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NISM Series III-C practice questions

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Question 1Securities Intermediaries Compliance (Fund)

Under the SEBI (Intermediaries) Regulations, 2008, an application for registration as a securities intermediary must be accompanied by a non-refundable application fee. Which statement correctly describes how SEBI handles this application fee when the application is rejected?

  1. The fee is refunded in full after deducting administrative charges
  2. The fee is refunded only if the applicant reapplies within six months
  3. The fee is retained by SEBI and is not refundable Correct answer.
  4. The fee is adjusted against the registration fee payable on a future application

Explanation

The application fee prescribed under the Intermediaries Regulations is expressly non-refundable. It is not returned even when SEBI rejects the application or the applicant withdraws it. This prevents frivolous filings and covers the cost of processing.

Question 2Securities Intermediaries Compliance (Fund)

A registered intermediary proposes to change its status from a private limited company to a public limited company. Under the SEBI (Intermediaries) Regulations, 2008, what is the correct compliance step?

  1. Surrender the existing registration and apply afresh after the conversion
  2. Seek prior approval of SEBI for the change in status Correct answer.
  3. File the revised certificate of incorporation within thirty days without any approval
  4. Inform the recognised stock exchange only, since SEBI approval is not required

Explanation

A change in the legal status or constitution of a registered intermediary requires prior approval of SEBI. The intermediary must apply for SEBI's approval before giving effect to the change. Merely filing documents afterwards does not satisfy the regulation.

Question 3Securities Intermediaries Compliance (Fund)

Which of the following is a continuing obligation placed on a registered securities intermediary under the SEBI (Intermediaries) Regulations, 2008?

  1. Maintaining records and documents for a minimum period of five years Correct answer.
  2. Publishing audited accounts in a national newspaper annually
  3. Obtaining fresh registration every three years
  4. Submitting monthly net worth statements to SEBI in every case

Explanation

Registered intermediaries must maintain books, records and documents relating to their operations for at least five years. This supports SEBI's inspection and enforcement functions. The obligation applies generally rather than being limited to specific intermediary categories.

Question 4Securities Intermediaries Compliance (Fund)

SEBI appoints an inspecting authority to examine the books of a registered intermediary. During inspection, the intermediary's compliance officer is unsure whether oral explanations alone can be relied upon. What does the regulation require?

  1. The intermediary must furnish documents and information as required by the inspecting authority Correct answer.
  2. The intermediary may refuse to furnish documents until a written show-cause notice is issued
  3. The intermediary may furnish documents only after obtaining a court order
  4. Oral explanations are sufficient if recorded by the inspecting authority in the inspection report

Explanation

During inspection, the intermediary is bound to furnish such documents, records and information as the inspecting authority requires. Cooperation with inspection is a condition of registration. Oral explanations may supplement but cannot replace production of records.

Question 5Securities Intermediaries Compliance (Fund)

An intermediary's registration has been suspended by SEBI. Which statement best describes the effect of suspension on the intermediary's permitted activity?

  1. The intermediary may continue servicing existing clients but cannot accept new ones
  2. The intermediary may continue if it deposits an additional security with SEBI
  3. The intermediary may continue all activities until the appeal period expires
  4. The intermediary must cease carrying on the regulated activity during the suspension Correct answer.

Explanation

Suspension of registration means the intermediary cannot carry on the regulated activity for the period of suspension. Continuing to operate during suspension would breach SEBI's order. Existing obligations such as client servicing are handled as directed by SEBI in the order.

Question 6Securities Intermediaries Compliance (Fund)

Which body is empowered to hear an appeal against an order of SEBI cancelling the registration of a securities intermediary?

  1. The High Court of the state where the intermediary is registered
  2. The Securities Appellate Tribunal Correct answer.
  3. The Board of Directors of the recognised stock exchange
  4. The SEBI Primary Market Advisory Committee

Explanation

Appeals against SEBI orders lie before the Securities Appellate Tribunal under the SEBI Act. The Tribunal is a specialised appellate forum for securities market matters. High Courts and stock exchange bodies do not hear such statutory appeals.

