SEBI restricts circulation of unauthenticated news by market intermediaries

Last week SEBI had issued a circular which prevented the circulation of unauthenticated news or rumours by market intermediaries. SEBI noted that market rumours can do considerable damage to the normal functioning and behavior of the market and distort the price discovery mechanisms. Towards this end, SEBI has issued the following directions to the market intermediaries:

New compliances for market intermediaries

1. Market intermediaries should have in place proper internal code of conduct and controls to prevent circulation of unauthenticated news or rumours.

2. Employees of market intermediaries should not encourage or circulate rumours or information obtained without verification.

3. Access of employees of market intermediaries to blogs/chat forums etc. should either be restricted under supervision or access should not be allowed.

4. Logs for any usage of such blogs/chat forums etc. shall be treated as records and the same should be maintained as specified by the respective Regulations which govern the concerned intermediary.

5. Employees should be directed that any market related news received by them either in their official mail/personal mail/ blog or in any other manner, should be forwarded only after the same has been seen and approved by the concerned Intermediary’s Compliance Officer. If an employee fails to do so, he/she shall be deemed to have violated the various provisions contained in SEBI Act/Rules/Regulations etc. and shall be liable for actions. The Compliance Officer shall also be held liable for breach of duty in this regard.

Challenges

1. The new direction from SEBI seeks to restrict circulation of rumours or unauthenticated news by market intermediaries i.e. the SEBI registered intermediaries like a stock broker or a portfolio manager. However, in many cases the sources of unauthenticated news or rumours are not SEBI registered intermediaries but private persons giving stock advice or websites, forums, blogs etc. managed by entities other than SEBI registered market intermediaries. Thus the new direction from SEBI has failed to address the threats posed by private persons or blogs and forums managed by entities other than SEBI registered market intermediaries.

2. SEBI has mandated that any market related news received by employees of market intermediaries, should be forwarded by the employee only after the same has been seen and approved by the concerned Intermediary’s Compliance Officer. However, it is difficult for Market Intermediaries having large number of employees to implement the same. Also it is difficult for any entity to monitor all the online activities of their employees like emails, chats, blog posts, forum posts etc.

Listing Agreement for Securitized Debt Instruments

Last week SEBI had issued the listing agreement for securitized debt instruments. The listing agreement provides for disclosure of pool level, tranche level and select loan level information. The listing agreement comes into force with immediate effect for all securitised debt instruments as defined under regulation 2(1)(s) of the Securities and Exchange Board of India (Public Offer and Listing of Securitised Debt Instruments) Regulations, 2008, seeking listing on the stock exchange. Readers may recall that in October last year SEBI had issued the draft listing agreement for securitized debt instruments for public comments/ suggestions.

Stock broker allowed to undertake referral activities for loan, mutual fund distribution etc.

Readers may recollect the SEBI order under the SEBI (Informal Guidance) Scheme 2003 wherein it was stated that a merchant banker cannot undertake referral activities for non-security related products and/or services ("Barclays Case"). SEBI has recently passed an order under the SEBI (Informal Guidance) Scheme 2003 wherein it has stated that stock brokers may undertake referral activities and may act as an agent on behalf of the lenders for referring/distributing third party loans without taking on any personal financial liability. SEBI stated that such activities fall under the exception provided at Rule 8(1)(f) of the Securities Contracts (Regulation) Rules, 1957.

In the recent case, Fullerton Securities & Wealth Advisors Limited ("Fullerton") a stock broker, registered with SEBI, had filed with SEBI a request for 'No Action Letter' under the SEBI (Informal Guidance) Scheme 2003 in relation to its proposed businesses including referral activity. Under its proposed business scheme Fullerton would refer /distribute loans provided by third party NBFCs/banks/HFIs/lending institution to its customers while acting in capacity as agent or broker, with no personal financial liability on Fullerton. Fullerton also proposed to undertake activities like distribution of mutual funds, setting up a corporate agency for distribute insurance products and act as a depository participant. SEBI in its reply stated the following:

(i)    Fullerton may undertake referral activities act as an agent on behalf of the lenders for referring/distributing third party loans without taking on any personal financial liability (as it is allowed under Rule 8(1) (f) of the Securities Contracts (Regulation) Rules, 1957).

(ii)    Fullerton may distribute mutual funds after obtaining requisite registration from AMFI.

(iii)    Fullerton may distribute insurance products in compliance with IRDA directives.

(iv)    Fullerton may provide services as depository participant in compliance with the SEBI (Depositories & Participants) Regulations, 1996.

In the Barclays Case, SEBI had stated that a merchant banker registered with SEBI cannot undertake any business other than in the securities market, under regulation 13A of the SEBI (Merchant Bankers) Regulations, 1992. Thus a merchant banker cannot undertake referral activities for non-security related products and/or services. However in the present case (Fullerton's case) SEBI allowed a stock broker registered with SEBI to under referral activity as there are no similar restrictions (as in the nature of regulation 13A of the SEBI (Merchant Bankers) Regulations, 1992) in the Securities Contracts (Regulation) Rules, 1957.