Compliance
Also written Compliance function
The set of actions by which securities market intermediaries and issuers conform to the rules of SEBI, the exchanges, the depositories and their own boards — records, policies, reports and submissions.
In plain language
In everyday English, compliance means following a rule. That rule might be a spec, a policy, a standard or a law.
In the securities market, the workbook gives it a sharper meaning. Compliance is the set of actions a firm takes to meet its rules. The firm may be a registered intermediary or an issuer company. The rules come from:
- SEBI;
- the stock exchanges;
- the depositories it is a member of;
- the policies of its own board and other competent authorities.
The actions are dull but concrete. They include keeping records, setting policies and steps, making reports, taking action and filing papers with the authorities.
Why call it a function? Because it does not happen by itself. Someone has to own it. The rules say who that is.
How it works
What the function does. IOSCO's 2005 discussion paper on the compliance function at market intermediaries defined it as "a function that, on an on-going basis, identifies, assesses, advises on, monitors and reports on a market intermediary's compliance with securities regulatory requirements, including whether there are appropriate supervisory procedures in place". The workbook adds that compliance looks into the culture and ethics of an intermediary and is a tool for managing the risk of legal or regulatory sanctions, financial loss, or loss to reputation.
Who owns it. A compliance officer, whom the workbook calls the first line regulator — all regulations require one. Under the Stock Brokers Regulations (regulation 18A as quoted in Chapter 3) and the Intermediaries Regulations, 2008 (regulation 14), the intermediary must appoint one to monitor compliance with the Act, rules, regulations, notifications, guidelines, circulars and orders of SEBI or the Central Government, and the rules, regulations and bye-laws of the stock exchanges or SRO — and to redress investor grievances. An intermediary not carrying on the activity need not appoint one.
The annual certificate (regulation 12, Intermediaries Regulations). The intermediary must:
- give SEBI a certificate of its compliance officer on 1 April each year, certifying compliance with all obligations and continuous fulfilment of eligibility criteria, and that disclosures in Form A are true and complete;
- prominently display a photocopy of the certificate at all offices, including branches;
- prominently display the name and contact details of the compliance officer for investor complaints;
- maintain books, accounts and records as specified.
Compliance for people, not just firms — the CAPSM Regulations, 2007. NISM runs certification for associated persons. SEBI considers whether a person deals with investors or clients, handles their assets or funds, handles grievances, is responsible for internal control, risk management or compliance, or affects operational risk. A certificate is valid for 3 years and is revalidated for 3 years by completing a CPE programme in the 12 months preceding expiry, or by passing the examination before expiry. Persons employed before SEBI's specified date could continue if certified within two years of that date.
A worked example
Illustrative facts. Sabarmati Securities Ltd is a stock broker and depository participant with 14 branches. Its compliance calendar for April shows how the definition turns into work.
| Action type (from the definition) | April item |
|---|---|
| Making submissions | Compliance officer's annual certificate to SEBI on 1 April |
| Taking actions | Photocopy of that certificate displayed at head office and all 14 branches |
| Maintaining records | Books of account preserved as the relevant regulations specify |
| Adopting policies | Board approves the updated insider trading code of conduct |
| Preparing reports | Quarterly reports to the exchanges and depository |
The certification check. Of 40 client-facing dealers:
- 31 hold certificates valid beyond December;
- 6 have certificates expiring 30 June — each must complete a CPE programme between 1 July of last year and 30 June (the 12 months preceding expiry) or pass the exam before 30 June;
- 3 have lapsed certificates and may not continue in those roles until they hold a valid certificate.
The cost of a gap. Under Section 15A of the SEBI Act (Chapter 4), failure to furnish information or returns carries a penalty of not less than Rs 1 lakh, which may extend to Rs 1 lakh for each day the failure continues, up to Rs 1 crore. A certificate filed 20 days late could, at the maximum daily rate, reach Rs 20 lakh — for a document the firm has to produce anyway.
Why NISM asks about it
Chapter 3 (Introduction to Compliance), 4% of the paper, is built on this term; its review question 1 — "Primarily, compliance involves ___" — has the answer conforming to a rule, policy, standard or law, and question 4 tests the 3-year validity of a CAPSM certificate.
The regulation 12 annual certificate (1 April, displayed at all offices) and the IOSCO definition's five verbs — identifies, assesses, advises on, monitors, reports — are the other likely targets.
Common exam traps
- Compliance is broader than SEBI rules — it includes the exchanges, the depositories where the intermediary has membership, and the board's own policies.
- Regulation 12 certificate: 1 April each year, from the compliance officer, displayed at all offices including branches.
- An intermediary not carrying on the activity may not appoint a compliance officer — the regulation 14 proviso.
- CAPSM certificate: 3 years, revalidated for 3 years; CPE must be done in the 12 months preceding expiry.
- A principal — sole proprietor, managing partner, whole-time director — has an extra route: delivering at least four sessions in a specific CPE programme.
- Persons aged 50+ or with 10 years' experience may use a CPE programme instead of the exam; others must pass the exam for the first certificate.
Check yourself
1.Primarily, compliance involves _____________.
- a)Conforming to a rule, policy, standard or law
- b)Record keeping
- c)Reporting
- d)Preventing frauds
Show the answer
Answer: (a) Conforming to a rule, policy, standard or law
In general, compliance means conforming to a rule, such as a specification, policy, standard or law.
The definition is given in exactly those words.
Options B and C name two of the five actions, not the meaning. The set of actions include maintenance of records, adoption of policies and procedures, preparation of reports, taking actions and making submissions to the competent authorities.
Record keeping and reporting are how compliance is achieved — they are not what compliance is.