Question 7Securities Intermediaries Compliance (Fund)

A registered intermediary fails to pay the registration fee within the time specified by SEBI. What is the most accurate consequence under the SEBI (Intermediaries) Regulations, 2008?

  1. The stock exchange is required to pay the fee on the intermediary's behalf
  2. The registration is automatically cancelled on the day following the due date
  3. The intermediary may continue indefinitely and pay the fee at the next renewal
  4. SEBI may initiate action for non-compliance, including suspension or cancellation after due process Correct answer.

Explanation

Failure to pay the prescribed fee is a contravention of the conditions of registration. SEBI can take action, including suspension or cancellation, after following due process. Automatic cancellation on the next day is not the prescribed mechanism.

Question 8Securities Intermediaries Compliance (Fund)

SEBI proposes to cancel the registration of an intermediary on grounds of fraud. Which procedural safeguard must be observed before the order is passed?

  1. A public notice inviting objections from investors
  2. Prior approval of the Central Government
  3. A reasonable opportunity of being heard being given to the intermediary Correct answer.
  4. A mandatory reference to the Securities Appellate Tribunal

Explanation

The principles of natural justice require that a reasonable opportunity of being heard be given before an adverse order such as cancellation. The regulations provide for a show-cause notice and an opportunity to respond. Other options are not statutory preconditions.

Question 9Securities Intermediaries Compliance (Fund)

An intermediary registered with SEBI wishes to open a branch office in another state. What is the correct position regarding SEBI approval?

  1. Approval is required only if the branch is outside India
  2. The intermediary must surrender its registration and register the branch separately
  3. The intermediary must inform SEBI and comply with the conditions of registration; a fresh registration is not required Correct answer.
  4. Prior written approval of SEBI is mandatory for every branch office

Explanation

Opening a domestic branch does not require a fresh registration, but the intermediary must inform SEBI and continue to satisfy the conditions of registration. The branch operates under the same registration. Separate registration for each branch is not the scheme of the regulations.

Question 10Securities Intermediaries Compliance (Fund)

Which of the following best describes the fit and proper person criteria applicable to a registered intermediary?

  1. A criterion based solely on the net worth of the intermediary
  2. A continuing requirement assessed on integrity, reputation, financial soundness and absence of disqualifying orders Correct answer.
  3. A requirement applicable only to the compliance officer and not to the directors
  4. A one-time certification obtained at the time of registration that never needs review

Explanation

The fit and proper person criteria are continuing in nature and cover integrity, reputation, character, financial soundness and absence of adverse regulatory orders. They apply to the intermediary and its key personnel. Compliance must be certified periodically as prescribed.

Question 11Securities Intermediaries Compliance (Fund)

A SEBI-registered intermediary appoints a new compliance officer. Within what framework must this appointment be handled?

  1. The appointment must be approved by the Securities Appellate Tribunal
  2. The appointment requires prior approval of SEBI before the person takes charge
  3. The appointment must be intimated to SEBI and the person must satisfy the fit and proper criteria Correct answer.
  4. No intimation is required because the compliance officer is an internal appointment

Explanation

Appointment of key personnel, including the compliance officer, must be intimated to SEBI and the person must meet the fit and proper criteria. The compliance officer carries responsibility for monitoring regulatory compliance. Prior SEBI approval or SAT approval is not the prescribed route.

Question 12Securities Intermediaries Compliance (Fund)

Under the SEBI (Intermediaries) Regulations, 2008, which of the following is a ground on which SEBI may cancel the registration of an intermediary?

  1. The intermediary has incurred a loss in two consecutive financial years
  2. The intermediary has changed its auditor without SEBI approval
  3. The intermediary has failed to comply with any condition of registration Correct answer.
  4. The intermediary has reduced its office space

Explanation

Failure to comply with the conditions of registration is an express ground for cancellation. Other grounds include violation of securities laws, providing false information and ceasing to meet eligibility criteria. Financial losses by themselves are not a listed ground.

