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INDICATIVE LIST OF OBSERVATIONS NOTED DURING INSPECTION/INTERNAL AUDIT AND ITS COMPLIANCE REQUIREMENT CLIENT REGISTRATION Requirement: In person verification to be done while registering the clients Ref: circular no. NSE/INSP/10938 dt 04-Jul-08 -In person verification not done while It is the responsibility of the members to satisfactorily identify their opening the trading account clients and to ensure in-person verification by their own staff while registering clients. The date of in -person verification, name and -Proof of in person verification done not signature of the official of the member, who has done the verification maintained by the members and the stamp of the member should be incorporated on the client registration form. In person verification activity cannot be outsourced -In person verification done by other than staff members Requirement: Financial details to be obtained at the time of client registration as a part of Know Your Client process Ref: circular no. NSE/INSP/5387 dt 27-Aug-04, NSE/INSP/13606 dt 03-Dec-09, NSE/INSP/14048 dt 03-Feb-10, Regulation No 4.3.2 of Part A of the CM segment and Regulation No 4.3.2 of the F&O segment -Financial details are filled without Members should obtain financial details of the clients along with adequate supporting document supporting documents before registering them. Members should obtain documentary evidence in support of financial information provided by the client in case the client opts to deal in derivative segment. -Balance sheet in case of corporate, firms In case of corporate, firms, etc members are required to obtain copies not obtained of the balance sheet for the last 2 financial years at the time of opening account -Copy of board resolution for non- In case of non individual clients, members are required to obtain a individual clients not maintained copy of the board resolution permitting trade in derivatives segment. Requirement: Review of client information / details on a periodic basis Ref: circular no. NSE/INVG/7236 dt 3-Mar-06 & NSE/INSP/5387 dt 27-Aug-04 Client information not reviewed Members are required to ensure that the client information is periodically periodically reviewed and updated on an ongoing basis and viewed in relation to the current trading activities of the client. Members are also advised to periodically review the information and update their database to ensure its completeness and accuracy Requirement: Delivery of copy of completed KYC, MCA, RDD or any other document executed by the client: Ref: circular no. NSE/INSP/10872 dt 23-Jun-08 Proof of delivery of copies of client Upon registration of a client, members are required to deliver to the registration documents not maintained by client a copy of the duly completed documents viz. Client registration the member form (KYC), Member Constituent Agreement / Tripartite agreement, Risk Disclosure document and also a copy of all other documents executed by the client. Member not communicating trading code, The trading code and the unique client code allotted to a client and the unique client code allotted to the client email id furnished by the client for the purpose of receiving electronic and the email furnished by the client for contract notes (ECNs) and other details, shall be communicated by the the purpose of receiving ECNs and other member through the KYC form or otherwise in writing to the clients details in writing to the clients. Requirement: Member Constituent Agreement should contain all clauses mentioned in UDR and all clauses included therein should be in conformity with SEBI / Exchange Rules, Regulations, Bye laws, Circulars Ref: Regulation No 4.3.1 of Part A of the CM segment and Regulation No 4.3.1 of the Regulations (F&O segment), Circular no. NSE/INSP/5387 dt 27-Aug-04, NSE/INSP/7657 dt 5-Jul-06, NSE/INSP/11324 dt 18-Sep-08, NSE/INSP/13606 dt 03-Dec-09, NSE/INSP/14048 dt 03-Feb-10, Contravening clause are included in the No clause which are contravening to Rules, Regulations, Articles, INDICATIVE LIST OF OBSERVATIONS NOTED DURING INSPECTION/INTERNAL AUDIT AND ITS COMPLIANCE REQUIREMENT voluntary/mandatory part of the Byelaws, circulars, directives and guidelines of SEBI or the Exchange agreement should be included in the voluntary or mandatory part of agreement clauses. Non segregation of mandatory and The docket or folder containing draft mandatory documents for signing voluntary documents / clauses pertaining and the checklist containing mandatory documents shall not include to client registration in separate docket. draft voluntary documents, if any Member should ensure that the folder consisting of constituent Voluntary clauses in agreements are not registration document shall have two parts: (a) Mandatory (b) Non highlighted as 'voluntary'. mandatory. All additional documents should state in bold that the document is “voluntary”. If such documents are required in order to ensure smooth functioning of special facility, the client shall be informed clearly that such documents are voluntary and the client need not