NISM Series XVI · Chapter 10: Codes of Conduct and Investor Protection Measures

L1 · Foundation

Foundation — SEBI's Code of Conduct for brokers

The five general obligations of integrity, due skill and care, no manipulation, no malpractices and compliance with statutory requirements, with the examples the workbook gives of what failing due skill and care actually looks like; the nine duties to the investor covering order execution, collateral segregation, contract notes, breach of trust, business and commission, defaulting clients, fairness, suitability of investment advice and the disclosure required for advice in publicly accessible media; and the six rules on dealing with other brokers.

19 min read · Worth 5% of the paper · Written from pages 190–208 of the official NISM workbook · Updated 18 September 2026

The Code of Conduct

1. Where it comes from

⚠️ "CHAPTER VIII OF THE SEBI (STOCK BROKERS) REGULATIONS, 2026 PRESCRIBES A CODE OF CONDUCT FOR SECURITIES BROKERS."

⚠️ "Brokers are required to ABIDE BY THESE CODES AS PER CONDITIONS OF REGISTRATION under the regulation."

The Code is not advisory. Compliance is a condition of registration — a broker who breaches it is not merely behaving badly but jeopardising its licence.

2. Part A — General

2.1 Integrity

⚠️ "Shall MAINTAIN HIGH STANDARDS OF INTEGRITY, PROMPTITUDE AND FAIRNESS in the conduct of all its business."

In plain words: be honest, act quickly and treat every client fairly. This covers all of the broker's business, not just part of it.

2.2 Exercise of due skill and care

⚠️ "Shall ACT WITH DUE SKILL, CARE AND DILIGENCE in the conduct of all its business."

In plain words: do the job properly and carefully. Doing nothing wrong on purpose is not enough.

Each of these is a real-world failure that would not obviously read as misconduct — nobody has stolen anything or rigged a price. The point of listing them is that "due skill, care and diligence" is a substantive standard, not a formula.

2.3 Manipulation

⚠️ "Shall NOT INDULGE IN MANIPULATIVE, FRAUDULENT OR DECEPTIVE TRANSACTIONS OR SCHEMES OR SPREAD RUMOURS WITH A VIEW TO DISTORTING MARKET EQUILIBRIUM OR MAKING PERSONAL GAINS."

In plain words: no fake trades, no tricks and no rumours. The rule catches two aims. One is to push the market out of balance. The other is to make a personal gain.

2.4 Malpractices

⚠️ "Shall NOT CREATE FALSE MARKET EITHER SINGLY OR IN CONCERT WITH OTHERS or indulge in ANY ACT DETRIMENTAL TO THE INVESTORS' INTEREST OR WHICH LEADS TO INTERFERENCE WITH THE FAIR AND SMOOTH FUNCTIONING OF THE MARKET."

In plain words: a broker must not create a false market, alone or with others. It must also not do anything that harms investors or gets in the way of a fair, smooth market.

2.5 Compliance with statutory requirements

⚠️ "Shall ABIDE BY ALL THE PROVISIONS OF THE ACT AND THE RULES, REGULATIONS ISSUED BY THE GOVERNMENT, THE BOARD AND THE STOCK EXCHANGE from time to time as applicable."

In plain words: follow every law and rule that applies. That means the Act, and the rules of the Government, SEBI (the Board) and the exchange, as they change over time.

3. Part B — Duty to the investor

3.1 Execution of orders

⚠️ "A stock-broker also shall PROMPTLY INFORM ITS CLIENT ABOUT THE EXECUTION OR NON-EXECUTION OF AN ORDER, and MAKE PROMPT PAYMENT in respect of securities sold and ARRANGE FOR PROMPT DELIVERY of securities purchased."

In plain words: carry out orders honestly, at the best price the market offers. Do not turn away a small investor because the order is small. Then three duties follow. Tell the client whether the order went through. Pay promptly for what the client sold. Deliver promptly what the client bought.

