing with the clients. Broker should ensure that client is personally known or has been introduced to him by a person known to him. A record of introduction of all clients should be kept by brokers.
The flow for client registration is depicted as below:
3.1.1
Client Acquaintance
The Know Your Client (KYC) policy should clearly spell out the client identification procedure to be carried out at different stages i.e. while establishing the member-client relationship, while carrying out transactions for the client or when the member has doubts regarding the veracity or the adequacy of previously obtained client identification data.
Member should ensure that an account is not opened where they are unable to apply appropriate clients due diligence measures / KYC policies. This may be applicable in cases where it is not possible to ascertain the identity of the client, information provided to the intermediary is suspected to be non genuine, perceived non co-operation of the client in providing full and complete information. No account is opened in a fictitious / benami name or on an anonymous basis. Members should develop customer acceptance policies and procedures that aim to identify the types of customers that are likely to pose a higher than the average risk of money laundering or terrorist financing. By establishing such policies and procedures, they will be in a better position to apply customer due diligence on a risk sensitive basis depending on the type of customer business relationship or transaction.
3.1.2
Client Account Opening Form & Documentation
SEBI Circular No. MIRSD/ SE /Cir-19/2009 dated December 3, 2009 on Dealings between a client and a stock broker (trading members included) has laid down the requirements governing client registration document:
Client Acquainta nce Collecti on of Docum Verificatio n of document In-person Verification
Account
Opening
Dispatch of Welcome kit to client Debarred entity check Creation of account in Back-office & Front-ofiice Upload of UCC to Exchange Dispatch of Details to KRA Inventory & Storage Controls42
a. The stock broker to make available a folder /book containing all the documents required for registration of a client.
b. The folder/book shall have an index page listing all the documents contained in it and indicating briefly significance of each document.
c. All the documents in both the mandatory and the non-mandatory parts shall be printed in minimum font size of 11.
d. The stock brokers having own web-sites shall display all the documents executed by a client, client’s position, margin and other related information, statement of accounts, etc. in the web-site and allow secured access by way of client-specific user id and password.
e. No term of the agreement, other than those prescribed by SEBI, shall be changed without the consent of the client. Such change needs to be preceded by a notice of 15 days.
f. The stock broker shall frame the policy regarding treatment of inactive accounts which should, inter- alia, cover aspects of time period, return of client assets and procedure for reactivation of the same. It shall display the same on its web site, if any.
g. Further, the folder/book shall have two parts: i. Mandatory
ii. Non-mandatory. a. Mandatory Documents
The mandatory section of the account opening kit to include only the following: - Account Opening Form
- Rights and Obligation Document - Risk Disclosure Document - Policies and Procedures
- Guidance note dealing with Dos and Donts - Tariff sheet
SEBI has, vide its Circular No.
CIR/MIRSD/16/2011
, dated August 22, 2011, devised standard formats for the Client Registration. In order to bring about uniformity in documentary requirements across different segments and exchanges and to avoid duplication and multiplicity of documents, SEBI has formulated uniform set of documents which are listed below:a. Account Opening Form
KYC Form- Document captures the basic information about the constituent and an instruction/check list. It also captures the additional information about the constituent relevant to trading account and an instruction/check list.
b. Rights and Obligations
Document stating the Rights & Obligation of the stock broker/trading member, sub-broker and client for trading on exchanges (including additional rights & obligations in case of internet/wireless technology based trading).
c. Risk Disclosure Document(RDD)
43 d. Policies and Procedures
Document describing significant policies and procedures of the stock broker (to be added by the stock broker).
e. Guidance note
Document detailing do’s and don’ts for trading on exchange, for the education of the investors. f. Tariff sheet
Document detailing the rate/amount of brokerage and other charges levied on the client for trading on the stock exchange(s) (to be added by the stock broker).
Checklist for filling KYC form are as listed below: