Sales practices, code of conduct and investor protection

Most complaints against brokers are not about prices or systems; they are about a salesperson who promised too much, traded without instruction, or failed to collect margin and then dumped the loss on the client. The exam closes with the rules that govern how a derivatives salesperson deals with a client, because an approved user who breaks them exposes the member to penalties and the client to loss. Learn them as a checklist of what must happen before, during and after a trade.

Before the first trade: onboarding

A client is onboarded through the account opening form, which has a mandatory part prescribed by SEBI and a voluntary part the broker may add (and which cannot contain clauses that dilute the client's rights). The mandatory documents the client must receive and acknowledge are the Rights and Obligations of stock brokers and clients, the Risk Disclosure Document (RDD), the Guidance Note of dos and don'ts, the broker's policies and procedures (including when the broker may square off positions for margin shortfall) and the tariff sheet. The RDD is specific to derivatives: it states that leverage magnifies losses, that losses can exceed the margin deposited, that daily MTM must be paid, that liquidity can vanish and that stop-loss orders do not guarantee a price. A separate RDD acknowledgement is required for the derivatives segment.

KYC requires PAN, proof of identity and address, in-person verification or its electronic equivalent, and upload to a KYC Registration Agency and the Central KYC registry. For the F&O segment the broker must also collect financial proof, such as the latest income tax return, Form 16, a six-month bank statement, a net worth certificate or a demat holding statement, because derivatives are unsuitable for a client who cannot absorb losses. Income details must be updated periodically. Under the Prevention of Money Laundering Act the broker must categorise the client by risk, monitor transactions, report suspicious ones to FIU-IND and keep records for the prescribed period.

During trading: authorisation, margins, records

Every order must come from the client. Unauthorised trading, where the dealer trades first and informs later, is the single largest category of complaints, and SEBI requires the broker to keep proof of the client's instruction: recorded phone lines, emails, messages from registered IDs, or system logs for online orders. A trade without such proof is presumed unauthorised in a dispute. Client codes must be entered correctly at the time of the order; modifications after the trade are permitted only for genuine errors and attract penalties.

Margins must be collected upfront, before the trade, in the derivatives segment: the full SPAN plus extreme loss margin, in cash or approved collateral such as pledged securities. The broker reports client-level margins to the clearing corporation daily, and a short collection is penalised at rates notified, with higher rates for larger or repeated shortfalls; the penalty is on the broker, who may not pass it to the client unless the client caused it. Peak margin rules require the full margin to be in place at the highest intraday position, not just at day end. Client funds are kept in designated client bank accounts, never mixed with the broker's own, and are passed upstream to the clearing corporation at the end of each day. Client securities stay in the client's demat account and are given as collateral only through the pledge and re-pledge mechanism, never by transfer to the broker's account.

The records that must reach the client are: a contract note for every trade by the next working day, showing the order and trade numbers and times, quantity, price, brokerage separately, STT and other charges, and the member's registration number, sent electronically with a digital signature if the client has opted for it; a daily margin statement; a statement of funds and securities at least quarterly; and settlement of the running account at least once a quarter (or monthly if the client prefers), with the unused balance returned. Brokerage is capped at 2.5% of trade value as per exchange rules, and on options it is charged on premium, not on the notional.

What sales staff may and may not say

Only an approved user holding a valid NISM certification may operate a trading terminal or advise a client on derivatives. The broker's code of conduct in the SEBI (Stock Brokers) Regulations and the exchange's rules set the limits:

• Never promise or imply assured or guaranteed returns, or agree to share profits or bear losses. Both are prohibited and void.
• Never run a scheme or pool client money, or take discretionary control of a client's account; that is portfolio management, which needs separate SEBI registration.
• Do not recommend trades that generate brokerage without a rationale for the client (churning), and do not push products the client's financial profile cannot bear.
• Explain the product: a client buying options must know the premium can go to zero; a client writing options must know the loss is unlimited; a futures client must know MTM is paid daily.
• Disclose brokerage and charges before the trade, and any interest the broker has in the security.
• Do not front-run clients, use client information or trade on the client's behalf in your own account; do not circulate unverified news or tips on social media or messaging apps.
• Advertisements and research must comply with the SEBI advertisement code and the research analyst rules; past performance must not be presented as a promise.

When something goes wrong: grievance redressal and protection

The escalation ladder is fixed and the exam asks for it in order. First, the client complains to the broker, who must resolve it within the time SEBI prescribes (currently 21 days) and acknowledge it immediately. Second, the client may lodge the complaint on SCORES, SEBI's online complaints system, which forwards it to the broker and tracks the response, with escalation to SEBI if unresolved. Third, the exchange's investor grievance redressal mechanism: the Investor Services Cell takes up the matter and refers unresolved money claims to the Investor Grievance Redressal Committee. Fourth, arbitration through the exchange or the common online dispute resolution (ODR) portal, which offers conciliation and then arbitration by independent arbitrators, with an appellate arbitration tier. A court challenge is possible only on the limited grounds in the Arbitration and Conciliation Act. Claims must be filed within the limitation period notified by the exchange, so clients should not sit on a complaint.

If a broker defaults, the exchange's Investor Protection Fund compensates eligible clients for proven claims, up to a cap per investor as notified by the exchange and SEBI. The fund is built from member contributions, penalties and a share of listing fees. Protection also comes from the structure itself: client funds upstreamed daily to the clearing corporation, securities held in the client's own demat, and the clearing corporation's settlement guarantee fund, which ensures that a counterparty's default never reaches the client. A salesperson who follows the rules in this chapter rarely has a client who needs any of these remedies, which is the point.