3.2 Segregation of client collateral

⚠️ "SEBI came up with norms on SEGREGATION AND MONITORING OF COLLATERALS AT CLIENT LEVEL, IN JULY 2021. This norm was to further strengthen measures to MITIGATE RISK OF MIS-APPROPRIATION OR MIS-USE OF CLIENT'S SECURITIES, INCLUDING USE OF ONE CLIENT'S SECURITIES FOR THE PURPOSE OF PROVIDING FOR EXPOSURE, OR MARGIN, OR SETTLEMENT OF ANOTHER CLIENT."

⚠️ "The member is expected to implement A FRAMEWORK FOR REPORTING OF CLIENT-WISE COLLATERALS, and ITS BIFURCATION INTO CATEGORIES LIKE CASH AND OTHER COLLATERALS... by way of UPLOADING THESE DETAILS ON THE RELEVANT WEB PORTAL, for which enabling functionality will be provided by clearing corporations and exchanges."

In plain words: since July 2021, each client's collateral is tracked on its own. One client's securities cannot be used for another client's margin, exposure or settlement. The broker reports each client's collateral on a web portal, split into cash and other collateral.

3.3 Issue of contract note

Note the two conditions: the contract note itself is mandatory for all transactions; the electronic form of it requires the client's consent. Neither is optional at the broker's discretion.

3.4 Breach of trust

⚠️ "Shall NOT DISCLOSE OR DISCUSS WITH ANY OTHER PERSON OR MAKE IMPROPER USE OF THE DETAILS OF PERSONAL INVESTMENTS OF THEIR CLIENTS and ANY OTHER INFORMATION OF A CONFIDENTIAL NATURE which it comes to know in its business relationship."

In plain words: keep client details private. Do not share them, talk about them or misuse them.

3.5 Business and commission

⚠️ "A stock-broker SHALL NOT ENCOURAGE SALES OR PURCHASES OF SECURITIES WITH THE SOLE OBJECTIVE OF GENERATING BROKERAGE OR COMMISSION."

⚠️ "A stock-broker SHALL NOT FURNISH FALSE OR MISLEADING QUOTATIONS OR GIVE ANY OTHER FALSE OR MISLEADING ADVICE OR INFORMATION TO THE CLIENTS WITH A VIEW OF INDUCING HIM TO DO BUSINESS IN PARTICULAR SECURITIES AND ENABLING ITSELF TO EARN BROKERAGE OR COMMISSION THEREBY."

In plain words: do not push clients to trade just to earn brokerage. Do not give false prices, advice or information to win that business.

3.6 Business of defaulting clients

⚠️ "Shall NOT DEAL OR TRANSACT BUSINESS KNOWINGLY, DIRECTLY OR INDIRECTLY, OR EXECUTE AN ORDER FOR A CLIENT WHO HAS FAILED TO CARRY OUT HIS COMMITMENTS IN RELATION TO SECURITIES WITH ANOTHER STOCK-BROKER."

In plain words: if a client has defaulted with another broker, do not knowingly deal for that client. It makes no difference whether the dealing is direct or indirect.

3.7 Fairness to clients

In plain words: tell the client whether you act as principal or as agent. Avoid conflicts of interest. If one arises, tell the client. Never profit from it, and never rank the client's interest below your own.

3.8 Investment advice — the suitability rule

⚠️ "The stock-broker SHALL SEEK SUCH INFORMATION FROM CLIENTS, WHEREVER IT FEELS IT IS APPROPRIATE TO DO SO."

In plain words: recommend only what suits the client. Judge that from the client's holdings, finances and goals, as far as the client has shared them. Ask for these facts where it seems right to do so.

3.9 Investment advice in publicly accessible media

⚠️ "In case AN EMPLOYEE of the stock broker is rendering such advice, HE SHALL ALSO DISCLOSE THE INTEREST OF HIS DEPENDENT FAMILY MEMBERS AND THE EMPLOYER, INCLUDING THEIR LONG OR SHORT POSITION."

