The Securities and Exchange Board of India (SEBI) has sought to do the impossible – prevention of abuse of the Internet and electronic means of communications, and holding compliance officers of market intermediaries liable for it.
“It has been observed by SEBI that unauthenticated news related to various scrips are circulated in blogs/chat forums/e-mail etc. by employees of broking house / other Intermediaries without adequate caution as mandated in the Code of Conduct for Stock Brokers and respective regulations of various intermediaries registered with SEBI,” a circular issued by SEBI last week states, as a preamble.
“Further, in various instances, it has been observed that the Intermediaries do not have proper internal controls and do not ensure that proper checks and balances are in place to govern the conduct of their employees. Due to lack of proper internal controls and poor training, employees of such intermediaries are sometimes not aware of the damage which can be caused by circulation of unauthenticated news or rumours. It is a well established fact that market rumours can do considerable damage to the normal functioning and behaviour of the market and distort the price discovery mechanisms.”
SEBI has directed every market intermediary to put in place an internal code of conduct and controls. The circular goes on to provide that employees, temporary staff and voluntary workers working in offices of market intermediaries should not encourage or circulate rumours or unverified information obtained from clients, industry, trade or other sources without verification. Indeed, both the intent and the measure itself, are unexceptionable.
It is after this point that the circular starts over-reaching. “Access to Blogs / Chat forums / Messenger sites etc. should either be restricted under supervision or access should not be allowed,” the circular says, adding: “Logs for any usage of such Blogs / Chat forums / Messenger sites (called by any nomenclature) shall be treated as records and the same should be maintained as specified by the respective Regulations which govern the concerned intermediary.”
In other words, every market intermediary would have to police the usage of the internet, and keep a log to maintain a record of usage of the internet from its offices. However, there is no means for any organisation to ensure that its employees do not have other means of accessing the internet, either using data cards, or non-office-sponsored phone instruments, or internet usage on rent from home, or public resources.
Indeed, some organisations do not allow usage of any data port on employee laptops, mandate that the blackberrys do not have a messenger function, a rare one does not permit usage of Blackberry as an instrument, while others cut off access to social networking sites from office servers. However, that is pretty much what a market intermediary can do – it can never ensure that no employee ever accesses the internet or that no employee ever does something objectionable on the internet.
The most stringent portion of SEBI’s new measure came in one day after the circular was issued. SEBI issued an amendment the very next day to replace a paragraph in its original circular. It read: “Employees should be directed that any market related news received by them either in their official mail / personal mail / blog or in any other manner, should be forwarded only after the same has been seen and approved by the concerned Intermediary’s Compliance Officer. If an employee fails to do so, he / she shall be deemed to have violated the various provisions contained in SEBI Act/Rules/Regulations etc. and shall be liable for action.” Perhaps, even this requirement can be implemented on paper – so long as the market intermediary bothers itself simply with what happens within its premises. The twist has come in the tail – “The Compliance Officer shall also be held liable for breach of duty in this regard.”
In short, if an employee does something wrong, the compliance officer in the market intermediary’s organisation would be regarded as having been lax. In short, SEBI hopes to ensure that misuse of the internet never takes place simply by placing the compliance officer under a perpetual guillotine.
Such far-reaching draconian policy stipulating deemed liability for compliance officers, can only hurt SEBI. A law that is incapable of being adhered to, can never be regarded as being enforceable – a breach would in fact run down the majesty of the law. No compliance officer can ensure that no employee ever uses his personal mail ID or his personal phone to communicate and commit fraud.
The best of intentions do not justify seeking to promulgate policy that cannot be implemented. SEBI should pause to consider if it could implement such policy in its own organisation before inflicting it on the market.
(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.) Email: somasekhar@jsalaw.com
