15 SEBI Cracks Down on Unverified Market Rumors Circulated by Intermediaries

Key Takeaways:

- Intermediaries must have proper internal codes of conduct and controls to prevent the circulation of unverified market information by their employees.

- Access to blogs, chat forums, and messenger sites should be restricted or supervised to prevent the spread of rumors.

- Logs of such activities should be maintained as records per applicable regulations.

- Employees should forward any market-related news to the compliance officer for approval before circulation.

- Failure to comply with these guidelines will be considered a violation of SEBI Act, Rules, and Regulations, and intermediaries and their employees will be liable for action.

Detailed Narrative:

The Securities and Exchange Board of India (SEBI) has observed a concerning trend where employees of broking houses and other registered market intermediaries are circulating unauthenticated news and rumors related to various scrips through various modes of communication, such as blogs, chat forums, emails, and more. This practice can cause significant damage to the normal functioning and behavior of the market, distorting the price discovery mechanisms.

SEBI has noted that many intermediaries lack proper internal controls and fail to ensure that adequate checks and balances are in place to govern the conduct of their employees. Due to this lack of proper internal controls and poor training, employees of such intermediaries are often unaware of the potential harm caused by circulating unverified news or rumors.

To address this issue, SEBI has issued guidelines through circulars CIR/ISD/1/2011 dated March 23, 2011, and CIR/ISD/2/2011 dated March 24, 2011, which outline the following requirements for intermediaries:

1. Proper internal codes of conduct and controls must be put in place to prevent the circulation of unverified information by employees.

2. Access to blogs, chat forums, messenger sites, and other similar platforms should either be restricted under supervision or not allowed at all.

3. Logs for any usage of such platforms shall be treated as records and maintained as specified by the relevant regulations governing the concerned intermediary.

4. Employees should be directed to forward any market-related news received through official or personal channels to the intermediary's compliance officer for approval before circulation.

5. Failure by an employee to comply with these guidelines shall be deemed a violation of various provisions contained in the SEBI Act, Rules, and Regulations, and the employee shall be liable for action. The compliance officer shall also be held liable for breach of duty in this regard.

SEBI has emphasized that market rumors can do considerable damage to the normal functioning and behavior of the market and distort price discovery mechanisms. Therefore, it is crucial for intermediaries to implement these guidelines and ensure their employees do not engage in the circulation of unauthenticated news or rumors.

FAQs:

Q1: Why is SEBI concerned about the circulation of unauthenticated news and rumors by intermediaries?

A1: SEBI is concerned because the circulation of unverified information can cause significant damage to the normal functioning and behavior of the market, distorting price discovery mechanisms. This can harm the integrity of the market and undermine investor confidence.

Q2: What are the key requirements outlined in the SEBI guidelines?

A2: The key requirements include implementing proper internal codes of conduct and controls, restricting or supervising access to blogs and chat forums, maintaining logs of such activities, requiring employees to obtain approval from the compliance officer before circulating market-related news, and holding employees and compliance officers liable for violations.

Q3: What are the consequences of non-compliance with these guidelines?

A3: Failure to comply with these guidelines will be considered a violation of the SEBI Act, Rules, and Regulations, and intermediaries and their employees will be liable for action. The compliance officer will also be held liable for breach of duty in this regard.

Q4: Why is it important for intermediaries to maintain logs of activities on blogs and chat forums?

A4: Maintaining logs of such activities is important because these logs will be treated as records and must be maintained as specified by the relevant regulations governing the concerned intermediary. This ensures that there is a trail of activities that can be reviewed and audited if necessary.

Key Precedents:

The guidelines issued by SEBI through circulars CIR/ISD/1/2011 dated March 23, 2011, and CIR/ISD/2/2011 dated March 24, 2011, are the key precedents covered in this chapter. These circulars outline the requirements for intermediaries to implement proper internal controls and prevent the circulation of unauthenticated news and rumors by their employees.

These circulars were issued by SEBI in exercise of its powers under the Securities and Exchange Board of India Act, 1992, and the relevant regulations governing the securities market. The circulars aim to protect the integrity of the market and ensure that intermediaries and their employees do not engage in practices that can distort price discovery mechanisms or undermine investor confidence.

By issuing these circulars, SEBI has established clear guidelines and expectations for intermediaries to follow in order to maintain a fair and orderly market. Failure to comply with these guidelines will be considered a violation of the SEBI Act, Rules, and Regulations, and intermediaries and their employees will be liable for action.

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Here's the SEBI's Debenture Trustees' circular's verbatim Chapter XV

Chapter XV: Unauthenticated news circulated by SEBI registered market intermediaries through various modes of communication{37}

1. It has been observed by SEBI that unauthenticated news related to various scrips are circulated in blogs/ chat forums/ e-mail etc. by employees of Broking Houses/ Other Intermediaries without adequate caution as mandated in the Code of Conduct.

2. Further, in various instances, it has been observed that the Intermediaries do not have proper internal controls and do not ensure that proper checks and balances are in place to govern the conduct of their employees. Due to lack of proper internal controls and poor training, employees of such intermediaries are sometimes not aware of the damage which can be caused by circulation of unauthenticated news or rumours. It is a well-established fact that market rumours can do considerable damage to the normal functioning and behaviour of the market and distort the price discovery mechanisms.

3. In view of the above, a Debenture Trustee shall ensure that:

3.1.Proper internal code of conduct and controls is put in place.

3.2.Employees/ temporary staff/ voluntary workers etc. employed/ working in the Offices of SEBI registered Debenture Trustees do not encourage or circulate rumours or unverified information obtained from client, industry, any trade or any other sources without verification.

3.3.Access to Blogs/ Chat forums/ Messenger sites etc. should either be restricted under supervision or access should not be allowed.

3.4.Logs for any usage of such Blogs/ Chat forums/ Messenger sites (called by any nomenclature) shall be treated as records and the same should be maintained as specified by the respective Regulations which govern the concerned Debenture Trustee

3.5.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 SEBI registered Debenture Trustee'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 action. The Compliance Officer shall also be held liable for breach of duty in this regard.

Note:-

{37}CIR/ISD/1/2011 dated March 23, 2011 and CIR/ISD/2/2011 dated March 24, 2011