In plain words: advice given in any public media, live or not, must come with a disclosure. The adviser must state the interest held in that security. That includes long or short positions of dependent family members and of the employer.

3.10 Competence

⚠️ "Shall have ADEQUATELY TRAINED STAFF AND ARRANGEMENTS TO RENDER FAIR, PROMPT AND COMPETENT SERVICES to its clients."

In plain words: have trained staff and proper systems. Clients should get service that is fair, quick and competent.

4. Part C — Dealing with other brokers

#	⚠️ Obligation
1	⚠️ CONDUCT OF DEALINGS: "Shall CO-OPERATE WITH THE OTHER CONTRACTING PARTY IN COMPARING UNMATCHED TRANSACTIONS... shall NOT KNOWINGLY AND WILFULLY DELIVER DOCUMENTS WHICH CONSTITUTE BAD DELIVERY, and shall COOPERATE FOR PROMPT REPLACEMENT of documents declared as bad delivery"
2	⚠️ PROTECTION OF CLIENTS' INTERESTS: "Shall EXTEND FULLEST COOPERATION TO OTHER STOCK-BROKERS IN PROTECTING THE INTERESTS OF ITS CLIENTS regarding their rights to DIVIDENDS, BONUS SHARES, RIGHT SHARES and any other right"
3	⚠️ TRANSACTIONS WITH STOCK-BROKERS: "Shall CARRY OUT ITS TRANSACTIONS WITH OTHER STOCK-BROKERS AND COMPLY WITH ITS OBLIGATIONS IN COMPLETING THE SETTLEMENT"
4	⚠️ ADVERTISEMENT AND PUBLICITY: "SHALL NOT ADVERTISE ITS BUSINESS PUBLICLY UNLESS PERMITTED BY THE STOCK EXCHANGE"
5	⚠️ INDUCEMENT OF CLIENTS: "SHALL NOT RESORT TO UNFAIR MEANS OF INDUCING CLIENTS FROM OTHER STOCK-BROKERS"
6	⚠️ FALSE OR MISLEADING RETURNS: "SHALL NOT NEGLECT OR FAIL OR REFUSE TO SUBMIT THE REQUIRED RETURNS, AND NOT MAKE ANY FALSE OR MISLEADING STATEMENT ON ANY RETURNS required to be submitted to SEBI AND THE STOCK EXCHANGE"

Rule 4 surprises most students — a broker may not advertise publicly unless the exchange permits it. The market is treated as an institution in which reputation should rest on conduct rather than promotion.

Think of it like this

The doctor who must ask before prescribing

A doctor who hands out a strong medicine without asking about allergies, age or existing conditions has not committed fraud. He has simply failed to do the job properly — and that is enough for a complaint to succeed.

⚠️ The suitability rule reads exactly this way: a broker "SHALL NOT MAKE A RECOMMENDATION TO ANY CLIENT WHO MIGHT BE EXPECTED TO RELY THEREON... UNLESS IT HAS REASONABLE GROUNDS FOR BELIEVING THAT THE RECOMMENDATION IS SUITABLE FOR SUCH A CLIENT UPON THE BASIS OF THE FACTS, IF DISCLOSED BY SUCH A CLIENT, AS TO HIS OWN SECURITY HOLDINGS, FINANCIAL SITUATION AND OBJECTIVES."

⚠️ And the duty to enquire: "The stock-broker SHALL SEEK SUCH INFORMATION FROM CLIENTS, WHEREVER IT FEELS IT IS APPROPRIATE TO DO SO."

The workbook's own examples of failing due skill, care and diligence carry the same flavour — "improper client profiling and improper advice of doing risky trades NOT COMMENSURATE WITH RISK PROFILE", and "AGGRESSIVELY INFLUENCING OLD AGE CLIENT TO DO INTERNET BASED TRADING IN SPITE OF HIS INABILITY TO UNDERSTAND COMPUTERS." Nobody stole anything in either case.

The bank locker that may hold only your own gold

A bank cannot take gold from one locker to make good a shortfall in another, however confident it is of putting it back. The gold is not the bank's to lend.

