NISM Series XI · Unit 2 of 9 · about 15% of the paper
Regulatory framework: NISM Series XI notes and practice questions
The laws and rules that apply to brokers and their clients. The most rule-heavy unit; learn exact terms.
What to know in Unit 2
- SEBI Act, SCRA, Depositories Act.
- Stock broker regulations and client documentation.
- Insider trading and fraud rules.
- PMLA and KYC.
Key terms, examples and exam traps
SEBI
SEBI protects investors, promotes market development and regulates the securities market, with powers to make regulations, investigate and penalise.
Example. The regulator can issue circulars and levy penalties on brokers.
Exam trap. This statement is false: SEBI is a stock exchange.
SCRA 1956
The Securities Contracts (Regulation) Act governs recognition of stock exchanges and regulates the trading of securities.
Example. The law under which exchanges are recognised.
Exam trap. This statement is false: The SCRA is the law on money laundering.
Depositories Act 1996
This law provides the legal framework for depositories and dematerialisation of securities in India.
Example. The law behind NSDL and CDSL.
Exam trap. This statement is false: The Depositories Act governs insurance companies.
Stock broker regulations
Brokers must be registered with SEBI, be members of an exchange, meet capital adequacy and follow a code of conduct.
Example. A broker without registration cannot deal for clients.
Exam trap. This statement is false: A broker needs no registration if it is an exchange member.
Client registration form
Each client must sign the account opening form with mandatory documents and KYC, and the broker must give a copy of the rights and obligations.
Example. A client signs the standard form before the first trade.
Exam trap. This statement is false: Clients may trade before signing the form.
Know Your Client
KYC verifies identity and address using PAN and documents, and is mandatory for opening any trading account.
Example. A new client provides PAN, address proof and a photograph.
Exam trap. This statement is false: KYC is optional for small investors.
Unique Client Code
The UCC is a unique code allotted to each client by the broker and mapped to the client's PAN in exchange records.
Example. Each client's trades are tagged with a code mapped to PAN.
Exam trap. This statement is false: Clients share one code with the broker.
Contract note
A broker must issue a contract note for every trade within 24 hours of execution, showing price, time, quantity and charges.
Example. A client gets a note after executing a trade.
Exam trap. This statement is false: A contract note is issued at the end of the year.
Power of attorney
A POA authorises the broker to perform limited acts such as pledging for margin; it must not give general trading authority and misuse is prohibited.
Example. A client signs a limited authority for settlement-related acts.
Exam trap. This statement is false: A POA allows brokers to trade at will for the client.
Running account settlement
Brokers must settle client funds and securities at regular intervals, monthly or quarterly as chosen by the client, unless the client specifies otherwise.
Example. A broker returns the unused client balance on schedule.
Exam trap. This statement is false: Brokers may hold client balances indefinitely.
Segregation of client funds
Client money and securities must be kept separate from the broker's own and cannot be used for proprietary trading.
Example. A broker keeps clients' money in a separate account.
Exam trap. This statement is false: A broker may use client funds for own trades.
Insider trading regulations
SEBI's PIT regulations prohibit dealing in securities while in possession of unpublished price sensitive information.
Example. A broker's employee trades on a leaked merger news.
Exam trap. This statement is false: Insiders may trade if they trade small amounts.
Fraudulent and unfair trade practices
The PFUTP regulations prohibit market manipulation, misleading statements and fraud in securities dealing.
Example. Spreading false rumours to move a stock price.
Exam trap. This statement is false: PFUTP regulations apply only to issuers.
PMLA
The Prevention of Money Laundering Act requires brokers to verify customers, maintain records and report suspicious transactions to the FIU.
Example. A broker reports an unusual cash-related pattern to the authority.
Exam trap. This statement is false: Brokers need not report suspicious transactions.
Suspicious transaction report
A broker must report suspicious transactions to the Financial Intelligence Unit when it suspects money laundering.
