Disclosure of Proprietary Trading to Clients — What Brokers Are Required to Reveal
Every broker must disclose to his client whether he does client-based business or proprietary trading as well. With a view to increase the transparency in the dealings between the broker and the client, SEBI has mandated that brokers disclose this information upfront. This article explains what brokers are required to reveal, when the disclosure must be made, and the consequences of non-disclosure.
The Regulatory Basis
SEBI Circular SEBI/MRD/SE/CIR-42/2003 dated November 19, 2003 mandated that with a view to increase the transparency in the dealings between the broker and the client, every broker shall disclose to his client whether he does client based business or proprietary trading as well.
What Must Be Disclosed
Brokers must disclose:
- Whether the broker does client-based business (trading on behalf of clients).
- Whether the broker does proprietary trading (trading on its own account).
- If the broker does both, this must be clearly disclosed.
When the Disclosure Must Be Made
For New Clients
The broker shall disclose this information upfront to his new clients at the time of entering into the Know Your Client agreement.
For Existing Clients
In case of a broker who at present does not trade on proprietary account, chooses to do so at a later date, he shall be required to disclose this to his clients before carrying out any proprietary trading.
Why This Disclosure Matters
Transparency
The disclosure increases transparency in the dealings between the broker and the client. Clients have a right to know whether their broker is also trading on its own account, which could create potential conflicts of interest.
Informed Decision-Making
Clients can make informed decisions about whether to trade with a broker that also engages in proprietary trading.
Conflict of Interest Awareness
Proprietary trading can create conflicts of interest, as the broker may be trading against its own clients. Disclosure helps clients understand and assess these risks.
Related Requirements
Pro-Account Trading Terminals
SEBI Circular SEBI/MRD/SE/CIR-32/2003/27/08 dated August 27, 2003 requires that the facility of placing orders on "pro-account" through trading terminals shall be extended only at one location of the members as specified / required by the members. Trading terminals located at places other than the above location shall have a facility to place orders only for and on behalf of a client by entering client code details.
Commodity Derivatives
The provisions regarding disclosure of proprietary trading by stock broker to client, as specified in SEBI Circular SEBI/MRD/SE/CIR-42/2003 dated November 19, 2003, are made applicable to all the commodity derivatives exchanges.
How We Help
At Anuj Desai & Associates, we help stock brokers implement the proprietary trading disclosure requirement, update client agreements, and ensure compliance with SEBI's requirements. If you need assistance with proprietary trading disclosure compliance, reach out to our regulatory compliance desk.