⚠️ That is the collateral segregation norm of July 2021, brought in "to further strengthen measures to MITIGATE RISK OF MIS-APPROPRIATION OR MIS-USE OF CLIENT'S SECURITIES, INCLUDING USE OF ONE CLIENT'S SECURITIES FOR THE PURPOSE OF PROVIDING FOR EXPOSURE, OR MARGIN, OR SETTLEMENT OF ANOTHER CLIENT."

⚠️ The mechanism is reporting: the member must implement "A FRAMEWORK FOR REPORTING OF CLIENT-WISE COLLATERALS, AND ITS BIFURCATION INTO CATEGORIES LIKE CASH AND OTHER COLLATERALS", uploaded to a portal provided by the clearing corporations and exchanges.

The same instinct runs through the members' obligations: "FUNDS IN CLIENTS' ACCOUNT NOT TO BE USED FOR PROPRIETARY TRADES OR MEETING ANY OTHER OBLIGATIONS." And through the Authorised Person rules from an earlier chapter — client money must be "routed directly through the brokers" and never handled by the AP.

The complaint that starts at the shop, not the court

Somebody with a faulty appliance goes first to the dealer, then to the company's service centre, and only then to a consumer forum. Nobody sues over a warranty claim they have not yet made.

⚠️ Investor grievance redressal is built the same way, in three ascending steps:

⚠️ "An investor/client shall FIRST TAKE UP THE GRIEVANCE WITH THE MARKET PARTICIPANT by lodging a complaint directly with the concerned Market Participant"
⚠️ "If the grievance IS NOT REDRESSED SATISFACTORILY, the investor may ESCALATE THROUGH THE SCORES PORTAL" — where "the entity must resolve the complaint WITHIN 21 DAYS after receiving intimation from SEBI"
⚠️ "If the investor is STILL NOT SATISFIED, the grievance can be taken up through the ODR PORTAL by initiating dispute resolution"

The workbook is explicit at the exchange level too: "Clients should FIRST send the complaint against the concerned Member TO THE EXCHANGE with whom the respective member is registered, AND THEN TO SEBI."

And two encouraging details: ⚠️ "NO FEE IS CHARGEABLE ON SUCH COMPLAINTS", and a complaint may be "IN ENGLISH OR HINDI OR IN ANY REGIONAL LANGUAGE."

The recorded call at the bank's dealing desk

Every treasury desk records its lines. Not because dealers are dishonest, but because six months later two people will remember the same instruction differently, and only the tape can settle it.

⚠️ The Code makes this an obligation: "BROKERS TO HAVE A VOICE RECORDING MECHANISM IN THEIR DEALING ROOM AND EXECUTE ALL THE DEALS ONLY THROUGH RECORDED LINES."

⚠️ On how long the tapes are kept: "These recordings should be maintained FOR A MINIMUM PERIOD FOR WHICH THE ARBITRATION ACCEPTS INVESTORS' COMPLAINTS as may be notified from time to time. HOWEVER, IN CASES WHERE DISPUTE HAS BEEN RAISED, SUCH RECORDS SHALL BE KEPT TILL FINAL RESOLUTION OF THE DISPUTE."

The purpose is stated plainly: to "FACILITATE RESOLUTION OF CLIENT DISPUTES RELATING TO DEALING ERROR." It sits alongside the broader record-keeping right — a member may execute a client trade only after "keeping records of the client's order like TELEPHONIC RECORD, CLIENT'S EMAILS FROM REGISTERED EMAIL ID, RELEVANT LOG OF INTERNET TRADES, PHYSICAL HAND-WRITTEN COPY OF CLIENT ORDER, MOBILE SMS RECORDS."

The silence that is not consent

A tenant who says nothing before the lease expires has not renewed it. Silence is not instruction, and the landlord is not obliged to guess.