execute such documents if he / she does not wish to use that facility Non execution of separate Member The Member Constituent Agreement can be uniform across all the constituent agreement for each Exchange segments of an Exchange. However, a separate agreement is required by the member with its clients. for each of the Exchanges where the broker is trading on different Exchanges Requirement: Execution of Internet Trading Agreement in prescribed format Ref: Circular no. NSE/CMT/1532 dt 16-Mar-00 Internet trading agreement not executed Members are required to execute an internet agreement with such for clients availing internet trading clients who are availing the internet trading facilities offered by the facilities member, spelling out all obligations and rights, minimum service standards to be maintained by the members etc. as per model agreement format. CONTRACT NOTES Requirement: Contract notes should be issued to clients in the prescribed format Ref: Regulation 3.5.1 of Part A of CM Regulations, Regulation 3.6.1 of the Regulations (F&O segment), Circular no. NSE/LEGAL/7036 & 7037 dt 05-Jan-06, NSE/INSP/7329 dt 30-Mar-06 Contract notes do not bear serial number, The Contract Notes are required to be numbered with unique running complete order number and trade serial number commencing from one which shall be reset only at the number, and execution time. Dealing beginning of every financial year. In case separate series is maintained office details are not printed on the in respect of different dealing offices of the member, then the dealing contract notes. Contract note issued to office name or code shall be prefixed to the serial number client without the signature of authorised representative of the member Jurisdiction clause states a particular place Contract note should mention that the Application for Arbitration shall of arbitration in case of dispute / claim / be filed by the Applicant at the RAC covering the state in which the difference between client and member Constituent ordinarily resides. -Order wise trade wise details are not -Trading member should send order wise trade wise details along with enclosed as separate annexure when contract notes when the contract notes are issued with weighted contract notes are issued with weighted average price for multiple trades for institutional clients average price for multiple trades (for institutional clients) -Contract notes are issued with weighted -Trading member should issue order wise scrip wise contract notes to average price for trades originating from the clients. Trade price and brokerage has to be separately mentioned multiple orders on the contract note. Requirement: Proper Order entry at client / PRO level INDICATIVE LIST OF OBSERVATIONS NOTED DURING INSPECTION/INTERNAL AUDIT AND ITS COMPLIANCE REQUIREMENT Ref: Regulation 3.5.1 of Part A of CM Regulations, Regulation 3.6.1 of the Regulations (F&O segment), Circular no. NSE/CMPT/11274 dt 10-Sep-08, & NSE/CMPT/11276 dt 10-Sep-08 Transfer of trades in the back office from Trading members are required to carry out client code modification, if Client to Pro, client to client and Pro to any, through the window provided to them by the Exchange. Members client. should note that proprietary trades cannot be modified to client trades and vice-versa. Requirement: Maintenance of Log Report of Electronic Contract Note non-delivered to the clients / rejected or bounced back Ref: Regulation 3.5A of Part A of CM Regulations, Regulation 3.6A of the Regulations (F&O segment), Circular no. NSE/INSP/6623 dt 09-Sep-05 & NSE/INSP/13606 dt 03-Dec-09 -Contract notes not digitally signed prior to Contract notes should be digitally signed prior to sending to clients in sending to clients case clients opts for receiving contract notes in electronic form. -No system available with member to track Members are required to maintain log report which provides details of record of bounced back emails contract notes not delivered to clients / email rejected or bounced back. -Physical contract notes are not sent to the In case of ECNs not delivered to clients / email rejected or bounced clients within stipulated time, in case the back, the trading members are required to issue physical contract ECNs have not been delivered to the notes. clients or have been rejected. -ECN's are sent to email-id created by the The email id shall not be created by the trading member. The client member and not provided by the client. desirous of receiving ECN shall create/provide his own email id to the trading member. Requirement: Maintenance of Designated website for the display of Electronic Contract Notes Ref: Circular no. NSE/INSP/6623 dt 09-Sep-05 ECN's are not made available A member in addition to email communication of Electronic contract simultaneously on the website of the note (ECN), shall simultaneously publish the ECN on his designated member website in secured way and enable access to clients. Requirement: Charging of Brokerage Ref: Regulation 3.6.2 of Part A of the CM segment Regulation, Circular no. NSE/ CMT/ 001 dt 28-Oct-1994, NSE/ INSP/3685 dt 17-Oct-02, Regulation 3.7.2 of the Regulations (F&O segment), Circular no. NSE/FOTRD/001 dt 08-Jun- 00,NSE/F&O/2577 dt 30-May-01 & NSE/INSP/8338 dt 05-Jan-07 -Excess brokerage is charged to the clients The rate of brokerage in case of contracts executed on the Exchange is on the trades executed on the Exchange. subject to a maximum of 2.5% of the transaction amount. However, in CMsegment, a trading member can charge brokerage up to 25 paise per share if the market value of the scrip is less than Rs 10/-. In case of option contracts, brokerage is to be charged on option premium amount and shall not exceed 2.5% of premium amount or Rs. 100/- per lot whichever is higher -Brokerage is not shown separately on Brokerage should be shown separately on the contract note. contract note. -Brokerage is charged on expiry contracts Brokerage is required to be charged only on trades executed on the Exchange - Charges other than brokerage and Member can charge brokerage + statutory levies to the client statutory charges are levied on the clients STATEMENT OF ACCOUNT FOR FUNDS AND SECURITIES Requirement: Statement of Account for Securities/Funds to be sent to Clients Ref: Regulation 6.1.5(d)of Part A of CM Regulations, Circular no NSEIL/LEGAL/6806 dt 24-Oct-05, NSCC/F&O/C&S/132 dt 08-Oct-02,NSE/LEGAL/7410 dt 21-Apr-06, NSE/INSP/13606 dt 03-Dec-09, NSE/INSP/14048 dt 03-Feb-10 INDICATIVE LIST OF OBSERVATIONS NOTED DURING INSPECTION/INTERNAL AUDIT AND ITS COMPLIANCE REQUIREMENT Instead of statement of account of Member is required to send a complete ‘Statement of Accounts’(not securities, holding statement is sent to the holding statement) for both funds and securities in respect of each of client. its client/constituents in such periodicity not exceeding three months (Calendar quarter) within a month of the expiry of the period. Statement sent to client without error Member is required to send statement of account for funds & reporting clause securities monthly/ quarterly as applicable at the time of settlement of funds & securities. This is an adequate compliance for the purpose of sending quarterly statement of accounts for funds/securities. The Statement shall also state that the client shall report errors, if any, in the Statement within 30 days of receipt thereof to the Member. The statements should have an account of all receipts and deliveries / payments during the relevant period and not just the details of holdings as at the end of the period The Statement of settlement shall state that the client shall report errors, if any, in the Statement within 7 days of receipt thereof to the Member. The statements should have an account of all receipts and deliveries / payments during the relevant period and not just the details of holdings as at the end of the period MARGIN REPORTING Requirement: Margin collection from clients and reporting of correct collected amount to NSCCL Ref: Circular no NSCC/F&O/C&S/97 dt 01-Feb-02, NSE/INSP/10367 dt 28-Feb-08, NSE /INSP/12503 dt 02-Jun-09 & NSE/INSP/12655 dt 30-Jun-09 -Inadequate margin collection from clients Members are required to ensure proper collection and report actual and also incorrect reporting of margin margin collected from clients / constituent to NSCCL collection to NSCCL. Considering cheques received subsequently, Pay in not due Members are required to collect initial margins from respective clients from Exchanges, Related party balances / constituents on upfront basis. Members can collect approved and while reporting margin collection to the liquid securities from their clients Exchange. -Reporting securities valuation as margin Members are required to ensure that the applicable haircut to be without applying appropriate haircut applied on such securities is the VaR margin rate applicable for the prescribed by the Exchange security in the CMsegment -Considering unapproved securities while Members are required to ensure that securities actively traded on the reporting margin collection from clients to National Exchanges, which are specifically not declared as illiquid the Exchange securities (by the Exchanges), received from respective client should be considered towards margin collection. Requirement: Margin details to be issued to clients Ref: Circular no. NSE/INSP/10239 dt 11-Feb-08 & NSE/INSP/10605 dt 21-Apr-08 Margin details not sent to clients on a daily Margin details should be sent to clients on a daily basis (in the CM basis in the CM segment as well in case the segment when the clients do not opt for bill to bill settlement of funds clients do not opt for bill to bill settlement & securities).Information related to margin applicable, utilised, of funds & securities. Incomplete details required & balance in respect of each client is required to be sent on a furnished to clients in the daily margin daily basis to the respective clients in both the segments. This statement information should give break up of details in terms of funds, bank guarantee, bank deposits and securities. The member must further maintain POD / dispatch proof of the same TRADING TERMINALS Requirement: Operation