5 common forms of broker misconduct

5 common forms of broker misconduct

When engaging a stockbroker, you expect them to make wise decisions with your capital. While SEBI (Securities Exchange Board of India), the Indian market watchdog, stands tall between you and brokers to address grievances, you need to be aware of your rights as a client and also of the broker’s code of conduct.

In this article, we take you through 5 common forms of stockbroker misconduct that most investors are seldom aware of but should be.

1. Unauthorized trading

Unauthorized trading can be loosely defined as trading without client knowledge or authorization. This is the most common form of stockbroker misconduct observed in India.

Your stockbroker may trade without your knowledge or authorization. They may go against your risk tolerance and capital capacity to trade on your behalf. This has been very commonly observed in the arenas of derivatives trading.

Derivatives trading is arguably the riskiest set of trades one can make in Indian markets. And not every individual may want to add such risk to their portfolios. But, sometimes, stockbrokers spotting ripe opportunities want to enter F&O trading on behalf of their clients. Now, this may require additional funds from your pockets to maintain margins and more. And the potential losses can be unlimited. A stockbroker can only perform any trading from your account through your authorization.

SEBI has made it clear that each and every trade has to be authorized by a client mandatorily. Also, SEBI’s latest circular mandates that stock brokers keep evidence of client orders in the form of phone records, authorized emails, physical records, and any other legally admissible records.

Unauthorized trading is a punishable offense that may lead to severe penalties and also imprisonment.

2. Misrepresentation

Another common form of stockbroker misconduct is the misrepresentation of facts. When working with a stockbroker, every individual is entitled to accurate information on investments, trading, and more. Now, some brokers may not have your best interest in mind and can indulge in misrepresentation of facts and information.

Your stockbroker might misrepresent information to you to sell a risky instrument or sell a shady scheme wherein he may earn a commission or more. Some brokers may lie to you outright, while others could make statements that are technically true but could be highly misleading. A broker knowingly may also omit facts, numbers, and statements to ensure you are on the downside of complete information.

If a broker knowingly misrepresented the truth, presented a suggestion as fact, actively concealed information, or indulged in any other omission, they may be liable for enquiry for misconduct.

3. Deceptive investment advice

For personal gains such as commissions and more, a few stockbrokers give out deceptive investment advice. They may not keep the investor’s profile in mind and can twist and turn facts to make their client agree to certain trades.

For instance, a stockbroker may present to you derivatives as a vehicle that may enhance your portfolio. While as a product, they sure do hold the potential, it is not everyone’s cup of tea (or coffee!). Of course, your broker is well-aware of the risks of this particular instrument and that it does not suit your risk profile. They may still strongly recommend and pursue you to indulge in such trades. Such brokers may be liable for misconduct.

SEBI clearly states in the Code of Conduct for Stock Brokers (Regulation 7) that a stockbroker shall not make any recommendation to any client unless he has reasonable grounds for believing that the advice is suitable.

4. Not maintaining books and records

Few stockbrokers fail to maintain books of accounts and other records. It may be a genuine lapse of responsibility in a few cases. But sometimes, books and records are not maintained to hide a misdoing or to not articulately present the same to the client. Now, this may qualify as stockbroker misconduct.

This is a punishable offense and can attract serious penalties and even imprisonment.

SEBI mandates that every stock broker preserve his books of accounts, records, and more for a minimum of 5 years. They should be readily available for access and accurate account-related information should be provided to investors at the earliest.

5. Fraud

Some brokers may indulge in outright fraud.

This could involve taking over your entire capital. It could also mean indulging in acts that create a false perception of security trading or dealing in securities with no aim of transferring back securities or gains to the client, or selling, pledging, trading counterfeit securities, and more such instances.

SEBI has prescribed in detail acts that may be considered fraudulent. The penalties again could be severe and even involve imprisonment.

What is the role of SEBI? Who protects the investors? Read all about the Regulatory Bodies in the Indian Stock Market

How can you protect yourself from stockbroker misconduct?

It is important to safeguard yourself against stock broker misconduct. This can be achieved by being largely aware of your rights and responsibilities as a market participant or a broker client. Understand and analyse the trading statements shared with you and preserve them for posterity. Learn about broker operations and watch out for news about your broker. Being caught unaware may land you in uncomfortable situations and may cause high potential losses.

Here are a few things you can do to avoid getting cheated by your stockbroker.

1. POA (Power of Attorney)

When opening a Demat with a broker, you are provided with ample paperwork. Very few investors have the patience to read every clause. The broker conveniently guides you through the signing process, and you may feel that the process is closed. Now, you could be inviting a disaster by not reading the fine print.

Buried in paperwork, you may find the PoA section. When you sign here, you are basically giving away your rights of trading to your broker or making him in charge of your trading. A broker may take advantage of this PoA to sanction trade, transfer money, or overtrade. Read all terms and conditions carefully before signing on PoA.

2. Face value

Once you open a Demat account, you may start getting bombarded with phone calls, SMSes, and more with stock recommendations stating ‘one time opportunity,’ ‘multi-bagger,’ and so on. Your broker may lure you into trading risky instruments for his personal benefit.

In such scenarios, you are better off reading the markets and truly understanding if a said recommendation really holds true.

3. F&O

The F&O trap is real. In fact, unauthorized trading is the highest in the F&O segment. Your broker may want you to trade F&O by misrepresenting facts, showing your false profit projects, and more. Here, you will need to have a thorough understanding of your risk appetite and if you really wish to pursue one of the riskiest trading schemes.

Conclusion

If you are a stock market participant, you need to be aware of your broker’s duties and responsibilities and your own set of rights and obligations. Stockbroker misconduct is real and may happen to you if you are not careful with your paperwork and are unaware of your broker’s activity. Before engaging a broker, read in detail their code of conduct provided by SEBI to have a safe trading environment.

Looking for a trustworthy financial advisor who may be able to help you with strategies suitable to your specific investing reqirements? Look no further! TejiMandi offers you the best of services. Note that TejiMandi is a subsidiary of the behemoth Angel One, India’s most trusted brokerage house. Lay your faith in us for a comfortable trading experience.

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