⚠️ The Code applies the same principle on expiry day, and it is one of the most consequential lines in the chapter: a member has the right "NOT TO SQUARE OFF AN EXISTING POSITION ON THE LAST DAY OF THE CONTRACT UNLESS THE CLIENT EXPRESSLY INTIMATES TO SQUARE OFF THE SAME."

⚠️ Why it matters so much: "This clarity is very important WHEN THE DECLARED FSP IS AT UNEXPECTED LEVELS AGAINST TRADED PRICES in the last few hours due to HUGE VOLATILITY in the spot market... This is also important in cases of DERIVATIVES CONTRACTS WHICH ARE SETTLED BY PHYSICAL DELIVERY AND INVOLVE SIGNIFICANT STORAGE AND OTHER COSTS."

But the right comes with a duty attached: "members SHOULD CO-OPERATE WITH THE CLIENT AND EXPLAIN TO HIM THE IMPLICATIONS OF NOT SQUARING OFF THE POSITION."

The bank that files a report and says nothing to the customer

A bank that suspects a customer's deposits are proceeds of crime must report it — and must not mention it to the customer. Telling him would defeat the entire purpose of the report.

⚠️ Suspicious Transaction Reporting works identically: brokers "shall MONITOR TRANSACTIONS OF THE CLIENT TO ENSURE THAT THOSE ARE NOT SUSPICIOUS FROM MONEY LAUNDERING OR TAX EVASION POINT OF VIEW" — the examples given being "REVERSAL TRADE, PROFIT TRANSFER TRADES OR TRADES ASSOCIATED WITH DABBA TRADES."

⚠️ The report goes to the FIU: "a SEPARATE INTELLIGENCE ARM UNDER FINANCE MINISTRY", through its online mechanism.

One further point the workbook insists on: the duty is the broker's own. "Though the Exchange through its surveillance mechanism raises a suspicion, IT IS THE DUTY OF THE CONCERNED BROKER TO IDENTIFY THOSE SUSPICIOUS TRANSACTIONS THROUGH ITS REGULAR MONITORING", and members "SHOULD NOT DEPEND SOLELY UPON DIRECTIONS FROM THE EXCHANGES' SURVEILLANCE TEAM."

