The exception to trading restrictions under the RA Regulations requires prior written approval. This approval ensures that any trading under the exception is properly reviewed and authorized. This article provides a comprehensive technical analysis of the prior written approval requirement.
Regulatory Basis
Primary Provision: Regulation 16(6)
Regulation 16(6) provides that:
"Notwithstanding anything contained in sub-regulations (2) to (4), such restrictions to trade or deal in securities may not apply in case of significant news or event concerning the subject company or based upon an unanticipated significant change in the personal financial circumstances of the research analyst, subject to prior written approval as per the terms specified in the approved internal policies and procedures."
The Approval Requirement
What is Required
- Prior Approval: Before the trade is executed
- Written Approval: In writing, not verbal
- Internal Policies: As per approved internal policies and procedures
When is Approval Required?
When the RA wishes to trade under the exception for:
- Significant news or event concerning the subject company
- Unanticipated significant change in personal financial circumstances
Approval Process
Step 1: Identify the Need
- Identify that an exception is needed
- Determine the trigger (significant news/event or unanticipated change)
Step 2: Prepare Request
- Prepare a formal request
- Include justification
- Include relevant details
Step 3: Submit Request
- Submit to the designated authority
- Follow internal policies
Step 4: Review and Decision
- The designated authority reviews
- Decision is made
- Written approval is provided
Step 5: Execute Trade
- Trade is executed after approval
- Documentation is retained
What the Request Should Include
For Significant News/Event
| Element | Description |
|---|---|
| Nature of News/Event | What is the news or event? |
| Significance | Why is it significant? |
| Impact | How does it affect the RA's position? |
| Proposed Trade | What trade is proposed? |
| Timing | When is the trade proposed? |
For Unanticipated Change
| Element | Description |
|---|---|
| Nature of Change | What is the unanticipated change? |
| Significance | Why is it significant? |
| Impact | How does it affect the RA? |
| Proposed Trade | What trade is proposed? |
| Timing | When is the trade proposed? |
What the Approval Should Include
| Element | Description |
|---|---|
| Approval Date | Date of approval |
| Request Reference | Reference to the request |
| Approval Decision | Approved or rejected |
| Terms and Conditions | Any conditions |
| Signature | Signature of approving authority |
Designated Authority
Who Should Approve?
- Compliance Officer
- Legal Officer
- Designated Committee
- Senior Management
Independence
The approving authority should be independent of the RA's research activities.
Internal Policies and Procedures
What to Include in Policies
- Definition of significant news/event
- Definition of unanticipated change
- Approval process
- Designated authority
- Documentation requirements
Documenting Policies
- Written policies
- Approved by senior management
- Communicated to all relevant personnel
Practical Implementation
Step 1: Develop Policies
- Develop internal policies for prior written approval
- Get them approved
Step 2: Communicate
- Communicate policies to all relevant personnel
- Provide training
Step 3: Implement
- Implement the approval process
- Monitor compliance
Step 4: Review
- Review the process periodically
- Make improvements
Common Compliance Gaps
1. No Prior Approval
Some RAs trade without prior approval.
Solution: Obtain prior approval before trading.
2. Verbal Approval
Some RAs obtain only verbal approval.
Solution: Obtain written approval.
3. Incomplete Request
Some RAs submit incomplete requests.
Solution: Submit complete requests.
4. Not Following Policies
Some RAs do not follow internal policies.
Solution: Follow approved policies.
Consequences of Non-Compliance
1. Regulatory Action
SEBI may take action for non-compliance.
2. Monetary Penalties
SEBI may impose monetary penalties.
3. Suspension or Cancellation
SEBI may suspend or cancel registration.
Conclusion and How Anuj Desai & Associates Can Help
Prior written approval is a critical requirement for the trading exception.
Anuj Desai & Associates offers specialized services to help RAs comply with the approval requirement:
- Development of internal policies
- Review of approval requests
- Assistance with the approval process
- Compliance audit and advisory
Contact us today to ensure your approval processes comply with SEBI requirements. Our team will guide you through the process.
Disclaimer: This article is for informational purposes only and does not constitute legal advice. Readers are advised to consult qualified professionals for legal and compliance matters. Anuj Desai & Associates is a SEBI compliance consulting firm based in India.