Question 13Securities Intermediaries Compliance (Fund)

An intermediary discovers that a material statement in its registration application was inaccurate. What does the regulation require and what is the risk?

  1. The intermediary should wait until the next renewal to correct the record
  2. The intermediary should correct the record only if SEBI raises a query
  3. The intermediary should inform SEBI promptly; suppression or misrepresentation is a ground for cancellation Correct answer.
  4. Nothing needs to be done if the registration was already granted

Explanation

Providing false or misleading information or suppressing material facts is a ground for cancellation. A registered intermediary is expected to disclose material changes proactively. Waiting for SEBI to detect the inaccuracy increases the risk of adverse action.

Question 14Securities Intermediaries Compliance (Fund)

Which statement correctly distinguishes the registration fee from the application fee under the SEBI (Intermediaries) Regulations, 2008?

  1. Both are refundable if registration is refused
  2. Both fees are payable only after the first inspection
  3. The application fee is non-refundable, while the registration fee is payable on grant and is also non-refundable Correct answer.
  4. The registration fee is refundable on surrender of registration

Explanation

The application fee accompanies the application and is non-refundable. The registration fee becomes payable on grant of registration and is likewise not refundable. Surrender of registration does not create a refund entitlement.

Question 15Securities Intermediaries Compliance (Fund)

SEBI issues directions to an intermediary pending completion of an enquiry. Which statement is most accurate about such interim directions?

  1. They may be issued to protect the securities market and investors, and the intermediary must comply Correct answer.
  2. They require the consent of the intermediary before taking effect
  3. They are limited to monetary penalties
  4. They can be issued only after the enquiry is concluded

Explanation

SEBI can issue interim directions during pending proceedings to protect investors and the integrity of the market. Such directions bind the intermediary and must be complied with. They are not limited to monetary penalties and do not require the intermediary's consent.

Question 16Securities Intermediaries Compliance (Fund)

An intermediary's certificate of registration is required to be displayed. Where must it be displayed?

  1. At the registered office and at every branch office Correct answer.
  2. Only at the office of the compliance officer
  3. Only at the registered office
  4. Only on the intermediary's website

Explanation

The certificate of registration must be displayed at the registered office and at every branch office of the intermediary. This enables clients and regulators to verify registration status. Display only at the registered office or website is insufficient.

Question 17Securities Intermediaries Compliance (Fund)

A registered intermediary ceases to carry on the securities business. What action is required under the SEBI (Intermediaries) Regulations, 2008?

  1. It must surrender the certificate of registration to SEBI Correct answer.
  2. It may retain the registration indefinitely without any intimation
  3. It must transfer the registration to another entity
  4. It must continue paying fees to keep the registration alive

Explanation

An intermediary that ceases to carry on the regulated activity must surrender its certificate of registration to SEBI. Retaining a dormant registration is not permitted. Transfer of registration to another entity is not contemplated by the regulations.

Question 18Securities Intermediaries Compliance (Fund)

Which of the following is an example of a condition of registration that a securities intermediary must satisfy on a continuing basis?

  1. Achieving a minimum annual profit
  2. Listing its shares on a recognised stock exchange
  3. Employing a minimum of one hundred staff members
  4. Maintaining the minimum net worth prescribed for its category of intermediary Correct answer.

Explanation

Minimum net worth is a continuing eligibility condition prescribed for each category of intermediary. It must be maintained throughout the period of registration, not merely at entry. Profit, listing and staff strength are not general conditions.

Question 19Securities Intermediaries Compliance (Fund)

An intermediary receives a notice from SEBI alleging violation of the conditions of registration. The intermediary believes the allegation arises from a misunderstanding of facts. What is the appropriate response?

  1. Ignore the notice because no penalty can be imposed without a court order
  2. Stop all operations immediately without replying
  3. File a written reply with supporting documents within the time allowed and seek a personal hearing Correct answer.
  4. Approach the stock exchange to have the notice withdrawn

Explanation

A noticee should file a written reply with supporting documents within the prescribed time and may seek a personal hearing. This is part of the reasonable opportunity of being heard. Ignoring the notice or stopping operations without replying is not appropriate.