Key terms in this chapter

Advice in publicly accessible media: Advice given in any public medium, real time or not, requires disclosure of the interest of the adviser, his dependent family members and his employer, including their long or short positions in the security concerned.
Arbitration under ODR: The stage reached if conciliation fails, where an arbitrator or panel reviews evidence and issues a binding award. Payment is due within 15 calendar days, an intention to challenge under Section 34 must be signalled within 7 days, and absent a stay within 3 months the award must be fully honoured.
Client risk categorisation: Classifying clients as low, medium or high risk on the basis of location, business activity, turnover, transaction nature and payment manner — medium being those speculating beyond known sources of income, and high those with a default history and suspect financial status.
Client's right to complain: A client may complain even where no monetary compensation is sought, including about servicing and operational issues, through the member, the exchange, SCORES or SMART ODR.
Code of Conduct: The standards for brokers set out in Chapter VIII of the SEBI (Stock Brokers) Regulations, 2026, covering general obligations, duties to the investor and dealings with other brokers. Compliance is a condition of registration, not a matter of choice.
Collateral segregation: The July 2021 norms requiring client-wise reporting of collateral bifurcated into cash and other categories, to prevent one client's securities being used for another client's exposure, margin or settlement.
Conciliation: The less formal ODR stage in which a sole independent and neutral conciliator helps the parties reach a mutual agreement within 21 calendar days, extendable by 10 with both parties' consent, concluded by a duly executed settlement agreement.
Dabba trading: Illegal off-exchange trading in unorganised markets. Investors are told not to engage in it, and trades associated with it are among the examples of suspicious transactions requiring an FIU report.
Digital KYC accessibility: Following the Supreme Court judgement of 30 April 2025, intermediaries must make digital KYC accessible to persons with disabilities — permitting guardian signatures and accepting alternatives to the blink liveliness test such as nodding, facial expressions or showing an OTP on camera.
Due skill, care and diligence: A substantive standard breached by delayed or absent responses, improper client profiling, advising trades not matching a client's risk profile, pushing an elderly client into internet trading he cannot manage, or trading under standing authority without recording reasons.
Electronic Contract Note: A contract note issued electronically. The contract note itself is mandatory for all transactions; the electronic form may be used only with the client's consent, given in the client agreement or separately.
Enhanced due diligence: Required for non-face-to-face clients, multiple accounts sharing common parameters, unexplained transfers between such accounts, unusual activity or alternate use of accounts, and sudden activity in dormant accounts.
Expiry-day square-off right: A member need not square off an open position on the last day of a contract without express client instruction. It is a right, not an obligation, so a client cannot presume it will happen — though the member should explain the implications.
Financial Intelligence Unit: A separate intelligence arm under the finance ministry, to which brokers report suspicious transactions through its online mechanism.
Independent Personal Verification: The third KYC attribute alongside identity and address proof — meeting the client in person, documented through a client visit report, as stronger proof of existence than documents alone.
Investors Grievance Division: The exchange department that resolves disputes by coordinating with the member and complainant, entertaining nine categories of complaint from non-receipt of documents through unauthorised transactions to servicing issues.
KUA and sub-KUA: KYC User Agencies permitted by SEBI allow registered intermediaries to undertake Aadhaar authentication of clients as sub-KUAs, under SEBI's circular of 8 February 2023.
KYC Registration Agency: An entity holding KYC records centrally. Four were recognised on 22 April 2020 — CDSL Ventures, NSDL Data Management, DotEx International and CAMs Investor Services. Members must upload KYC within 10 days of receiving documents.
Officially Valid Documents: The alternatives to Aadhaar under section 11A of PMLA, inserted with effect from 2019, which makes Aadhaar voluntary: driving licence, passport copy, voters' ID and the NREGA job card.
Risk Disclosure Document: The document a client must sign before onboarding, covering market risk, macroeconomic factors, liquidity drying up, basis risk, unhedged positions, short option risk, the broker's own credit risk, technical failures, penalties, and warehouse rejection leading to delivery failure.
SCORES: SEBI Complaints Redress System — the web-based centralised grievance portal that issues an instantaneous acknowledgement and a unique registration number, and requires the entity concerned to resolve the complaint within 21 days and upload an Action Taken Report.
SMARTODR portal: The Online Dispute Resolution platform established by the Market Infrastructure Institutions, offering centralised, digital-first conciliation and arbitration across seven categories of grievance, connected to SCORES.
Social media disclosure: SEBI's requirement that regulated entities and their agents display their registered name and registration number both on the home page of their social media handles and at the beginning of each securities-market-related content they upload.
Suitability rule: A broker may not make a recommendation a client might rely on unless it has reasonable grounds to believe it suitable given the client's disclosed holdings, financial situation and objectives — and must seek that information where appropriate.
Suspicious Transaction Reporting: The broker's duty to monitor for trades suspicious from a money laundering or tax evasion standpoint — reversal trades, profit transfer trades and dabba-linked trades — and report them online to the Financial Intelligence Unit.
Tipping off: Informing a client that a suspicious transaction report has been made about him. It is illegal and not allowed, because it would let the client stop, move the money and destroy the trail.
Unauthorized PMS liability: A broker is responsible for client losses from unauthorised portfolio management services extended directly or indirectly — including through a relative's entity over which the broker has influence.
Unique Client Code: The mandatory client identifier for all commodity derivatives trades. Exchanges may not allow execution without UCC upload, and PAN or e-PAN must be verified against the original and the Income Tax Department website before being uploaded as part of it.
Voice recording obligation: Brokers must record the dealing room and execute all deals only through recorded lines, keeping recordings for the minimum period arbitration accepts complaints — and, where a dispute is raised, until its final resolution.

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Original explanatory writing based on the official NISM workbook for Series XVI, which is published and copyrighted by NISM. Check figures against the current edition at nism.ac.in.

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