Unauthorized PMS liability
Also written Broker liability for unauthorised PMS
A broker's responsibility for a client's losses arising from Portfolio Management Services it extends without proper authorisation — whether run directly by the broker or indirectly through an entity it influences.
In plain language
A broker cannot just start managing a client's money on his own judgment. That is Portfolio Management, and it needs its own licence.
Suppose a broker does it anyway, without that licence, and the client loses money. The workbook makes the broker pay for the loss. It does not matter if the broker ran this himself. It does not matter if he used another firm to do it for him.
How it works
Chapter 10, section 10.4, lists this among the duties and obligations of members towards clients: a broker will be responsible for losses to the client arising from unauthorised PMS services extended either directly or indirectly. The workbook gives a specific example of the indirect route — carrying out unauthorised PMS activity through another entity, such as one owned by relatives, over which the broker has influence.
The rule closes off the obvious workaround. A broker cannot escape liability for running unauthorised discretionary trading simply by routing it through a related party rather than doing it under its own name — the liability follows the activity, not the entity used to carry it out.
A worked example
A commodity broker's dealer, without any PMS registration or client mandate, starts making discretionary trading decisions on behalf of a client's account — buying and selling futures contracts on his own judgment, worth a cumulative Rs 40,00,000 in notional trades over two months, without the client's specific instruction for each trade.
The client's account loses Rs 6,00,000 over this period. Because this was, in substance, unauthorised portfolio management, the broker is liable for the Rs 6,00,000 loss. The outcome would be the same if the dealer had instead routed these trades through a separate advisory entity run by his brother-in-law, over which the broker firm had real influence — the workbook treats that as the same unauthorised PMS activity carried out indirectly.
Why NISM asks about it
Chapter 10 (Code of Conduct and Investor Protection Measures), section 10.4, "Other duties and obligations of members towards clients." Expect a scenario question testing whether a broker escapes liability by using a related entity for unauthorised PMS activity — it does not.
Common exam traps
- Liability follows the activity, whether direct or indirect — using a related entity does not shield the broker.
- This is about unauthorised PMS specifically — a properly registered and mandated PMS relationship is a separate, lawful activity with its own regulatory framework.
- The broker bears the client's loss; this is not merely a disciplinary matter for the broker — the workbook frames it as financial responsibility for the client's loss.
Where this is taught
Free preparation for NISM Series XVIRelated terms
- Code of conductThe conduct obligations a broker accepts as a condition of registration — integrity, due skill and care, no manipulation, and a specific list of duties owed to the client and to other brokers.
- Suitability ruleThe stock broker's code-of-conduct duty not to recommend a security to a client unless it has reasonable grounds to believe the recommendation suits that client's holdings, financial situation and investment objectives.
- Voice recording obligationA broker's duty to run all dealing room calls on recorded lines, kept at least as long as arbitration accepts complaints, and until a raised dispute is fully resolved.