Question 20Securities Intermediaries Compliance (Fund)

Which statement correctly describes the obligation of a registered intermediary regarding the submission of periodic reports to SEBI?

  1. Reports must be submitted only at the time of renewal of registration
  2. Reports must be submitted only when SEBI specifically asks for them
  3. Reports may be replaced by oral briefings to the inspecting authority
  4. Reports must be submitted at the periodicity prescribed by SEBI or the relevant regulations Correct answer.

Explanation

Registered intermediaries must submit periodic reports at the frequency prescribed by SEBI or the specific regulations applicable to them. Submission is a continuing obligation, not one triggered only by a request. Oral briefings cannot substitute for prescribed reports.

Question 21Securities Intermediaries Compliance (Fund)

An intermediary's registration is cancelled. What is the position regarding records maintained by the intermediary?

  1. All records may be destroyed immediately upon cancellation
  2. Records must be transferred to the stock exchange for safekeeping
  3. Records must be preserved for the period prescribed and made available to SEBI on demand Correct answer.
  4. Records must be handed over to the clients immediately

Explanation

Even after cancellation, records must be preserved for the prescribed period and produced to SEBI on demand. Preservation supports any investigation or appeal relating to the intermediary's conduct. Immediate destruction would breach this obligation.

Question 22Securities Intermediaries Compliance (Fund)

Which of the following persons would generally be considered 'key personnel' for the purpose of fit and proper assessment of a securities intermediary?

  1. An external legal counsel engaged for one matter
  2. The managing director and the compliance officer Correct answer.
  3. A client of the intermediary
  4. A temporary data entry operator

Explanation

Key personnel include senior management such as the managing director, directors and the compliance officer, whose conduct affects the intermediary's compliance. Fit and proper assessment extends to them. Temporary staff, clients and one-off external counsel are not key personnel in this sense.

Question 23Securities Intermediaries Compliance (Fund)

An intermediary is required to inform SEBI of certain events. Which of the following is most likely to require intimation to SEBI?

  1. A change in the intermediary's bankers for routine operations
  2. An increase in the number of client complaints
  3. A change in the intermediary's office furniture supplier
  4. A change in the intermediary's shareholding pattern that affects control Correct answer.

Explanation

Changes affecting control or shareholding of a registered intermediary are material and require intimation and, where applicable, prior approval. Routine operational changes do not. Client complaints are handled through grievance mechanisms rather than event-based intimation.

Question 24Securities Intermediaries Compliance (Fund)

Which statement about the powers of SEBI to call for information from a registered intermediary is correct?

  1. SEBI must obtain the consent of the intermediary before calling for information
  2. SEBI may call for information only after cancelling registration
  3. SEBI may call for information and records at any time to discharge its regulatory functions Correct answer.
  4. SEBI may call for information only during a formal inspection

Explanation

SEBI has broad powers to call for information and records from registered intermediaries at any time to discharge its regulatory functions. This power is not confined to formal inspections. The intermediary's consent is not required.

Question 25Securities Intermediaries Compliance (Fund)

A registered intermediary outsources part of its back-office operations to a third-party service provider. What is the correct compliance position?

  1. The intermediary remains responsible for compliance and must ensure the arrangement does not impair SEBI's supervision Correct answer.
  2. Outsourcing is prohibited for all registered intermediaries
  3. Outsourcing requires the intermediary to surrender its registration
  4. Outsourcing transfers regulatory responsibility for the outsourced activity to the service provider

Explanation

Outsourcing does not transfer regulatory responsibility; the registered intermediary remains accountable to SEBI. The arrangement must permit SEBI's supervision and preserve records and access. Surrender of registration or an absolute prohibition is not the position.

Question 26Securities Intermediaries Compliance (Fund)

Under the SEBI (Intermediaries) Regulations, 2008, what is the validity period of a certificate of registration granted to a securities intermediary, unless it is cancelled or surrendered earlier?

