Promoting Market Integrity: RBI’s Self-Regulatory Organisations’ (SRO) Recognition Framework

Introduction

As financial markets continue to grow and evolve, there is a growing need for effective self-regulation. Self-Regulatory Organizations (SROs) can play a vital role in promoting industry standards, best practices, and ethical conduct among market participants. By complementing the existing regulatory framework, SROs can help to enhance the integrity, professionalism, and efficiency of financial markets.

The RBI has introduced a Framework for recognizing SROs in financial markets[1] based on the Omnibus Framework for SRO Recognition for Regulated Entities.[2] This framework outlines the objectives, functions, eligibility criteria, governance standards, membership criteria, and other requirements that SROs must meet to obtain recognition from the RBI. The guidelines provided in the framework are minimum standards, and recognized SROs are encouraged to develop their own best practices.

Characteristics of an SRO

• Credibility, Objectivity, and Responsibility: SROs should operate under the oversight of a regulator to maintain market integrity, ensure professionalism, promote ethical conduct, and improve regulatory compliance.
• Sufficient Authority: They should have the necessary power and authority to set and enforce ethical, professional, and governance standards on their members.
• Strong Governance: They should maintain a strong governance framework, including an independent board, transparency, and well-defined processes.
• Objective Rule-Making: They should develop clear rules of conduct through consultative processes.
• Effective Oversight: They should oversee the activities of their members and establish clear consequences for violations of the rules such as counseling, cautioning, reprimanding, or expulsion.
• Independence: They should operate independently and impartially, free from the influence of any single member or group of members.
• Compliance Standards: They should develop standards to improve member adherence to regulatory requirements.
• Dispute Resolution: They should have standardized procedures for handling disputes among members, including arbitration.
• Market Monitoring: They should keep track of developments in the financial markets.
• Sector Development: They should strive to improve the sector and ensure that their standards align with applicable laws and regulations.

Objectives and Responsibilities of the SRO

Objectives of the SRO

General Objectives

• Promote the betterment of the sector it represents.
• Foster advancement and address industry concerns.
• Steer the sector towards enhanced integrity, professionalism, compliance, innovation, and ethical conduct.
• Adhere to robust self-regulatory principles and practices.
• Uphold principles of good faith and avoid conflicts of interest.

Specific Objectives

• Promote Compliance Culture: Encourage progressive practices and conventions among members, provide guidance and support to smaller entities, and implement a comprehensive code of conduct.
• Collective Voice: Represent members in engagements with regulators and government bodies, address industry concerns, and ensure equitable and transparent treatment for all members.
• International Best Practices: Examine international standards and market practices to identify opportunities for improvement.
• Information Sharing: Collect and share sectoral information with the Reserve Bank to aid in policymaking.
• Innovation: Foster innovation and facilitate the introduction of new products within the regulatory framework.
• Research and Development: Promote a culture of research and development to encourage innovation while maintaining high standards of compliance.
• Fair Pricing: Promote best practices to ensure transparency and fair pricing for retail and smaller participants.

Responsibilities of an SRO Towards its Members

• Promote Best Business Practices: Establish minimum benchmarks and conventions for professional market conduct among members.
• Code of Conduct: Frame and monitor adherence to a code of conduct and regulatory compliance.
• Membership Fees: Develop a fair and non-discriminatory membership fee structure that ensures equal rights and representation for all members.
• Good Faith and Conflict of Interest: Act in utmost good faith and avoid conflicts of interest in its functions.
• Information Dissemination: Disseminate sector-specific information to members through various channels.
• Grievance Redressal and Dispute Resolution: Establish a framework for resolving disputes and offer counseling on detrimental practices.
• Regulatory Knowledge: Promote knowledge of statutory and regulatory provisions and provide resources for member development.
• Public Education: Educate the public about member operations, grievance redressal mechanisms, and the sector in general.

Responsibilities of an SRO Towards the Regulator

• Regulatory Collaboration: Act as an ally of the RBI in ensuring compliance, market development, stakeholder protection, innovation, and early warning signal detection.
• Regular Updates: Inform the RBI about sector developments and report misconduct or violations by members.
• Regulatory Assignments: Carry out work assigned by the RBI and provide requested data and information.
• Reporting: Submit annual and periodic reports to the RBI as required.
• Regular Interactions: Engage in periodic interactions with the RBI, offering insights and suggestions.
• Stakeholder Feedback: Provide feedback on consultations and draft circulars shared by the RBI.
• Adherence to Directions: Comply with any additional functions or directions specified by the RBI.
• Inspections: Allow the RBI to inspect its books and provide necessary information for inspections.

