SEBI Informal Guidance in the Matter of DSP Merrill Lynch Limited

SEBI issued an interpretative letter on February 8, 2019, to DSP Merrill Lynch Limited (‘DSPML’), a SEBI registered intermediary engaged in activities including stock broking, merchant banking, underwriting and research analysis, and provided guidance under the SEBI (Informal Guidance) Scheme, 2003 regarding the SEBI (KYC (Know Your Client) Registration Agency) Regulations, 2011 (‘SEBI KRA Regulation’) and SEBI’s Master Circular on ‘Guidelines on Anti-Money Laundering (AML) Standards and Combating the Financing of Terrorism (CFT) /Obligations of Securities Market Intermediaries under the Prevention of Money Laundering Act, 2002 and Rules framed thereunder’ dated July 4, 2018 (‘Master Circular’).

DSPML had sought guidance on whether it could rely on the client’s status as ‘verified or registered’ on the KYC Registration Agency (‘KRA’) system while performing due diligence on the client, if certain KYC documents were deficient, obsolete or missing. SEBI clarified that the intermediary is responsible for identifying and verifying its client by using the KYC documents provided and any discrepancies in the documents are required to be informed to KRA for subsequent corrective action.

In this regard, SEBI highlighted various rules / regulations, including the SEBI KRA Regulations, the Master Circular, Frequently Asked Questions (FAQs) on KYC Requirements, and the Prevention of Money-laundering (Maintenance of Records) Rules, 2005 (‘PML Rules’) and stated that the ultimate responsibility to verify and identify the client is cast upon the registered intermediary while commencing an account-based relationship with the client. In case of mismatch in information, the intermediary is required to immediately refer the matter for corrective action to the custodian and KRA, before on-boarding the client.

Therefore, DSPML would not be permitted to rely on documents which are deficient, obsolete or missing, if the KYC status is shown as ‘verified/ registered’ in the KRA system. DSPML, as part of conducting a KYC check is required to do due diligence by seeking the proper KYC documents in accordance with SEBI regulations / circulars and the PML Rules, before onboarding the client.

Published In:Inter Alia - Quarterly Edition - March 2019 [ English Chinese japanese ]
Date: March 31, 2019