Preparing for a Stock Exchange Inspection — A Practical Broker Readiness Checklist

Preparing for a stock exchange inspection requires a systematic approach covering documentation, client records, financial statements, and operational controls. Recent inspections by SEBI have highlighted several critical compliance issues among stockbrokers, particularly concerning the supervision of Authorized Persons (APs). This article provides a practical readiness checklist to help brokers navigate the inspection process smoothly.

Pre-Inspection Preparation

1. Review Common Inspection Findings

• Familiarize yourself with the illustrative list of common violations and deficiencies observed by SEBI during inspections of trading members.
• Conduct a self-assessment against each of the common findings to identify potential gaps.

2. Organize Documentation

• Maintain Proper Records.
• Ensure all registration certificates are readily available.
• Keep Do's and Don't List, all Annexures, Registration Certificate & Gumasta readily available.
• Ensure Trader Terminal Location & Office address are the same.

3. KYC and Client Documentation

• Ensure 'In-person verification' has been done while opening the account.
• Ensure photo copy of KYC & Rights and Obligations document has been provided to clients.
• Ensure no clauses have been added in Rights and Obligations document which are contrary to the clauses as prescribed by SEBI.
• Ensure voluntary clauses are highlighted as 'voluntary'.

4. Contract Notes

• Ensure contract notes bear serial numbers, SEBI registration numbers, Order no. & time.
• Ensure contract notes are issued in the prescribed format within 24 hours of trade execution.
• Ensure brokerage is shown separately on contract notes.
• Ensure stamp duty is paid appropriately.

5. Investor Services

• Maintain investor grievance register with proper system for receipt and reconciliation.
• Ensure client database is properly maintained.
• Ensure email ID created for receiving investor grievances is disseminated to investors.
• Ensure daily margin statements and quarterly statements are sent to clients.

6. Funds and Securities

• Ensure separate accounts for clients' funds / securities are maintained.
• Ensure margins are collected from clients and reported correctly.
• Do not accept cash from clients.

7. Terminals

• Ensure unique client code (UCC) of clients is put while placing orders in the trading system.
• Ensure trading terminals are granted only at specified locations.

8. Authorized Persons (APs)

• Broker must conduct proper inspection of Authorized Persons.
• This includes in-person verification, site visits, PAN validation, background checks, scrutiny of all demat and bank account statements of the APs, continuous screening / verification that they are not debarred by SEBI & Exchanges.

9. Financial Statements

• Ensure financial statements are submitted as per the timeline prescribed under the Companies Act, 2013.
• Ensure net worth certificate is filed within the prescribed deadlines.

10. Systems and Technology

• Ensure IP address (from where the orders are originating) is captured for all IBT / STWT orders.
• Ensure proper systems are in place for recording client orders.

During the Inspection

• Cooperate fully with the inspecting authority.
• Provide all information / records sought within the specified timeline.
• Designate a point of contact to coordinate with the inspection team.
• Maintain a log of all documents and information provided.

Post-Inspection

• Review the inspection findings carefully.
• Take corrective action on any observations / deficiencies identified.
• Submit the Action Taken Report (ATR) within the prescribed timeline.
• Implement systemic improvements to prevent recurrence of issues.

Common Pitfalls to Avoid

• Incomplete documentation. Ensure all required documents are organized and readily available.
• Non-cooperation. Failure to cooperate with the inspection team can lead to adverse findings.
• Delay in corrective action. Failure to address inspection findings promptly can lead to penalties.
• Inadequate supervision of APs. This has been a key area of concern in recent inspections.

How We Help

At Anuj Desai & Associates, we help stock brokers prepare for inspections by conducting pre-inspection compliance reviews, identifying potential gaps, and ensuring all documentation is in order. If you are facing an upcoming inspection or want to proactively strengthen your compliance framework, reach out to our regulatory compliance desk.