  1. Until it is cancelled or surrendered, with no fixed expiry Correct answer.
  2. Five years from the date of grant, renewable thereafter
  3. Three years from the date of grant, renewable thereafter
  4. Ten years from the date of grant, renewable thereafter

Explanation

The SEBI (Intermediaries) Regulations, 2008 prescribe that a certificate of registration remains valid until it is cancelled by SEBI or surrendered by the intermediary. There is no fixed-term renewal cycle comparable to a licence that lapses automatically. The intermediary must, however, continue to satisfy the conditions of registration throughout.

Question 27Securities Intermediaries Compliance (Fund)

A registered intermediary wants to change its status from a private limited company to a public limited company. What is the correct regulatory position?

  1. The change requires only an intimation to the recognised stock exchange
  2. The change requires fresh registration without any prior approval
  3. The change requires prior written approval of SEBI Correct answer.
  4. The change may be made freely as it is only a corporate formality

Explanation

A change in the legal form or constitution of a registered intermediary is a material change requiring the prior approval of SEBI. The intermediary must apply and obtain approval before effecting the change, not merely report it afterwards. This ensures the registration continues to attach to an entity that satisfies the eligibility conditions.

Question 28Securities Intermediaries Compliance (Fund)

Which document must a registered intermediary maintain to record the names of persons who are associated with it and hold positions of responsibility?

  1. A register of clients and their beneficial owners
  2. A register of all employees drawing salary above a threshold
  3. A register of persons acting as key management personnel Correct answer.
  4. A register of complaints received from investors

Explanation

Intermediaries are expected to maintain proper records identifying key management personnel and persons in positions of responsibility, so that fit and proper assessment can be applied on a continuing basis. A client register, salary register or complaint register serves different purposes. These records also support SEBI inspection and enquiry.

Question 29Securities Intermediaries Compliance (Fund)

An intermediary's registration is suspended by SEBI for three months. What is the correct position regarding its existing clients during the suspension?

  1. It may continue serving clients if the stock exchange grants a temporary waiver
  2. It must cease the regulated activity covered by the suspension and make orderly arrangements for clients Correct answer.
  3. It may continue all activities but cannot accept new clients
  4. It automatically transfers all client accounts to another registered intermediary

Explanation

During a suspension, the intermediary cannot carry on the regulated activity covered by the suspension. It must wind down or make orderly arrangements so that clients are not prejudiced, and it cannot rely on exchange waivers to continue. Automatic transfer of client accounts is not a consequence of suspension.

Question 30Securities Intermediaries Compliance (Fund)

Which of the following best describes the purpose of the code of conduct prescribed for intermediaries under the SEBI (Intermediaries) Regulations, 2008?

  1. To prescribe the fee schedule intermediaries may charge clients
  2. To establish standards of fair dealing, integrity and professional conduct Correct answer.
  3. To define the format of financial statements filed with SEBI
  4. To set minimum capital adequacy levels for each category of intermediary

Explanation

The code of conduct lays down ethical and professional standards such as fair dealing, integrity, confidentiality and avoidance of conflicts of interest. Capital adequacy, fee schedules and financial statement formats are addressed through separate provisions, not the code of conduct. The code is a conduct framework rather than a prudential or accounting rule.

Question 31Securities Intermediaries Compliance (Fund)

A compliance officer of a registered intermediary learns that a senior dealer has been front-running client orders. What is the most appropriate immediate action for the compliance officer?

  1. Report the matter internally to senior management and ensure it is escalated and recorded Correct answer.
  2. Wait for the annual SEBI inspection to disclose the matter
  3. Resign from the position to avoid personal liability
  4. Confront the dealer privately and take no written record

Explanation

The compliance officer is responsible for identifying and escalating regulatory breaches through proper internal channels and maintaining records of the action taken. Front-running is a serious market misconduct that must be reported and investigated, not concealed or deferred. Resignation does not discharge the obligation to report.