Option D names a consequence. Preventing frauds is one benefit of a compliant firm, but compliance is broader: it is an important tool in managing the risk of legal or regulatory sanctions, financial loss, or loss to reputation resulting from the violation of regulatory requirements.
What the definition means in this market specifically: compliance however means a set of actions by which registered intermediaries in securities markets and issuer companies need to comply with the rules and regulations, notifications, guidelines and instructions issued by the Securities and Exchange Board of India (SEBI), the stock exchanges, depositories with whom the intermediary has taken membership, as well as policies laid down by the Board of Directors (BoD) of the Company and other competent authorities.
Five sources of obligation — and note that the company's own board is one of them. Compliance is not only about external rules.
Who carries it out: the Compliance Officer (CO), described as the first line regulator, and IOSCO's definition captures the work as a function that identifies, assesses, advises on, monitors and reports on a market intermediary's compliance with securities regulatory requirements, including whether there are appropriate supervisory procedures in place.
2.The SEBI (Intermediaries) Regulations, 2008 mandate the appointment of a Compliance Officer. True or False?
- a)True
- b)False
Show the answer
Answer: (a) True
Regulation 14(1): An intermediary shall appoint a compliance officer for monitoring the compliance by it, of the requirements of the Act, rules, regulations, notifications, guidelines, circulars and orders made or issued by SEBI or the Central Government, or the rules, regulations and bye-laws of the concerned stock exchanges, or the SRO, where applicable.
"Shall appoint" — mandatory.
**The regulations are dated 26th May 2008, and this is one of two provisions the chapter cites. The other is Regulation 18A of the SEBI (Stock Brokers) Regulations, 1992: every stockbroker shall appoint a CO who shall be responsible for monitoring the compliance of the Act, rules and regulations, notifications, guidelines, instructions and so on, issued by SEBI or the Central Government and for redressal of investors' grievances.
Nor are these the only two: the compliance officer may be appointed under other regulations also, apart from the Securities and Exchange Board of India (Stock Brokers) Regulations, 1992.
**Which is why the chapter says all regulations require the appointment of COs.
One exemption exists, and it is narrow: provided that the intermediary may not appoint a compliance officer if it is not carrying on the activity of the intermediary.
A registered but dormant intermediary need not appoint one — because there is nothing to monitor.
Note the difference in reporting between the two provisions. Regulation 14(2) requires the CO to report to the intermediary or its BoD, in writing, any material non-compliance by the intermediary; Regulation 18A(2) requires him to immediately and independently report to SEBI any non-compliance observed by him.
Both apply — it is the duty of the CO to immediately and independently report any non-compliance observed to the BoD of the intermediary and SEBI.
3.Critical reporting by a compliance officer includes which of the following?
- a)Money laundering activities
- b)Submission of books of accounts
- c)The sauda book
- d)All of the above
Show the answer
Answer: (a) Money laundering activities
The distinction turns on what triggers the report.
Mandatory reporting: Periodic submission of reports as per provisions of regulations.
Critical Reporting: CO must immediately and independently report to SEBI and BoD any non-compliance observed.
A date triggers mandatory reporting; a discovery triggers critical reporting.
Options B and C are periodic filings. Books of accounts and the sauda book — the broker's record of transactions — are submitted on a schedule as the regulations require. They are mandatory reporting, and option D therefore fails too.
A suspected money laundering activity is different in kind. It is a non-compliance observed, and cannot wait for a filing cycle: it must be reported immediately and independently.
Read those two adverbs carefully. Immediately rules out waiting; independently rules out routing the report through anyone who might prefer it unsent.
Where the obligation comes from: the Compliance Officer shall immediately and independently report to SEBI any non-compliance observed by him, and it is the duty of the CO to immediately and independently report any non-compliance observed to the BoD of the intermediary and SEBI.
Both destinations, not one.
A third responsibility sits beside these two types: Coordination with the Regulators - The Compliance Officer is responsible for all the compliances under various laws. The coordination with the regulators under each law applicable to the entity is an important role of the Compliance Officer.
And the clearest example of mandatory reporting is the annual certificate under Regulation 12 — furnished on the 1st April of each year, a fixed date with fixed content.
Where this is taught
Free preparation for NISM Series III-ARelated terms
- Compliance OfficerThe separately appointed officer of a merchant banker, listed company or intermediary who monitors compliance with securities law, handles investor grievances, and reports non-compliance to SEBI independently.
- Designated authorityA SEBI officer not below the rank of Division Chief (or a bench of three) appointed under the Intermediaries Regulations to enquire into an intermediary's default and recommend action.
- Dual reporting lineThe compliance officer's two reporting duties — to the board of the entity that appointed him, and, for any non-compliance of the SEBI Act or regulations, immediately and independently to SEBI.
- Early warning signalsIndicators that stock exchanges, depositories and clearing corporations monitor to catch a stock broker's deteriorating finances or diversion of client securities early, triggering joint preventive action.
- Stock exchange bye-lawsThe rules each stock exchange frames for its own trading members — admission, listing, fees, trading and settlement, members' rights, arbitration — approved by SEBI and consistent with the SCRA, SCRR and SEBI Act.
- Regulatory RiskThe risk that laws and regulations change unfavourably — raising costs or altering competition — and hurt investment returns. The workbook treats it as a part of legal risk.
- Minimum public shareholdingThe minimum share of a listed company that must be held by the public — 25% under Rule 19A of the SCRR, a continuous listing requirement rather than a condition met only at listing.
- Composition of offencesClosing a criminal case under the Depositories Act by agreement instead of a trial — available for any offence except one punishable with imprisonment only, or with imprisonment and also fine.