of trading terminals by approved users/ Operation of trading terminals by persons INDICATIVE LIST OF OBSERVATIONS NOTED DURING INSPECTION/INTERNAL AUDIT AND ITS COMPLIANCE REQUIREMENT with valid certification Ref: Regulation 2.2 of Part A of the CM Regulations & Regulation 2.2 of Regulations (F&O Segment), Circular no. NSE/MEM/3740 dt 13-Nov-02 & NSE/MEM/7992 dt 10-Oct-06 -In correct terminal user id / user name Member should ensure that terminals are operated only by approved details uploaded / informed to the persons and the details of such approved person should be correctly Exchange. uploaded/informed to the Exchange -Terminals are operated by the person In case of NEAT Terminal in CMSegment, under each Corporate without valid NCFM certification in CM Manager / Branch Manager who is NCFM certified maximum of 4 NEAT segment, Branch manager / corporate Approved Users (Dealers) are allowed. In case of CTCL terminals in manager ids are operated by the person CMsegment, for every 5 CTCL users, 1 user should be NCFM certified. without valid NCFM certification in CM In case of F&O segment, every NEAT and CTCL user is required to have segment of the Exchange. Terminals are valid certification for operation of terminals. operated by the person without valid NCFM certification in F&O segment of the Exchange. Requirement: Upload of information in respect of CTCL terminals to the Exchange Ref: Circular no. NSE/MEMB/3574 dt 29-Aug-02 ,NSE/MEMB/3635 dt 25-Sep-02, NSE/MEM/7913 dt 25-Sep-06 Same User names / NCFM certifications Trading Members are required to upload details of all CTCL terminals uploaded for multiple users. to the Exchange prior to their activation. Any change in the details viz. terminal id, user, location, etc. also needs to be uploaded prior to such change Non upload of CTCL terminal details to the Trading members are required to upload the details of all the terminal Exchange ids i.e. trading ids, administrative ids, etc. to the Exchange. DEALING WITH CLIENTS Requirement: Use of client funds / securities for specified purpose only Ref: Regulation 4.5.3 (e) of Part A CM Regulations and Regulation 4.5.3 (e) of the Regulations (F&O segment) , circular No.NSE/INSP/10605 dt 21-Apr-08 -Funds/securities of one client are utilised Members are required to ensure that clients funds and securities are for other clients/pro obligation. used to meet only the respective client's margin / pay-in requirements. -Pledging of clients’ securities with bank Members should not pledge clients’ securities with banks or any other for raising funds. Pledging client securities financial institutions for raising funds. without specific authorisation from client. Non-maintenance of specific records to indicate the client wise securities pledged. -Inadequate mechanism to monitor that the pledge proceeds are utilised for respective client only. Requirement: Maintenance of separate constituents beneficiary demat account for holding constituent’s securities, Receipts from clients to be deposited in client bank account and Payments to clients made from client bank account only Ref: Regulation 6.1.5 (c) (f) of Part A CM Regulations, and Regulation 18.104.22.168 of the Regulations (F&O segment) Though member is having designated Members are required to segregate client securities from own constituent beneficiary account, securities and maintain separate client beneficiary account(s) for segregation of client's securities with own keeping client’s securities. Members are required to ensure that securities is not maintained. Receipts of receipts from clients are deposited in client bank account only and clients are deposited in own bank account similarly members are required to make payments to clients from and vice versa client bank account only. Requirement: Use of client bank account for specified purposes only Ref: Regulation 6.1.5 (b,c) of Part A of the CM Regulations and 22.214.171.124 of the Regulations (F&O segment) INDICATIVE LIST OF OBSERVATIONS NOTED DURING INSPECTION/INTERNAL AUDIT AND ITS COMPLIANCE REQUIREMENT Payment of office expenses like electricity Members are required to ensure that no payments towards expenses / bills, insurance, salary to staff is being levies are made from client bank account and the funds are deposited made from client bank account. / withdrawn from client bank account only as per the regulations of Dividend on client securities received in the Exchange own bank account instead of client bank account. Requirement: Proper Risk Management Policy Ref: Circular no. NSE/MEMB/261 dt 27-May-97, NSE/CMPT/6122 dt 09-May-05, NSE/INVG/7236 dt 3-Mar-06, NSE/INSP/6938 dt 09-Dec-05, NSE/INVG/5913 dt 10-Mar-05 and NSE/INVG/12389 dt 12-May-09 Trading member has not put in place a Members are required to ensure that their system ensure client-wise proper Risk Management System to and security-wise limits on exposure, open position, etc. Member are protect itself from the client default required to have adequate systems and checks in place for identifying Risk management system of the member is debarred entities and to ensure