Question 32Securities Intermediaries Compliance (Fund)

Which statement correctly describes the obligation of an intermediary regarding maintenance of books of account and records under the SEBI (Intermediaries) Regulations, 2008?

  1. Records need be kept only until the annual audit is completed
  2. Records must be maintained for a minimum period of five years Correct answer.
  3. Records must be maintained for a minimum period of eight years
  4. Records must be maintained for a minimum period of three years

Explanation

The regulations require intermediaries to maintain books of account and records for a minimum period of five years. These records must be preserved in a manner that allows inspection and production to SEBI on demand. Retention only until audit completion or for shorter periods would not satisfy the requirement.

Question 33Securities Intermediaries Compliance (Fund)

An intermediary receives a request from SEBI for information relating to certain client transactions. The intermediary is concerned about client confidentiality. What is the correct position?

  1. The intermediary must furnish the information to SEBI notwithstanding confidentiality Correct answer.
  2. The intermediary may refuse until a court order is obtained
  3. The intermediary may provide only aggregated data without client identifiers
  4. Confidentiality obligations override the request unless the client consents

Explanation

Statutory confidentiality obligations owed to clients do not prevent disclosure to SEBI in the exercise of its regulatory powers. The intermediary is required to furnish the information sought, and refusing or diluting the response can itself be a violation. Client consent is not a precondition for responding to a lawful regulatory request.

Question 34Securities Intermediaries Compliance (Fund)

Which of the following is a continuing condition that a registered intermediary must satisfy after registration?

  1. Closing all branch offices before the financial year ends
  2. Obtaining client consent before every regulatory filing
  3. Submitting a fresh application each year for renewal
  4. Maintaining the minimum net worth or capital adequacy applicable to its category Correct answer.

Explanation

Capital adequacy and net worth requirements are continuing conditions that must be met not only at the time of registration but throughout the period of registration. There is no annual renewal application, and regulatory filings do not require client consent. Branch offices are governed by separate approval requirements.

Question 35Securities Intermediaries Compliance (Fund)

A registered intermediary proposes to appoint a new whole-time director who was previously associated with an entity whose registration was cancelled for fraudulent practices. What should the intermediary do before making the appointment?

  1. Appoint the person on a probationary basis to avoid regulatory scrutiny
  2. Assess the person against fit and proper criteria and seek SEBI approval where required Correct answer.
  3. Proceed with the appointment and disclose it in the next annual report
  4. Delegate the appointment decision to the compliance officer alone

Explanation

Directors and key management personnel must satisfy the fit and proper person criteria on a continuing basis, and prior association with an entity whose registration was cancelled for fraud is a relevant adverse factor. The intermediary must assess suitability and obtain SEBI approval where the regulations require it before effecting the appointment. Probation or later disclosure does not cure the deficiency.

Question 36Securities Intermediaries Compliance (Fund)

Which of the following best describes the role of the compliance officer in a SEBI-registered intermediary?

  1. To act as the sole point of contact for all client grievances
  2. To audit the intermediary's financial statements annually
  3. To monitor compliance with securities laws and report breaches to the board Correct answer.
  4. To independently manage the investment decisions of clients

Explanation

The compliance officer monitors adherence to securities laws and internal policies and reports material non-compliance to the board or management. Investment decisions and statutory audits are distinct functions performed by other personnel. Grievance handling may be coordinated but is not the sole responsibility of the compliance officer.

Question 37Securities Intermediaries Compliance (Fund)

An intermediary registered as a stock broker wishes to also act as a depository participant. What is the correct regulatory approach?

  1. It may begin the additional activity after informing the stock exchange
  2. A single registration automatically covers both activities
  3. It must surrender the stock broker registration before applying
  4. It must obtain separate registration for the additional activity from SEBI Correct answer.

Explanation

Each regulated activity requires its own registration or approval from SEBI under the applicable regulations. A stock broker registration does not automatically authorise depository participant activities. The intermediary must apply for and obtain the additional registration before commencing that activity.