Example. A broker files a report on a client with unexplained large flows.
Exam trap. This statement is false: The client must be told before a report is filed.
Investor charter
Brokers must display and share the investor charter listing investors' rights, responsibilities and grievance steps.
Example. A client receives a document describing her rights.
Exam trap. This statement is false: The investor charter is for brokers' internal use.
Arbitration
Disputes between clients and brokers can be referred to the exchange's arbitration mechanism within the prescribed period.
Example. A client takes an unresolved dispute to arbitration.
Exam trap. This statement is false: Clients cannot resolve disputes through exchanges.
SCORES and ODR
Clients can lodge complaints with SEBI through SCORES and use the online dispute resolution platform after approaching the broker and the exchange.
Example. A client files a complaint on the regulator's portal.
Exam trap. This statement is false: Complaints can only be made in person.
Investor Protection Fund
Exchanges maintain a fund to compensate clients of defaulting brokers up to a limit.
Example. A client of a defaulting broker may claim compensation from the fund.
Exam trap. This statement is false: The fund covers all trading losses.
Code of conduct
The code of conduct for brokers requires integrity, diligence, fair dealing and proper records, and prohibits unfair practices.
Example. A broker must not promise guaranteed profits.
Exam trap. This statement is false: The code allows brokers to guarantee returns.
Margin trading facility
Brokers may offer margin funding under SEBI rules with disclosures, collecting margin and keeping the pledged securities in a separate account.
Example. A client buys shares by funding part with the broker's money.
Exam trap. This statement is false: Margin funding needs no margin from the client.
Authorised person
Authorised persons act on behalf of brokers for acquiring clients and facilitating trades, as registered with the exchange.
Example. An agent introduces clients to the broker.
Exam trap. This statement is false: Authorised persons may execute trades on their own.
Record retention
Brokers must maintain records of orders, trades, communications and client details for at least five years.
Example. A broker keeps the call recording of a client order.
Exam trap. This statement is false: Records can be deleted after a month.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which term is described here? A broker must issue a contract note for every trade within 24 hours of execution, showing price, time, quantity and charges.
- Complaint handling
- Anchor investor
- Bid lot
- Contract note
Q2. Which term is described here? This law provides the legal framework for depositories and dematerialisation of securities in India.
- Fraudulent and unfair trade practices
- Depositories Act 1996
- 52-week high and low
- Market segments
Q3. Which term is described here? The Prevention of Money Laundering Act requires brokers to verify customers, maintain records and report suspicious transactions to the FIU.
- Sensex
- PMLA
- Trading segments
- Retail and institutional participants
Q4. Which term is described here? Brokers must settle client funds and securities at regular intervals, monthly or quarterly as chosen by the client, unless the client specifies otherwise.
- Client onboarding
- Unauthorised trading
- Corporate action adjustments
- Running account settlement
Q5. Which term is described here? SEBI protects investors, promotes market development and regulates the securities market, with powers to make regulations, investigate and penalise.
- SCRA 1956
- SEBI
- Honest communication
- Stock broker regulations
Q6. Which statement best describes “Authorised person”?
- The draft red herring prospectus is filed with SEBI, which examines it and issues observations before the issue is launched.
- QIBs are institutions such as mutual funds, insurers, banks and FPIs, treated as sophisticated investors.
- Brokers may offer margin funding under SEBI rules with disclosures, collecting margin and keeping the pledged securities in a separate account.
- Authorised persons act on behalf of brokers for acquiring clients and facilitating trades, as registered with the exchange.
Frequently asked questions
How much of NISM Series XI comes from Unit 2?
Unit 2 (Regulatory framework) usually carries about 15% of the questions. The whole exam has 100 questions and the pass mark is 50%.
What should I study in NISM Series XI Unit 2?
SEBI Act, SCRA, Depositories Act. Stock broker regulations and client documentation. Insider trading and fraud rules. PMLA and KYC.
Are these NISM Series XI practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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