that SEBI debarred entities are unable not made accessible to the clients. to trade No system in place to ensure that SEBI debarred entities do not execute trade Requirement: Cash dealings with clients Ref: Circular No NSE/INSP/4377 dt 01-Sep-03 Trading member has undertaken cash Members are required to ensure that funds are received from / paid to dealings with clients. Accepting cash from clients by way of crossed cheques / demand drafts or by way of direct clients is generally observed in the credit into the bank account through EFT or any other modes allowed branches of the member by RBI only. Members should not indulge in cash dealing with clients Requirement: Maintenance of register of securities in prescribed format Ref: Regulation no 6.1.3A (e) of Part A of the CM Regulations, 6.1.1 of the Regulations (F&O segment) and NSE/INSP/4986 dt 16-Apr-04 Trading member maintains script wise Register of securities of the member should be maintained client wise client wise register of securities instead of – scrip wise and should be in the prescribed format viz. contain client wise scrip wise register of securities information like Balance Quantity, Purpose of receipt / delivery, etc Requirement: Distribution of dividend to clients Ref: Regulation 4.4.15, 6.1.3 A(b) of Part A of the CM Regulations and 4.4.15 of the Regulations (F&O segment) Dividend is not paid / credited to the Members are required to reconcile dividend account periodically and clients, Delay in payment / credit of ensure that dividend received on behalf of clients is credited/paid to dividend to the clients, Non reconciliation the respective clients account. of dividend ledger. Requirement: Not to indulge in Fund based activities (funding to clients) Ref: Circular NSE/MEMB/261 dt 27-May-97 and NSE/MEM/4972 dt 07-Apr-04 Interest charged on debit balances of Members should not indulge in fund based activities and should not be clients, however, further exposure granted a party to any financing arrangements to the clients in spite of debit balances PROVISIONS OF PMLA Requirement: Implementation of written procedures as envisaged in the PMLA Ref: Circular no. NSE/INVG/7102 dt 25-Jan-06, NSE/INVG/7307 dt 24-Mar-06,NSE/INVG/223 dt 22-Dec-08, NSE/INVG/11928 dt 22-Jan-09 and NSE/INVG/14117 dt 17-Feb-2010. INDICATIVE LIST OF OBSERVATIONS NOTED DURING INSPECTION/INTERNAL AUDIT AND ITS COMPLIANCE REQUIREMENT Members are required to ensure -Change in Principal officer is not -Appointment of and change in Principal Officer to be intimated to FIU- intimated to FIU-Delhi Delhi -Non implementation of mechanism of risk - Written procedure for compliance with PMLA to be adopted. categorization of clients -Adopt customer acceptance policies and procedures sensitive to the -Absence of process of customer due risk of money laundering or terrorist financing transactions diligence - Strict adherence to customer due diligence requirements from - Non implementing a system of identifying establishment of new account to transaction monitoring and report clients of special category suspicious transactions, if any, to the FIU -Non maintenance of adequate systems to - To Organise suitable training programmes for employees and ensure scrutinize alerts and arrive at suspicious awareness transactions/Member does not system in - To adopt risk based approach while implementing client due place that allows continuous monitoring of diligence transactions to generate alerts - To implement the system of identifying clients of special category -No records are maintained of transactions - To maintain adequate systems to scrutinize alerts & arrive at as per Rule 3 of PMLA suspicious transactions. -Trading Member has not undertaken ongoing training program for employees - To maintain and preserve all such records of transactions which are so that members of the staff are prescribed under Rule 3 of PMLA adequately trained in AM and CFT - To have adequate systems & procedures in place to ensure (Combating Financing of Terrorism) screening of employees while hiring. procedure/ Non implementation of steps to create awareness among Employees / Investors regarding money laundering OTHER COMPLIANCE ISSUES Requirement: Inspection of sub brokers / branches Ref: circular no 60 ref no NSE /MEM/275 dt 12-Jun-1997 and NSE/INSP/2002/14 dt 17-Oct-02, Inspection reports of branch are not Trading members are required to inspect at least 10% of active maintained branches and sub brokers every year and ensure that each branch and sub broker is inspected at least once in every five years Requirement: Display of notice board / SEBI registration certificate Ref: circular no. NSE/MEM/6706 dt 28-Sep-05 and NSE/MEM/1591 dt 20-Apr-00 Non display of notice board Members are required to display, in all their offices / offices of their sub brokers where trading terminals are located, notice boards/plates at prominently visible locations, painted / printed in a permanent manner, in a font and colour which enables easy reading of the subject matter and containing prescribed details.
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