Question 38Securities Intermediaries Compliance (Fund)

What is the consequence under the SEBI (Intermediaries) Regulations, 2008 when an intermediary fails to comply with a direction issued by SEBI after an enquiry?

  1. The direction lapses automatically after ninety days
  2. SEBI may initiate action for suspension or cancellation of registration Correct answer.
  3. The matter is referred to the stock exchange for arbitration
  4. The intermediary is permitted to continue until the next inspection

Explanation

Non-compliance with a SEBI direction is itself a ground for further regulatory action, including suspension or cancellation of registration. Directions do not lapse automatically after a fixed period absent compliance. Reference to arbitration or waiting for the next inspection would not address the default.

Question 39Securities Intermediaries Compliance (Fund)

Which of the following statements about the surrender of a certificate of registration by an intermediary is correct?

  1. Surrender takes effect immediately upon the intermediary's written request
  2. Surrender takes effect only after SEBI accepts it and the intermediary settles obligations Correct answer.
  3. Surrender requires the consent of every client of the intermediary
  4. Surrender is not permitted under any circumstances

Explanation

An intermediary may seek to surrender its registration, but the surrender becomes effective only when SEBI accepts it, typically after the intermediary has discharged its obligations and made arrangements for existing clients. It is not automatic on request. Client-by-client consent is not the prescribed mechanism.

Question 40Securities Intermediaries Compliance (Fund)

An intermediary is required to file periodic reports with SEBI. Which statement most accurately describes the consequence of filing a report containing materially false information?

  1. It is permitted if the error was inadvertent and later corrected
  2. It attracts only a warning letter from the stock exchange
  3. It may constitute a violation inviting penalty and action against registration Correct answer.
  4. It is a minor procedural lapse correctable by a revised filing

Explanation

Filing materially false or misleading information with SEBI is a substantive violation that can attract monetary penalty and action against the certificate of registration. A revised filing may mitigate but does not erase the violation. Inadvertence is a factor in determining penalty, not an automatic defence.

Question 41Securities Intermediaries Compliance (Fund)

Which of the following persons would be subject to the fit and proper person criteria in relation to a registered intermediary?

  1. The statutory auditor of the intermediary's parent company
  2. A director and the compliance officer of the intermediary Correct answer.
  3. A vendor supplying office stationery to the intermediary
  4. A client who trades through the intermediary

Explanation

Fit and proper criteria apply to the intermediary itself as well as to its directors, key management personnel and compliance officer. Clients, unrelated auditors and ordinary vendors are not assessed under these criteria. The assessment covers persons who control or manage the regulated activity.

Question 42Securities Intermediaries Compliance (Fund)

An intermediary becomes aware that one of its directors has been convicted of a serious economic offence. What is the most appropriate regulatory response?

  1. Promptly inform SEBI and take steps consistent with the fit and proper framework Correct answer.
  2. Continue operations and disclose the conviction at the next renewal
  3. Await a SEBI query before taking any internal action
  4. Remove the director's name from the website and take no further action

Explanation

A conviction of a director for a serious offence affects the fit and proper status of the intermediary and must be disclosed to SEBI promptly. The intermediary should also take appropriate internal action consistent with the fit and proper framework. Passive disclosure at renewal or cosmetic website changes do not meet the obligation.

Question 43Securities Intermediaries Compliance (Fund)

Which statement correctly describes the position of a registered intermediary regarding the display of its registration certificate?

  1. It need not be displayed anywhere after registration
  2. It must be published in a newspaper annually
  3. It must be displayed only at the registered office and nowhere else
  4. It must be displayed at the principal place of business and available at branch offices Correct answer.

Explanation

The registration certificate must be displayed at the principal place of business, and copies or particulars should be available at branch offices so that clients can verify registration. Publication in a newspaper is not the prescribed method. Display is a continuing obligation, not a one-time formality.

Question 44Securities Intermediaries Compliance (Fund)

An intermediary's back-office processing is handled by a group company. How should the intermediary treat this arrangement for regulatory purposes?