Eligibility Criteria and Governance Standards

Eligibility Criteria for an SRO Applicant

• Legal Structure: Must be a not-for-profit company registered under Section 8 of the Companies Act, 2013.
• Financial Stability: Must have a minimum net worth of INR 10 crore and possess or have the ability to create the necessary infrastructure.
• Shareholding Diversity: Where applicable, shareholding should be sufficiently diversified to avoid concentration of control.
• Voluntary Membership: Membership in the SRO must be voluntary.
• Market Representation: Must adequately represent the sector or market with a diverse membership base.
• Professional Competence and Integrity: The applicant and its directors must demonstrate professional competence and a good reputation for fairness and integrity.
• No Criminal Record: Neither the applicant nor its directors should have a criminal record, including moral turpitude or economic offenses.
• Legal Proceedings: Should not be involved in any legal proceedings that could harm the interests of the financial system.
• Fit and Proper: Must be deemed fit and proper for recognition as an SRO.
• Adherence to Objectives: Must undertake to function according to the prescribed objectives and responsibilities.
• Additional Conditions: The RBI may impose additional conditions to ensure that the SRO operates in the public interest.

Governance Framework for an SRO

• Professional Management: SROs should be professionally managed and have clear provisions in their articles of association or bylaws regarding governance.
• Conflict of Interest: The Articles of Association should address conflict of interest issues within the board or governing body.
• Functions and Membership: SROs should clearly define their functions and membership criteria in their articles of association.
• Director Qualifications: Directors must meet fit and proper criteria, have relevant expertise, and be persons of high integrity.
• Independent Directors: At least one-third of board members should be independent directors without active association with the sector.
• Director Rotation: The Board should have a policy on the rotation of directors in important positions.
• Key Managerial Personnel: The key managerial personnel should possess professional competence and integrity.
• Human Resources and Technical Capability: SROs should have adequately skilled staff and technical capabilities to monitor the sector.
• Transparency: The governance processes should be transparent and open to scrutiny.
• Regulatory Compliance: SROs must comply with relevant laws and regulations issued by the RBI.

Application Process and Recognition

Application for SRO Recognition

Required Documents

• Memorandum of Association
• Articles of Association or Bylaws
• Board and Director Details: Constitution, roles, responsibilities, and operational procedures.
• Key Managerial Personnel Details: Powers and duties.
• Representation Roadmap (if applicable): Plan to achieve adequate market representation within the prescribed timeline.
• Other Activities: Details of any other activities undertaken or planned.
• Criminal Record Declaration: Declaration that no board member or key managerial personnel has a criminal record.

Additional Requirements

• The Reserve Bank may request further information or clarification to assess the SRO’s representativeness and the fit and proper status of the applicant and its directors.
• The Reserve Bank may gather additional information from government departments, other regulators, or relevant authorities.
• Incomplete or non-compliant applications may be rejected.
• Applicants have 30 days to address objections before final rejection.
• Recognition is granted through a Letter of Recognition issued by the Reserve Bank.
• The Reserve Bank reserves the right to not grant recognition.
• The Reserve Bank’s decision regarding recognition is final.

Conditions for SRO Recognition

• Accurate Information: Information provided by the SRO must be true and not misleading.
• Adherence to Framework: The SRO must continue to adhere to the requirements of the framework, including membership criteria.
• Compliance with Terms and Conditions: The SRO must comply with the terms and conditions of its recognition and any subsequent requirements imposed by the Reserve Bank.
• Periodic Review: The recognition may be subject to periodic review by the RBI.
• Revocation of Recognition: The RBI may revoke recognition if the SRO’s functioning is detrimental to public interest or if it engages in activities that do not align with its objectives.

Conclusion and The Way Forward

The RBI’s Framework for recognizing SROs in India’s financial markets is a significant step towards promoting self-regulation and enhancing market integrity. By outlining the objectives, responsibilities, eligibility criteria, and governance standards for SROs, the framework provides a clear path for these organizations to contribute to the development and efficiency of the financial sector.

The success of SROs in India will depend on their ability to adhere to the framework’s guidelines, establish effective governance structures, and promote a culture of ethical conduct among their members. As the financial markets continue to evolve, SROs will play a vital role in ensuring that they remain safe, efficient, and resilient.

[1] https://www.rbi.org.in/Scripts/PublicationReportDetails.aspx?UrlPage=&ID=1276.

[2] https://www.rbi.org.in/Scripts/BS_PressReleaseDisplay.aspx?prid=57534.

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