  1. The intermediary remains responsible for compliance and must ensure effective oversight Correct answer.
  2. The arrangement requires no documentation if the group company is registered
  3. The arrangement transfers regulatory responsibility to the group company
  4. The arrangement is prohibited unless SEBI approves each transaction

Explanation

Outsourcing or group-company arrangements do not transfer the intermediary's regulatory responsibilities. The intermediary remains accountable for compliance and must maintain proper agreements, oversight and records. Registration of the service provider does not eliminate the need for documentation and supervision.

Question 45Securities Intermediaries Compliance (Fund)

Which of the following best explains why SEBI requires intermediaries to segregate client funds from their own funds?

  1. To reduce the intermediary's tax liability
  2. To increase the intermediary's profitability
  3. To protect client assets in the event of the intermediary's insolvency Correct answer.
  4. To simplify the preparation of annual financial statements

Explanation

Segregation of client funds and securities protects investors by ensuring that client assets are not exposed to the intermediary's own creditors or business failures. It is an investor protection measure, not a profitability or tax measure. It also supports accurate reconciliation and audit.

Question 46Securities Intermediaries Compliance (Fund)

A SEBI inspection reveals deficiencies in an intermediary's record-keeping and client onboarding processes. Which response best reflects the intermediary's obligation?

  1. Rectify the deficiencies only after a penalty order is issued
  2. Replace the compliance officer and take no other action
  3. Rectify the deficiencies, strengthen controls and report the corrective action to SEBI Correct answer.
  4. Dispute every observation to avoid adverse findings

Explanation

An intermediary under inspection is expected to address the deficiencies identified, strengthen its systems and controls, and report the corrective steps taken. Defensive denial or waiting for a penalty order aggravates the matter. Simply replacing personnel does not remedy process deficiencies.

Question 47Securities Intermediaries Compliance (Fund)

Which statement correctly describes the obligation of a registered intermediary when it changes its address of the principal place of business?

  1. No action is required as long as the registered office is unchanged
  2. It must obtain fresh registration for the new address
  3. It may change the address after informing clients only
  4. It must intimate SEBI and comply with the applicable requirements for the change Correct answer.

Explanation

A change in the principal place of business must be intimated to SEBI and handled in accordance with the applicable requirements. It does not require fresh registration, but silence is not an option. Informing clients alone does not discharge the regulatory obligation.

Question 48Securities Intermediaries Compliance (Fund)

An intermediary's compliance officer reports directly to the chief executive officer and not to the board. Why is this reporting structure generally viewed as a weakness?

  1. It violates the requirement that the compliance officer be a chartered accountant
  2. It increases the compliance officer's workload
  3. It reduces the intermediary's net worth
  4. It may compromise independent escalation of compliance issues to the board Correct answer.

Explanation

Effective compliance requires independent escalation of material issues to the board so that management cannot suppress adverse findings. Reporting solely to the chief executive officer can compromise that independence. The concern is governance and independence, not workload, capital or professional qualification.

Question 49Securities Intermediaries Compliance (Fund)

Which of the following is the most accurate description of the action an intermediary must take when it ceases to carry on the securities business for which it is registered?

  1. It must surrender its certificate of registration and follow the prescribed procedure Correct answer.
  2. It may retain the certificate indefinitely without any intimation
  3. It must transfer the certificate to another intermediary
  4. It must continue filing periodic reports indefinitely

Explanation

When an intermediary ceases the regulated activity, it should surrender the certificate of registration following the prescribed procedure and make orderly arrangements for clients. Retaining an unused certificate without intimation is inconsistent with the regulatory framework. Certificates are not transferable to another entity.

Question 50Securities Intermediaries Compliance (Fund)

Which of the following best describes the standard of conduct expected of an intermediary when dealing with a client who lacks sophistication in securities markets?

  1. The intermediary may treat all clients identically regardless of their understanding
  2. The intermediary should refuse to deal with such clients entirely
  3. The intermediary should exercise care appropriate to the client's level of understanding and disclose risks clearly Correct answer.
  4. The intermediary may rely solely on a signed risk disclaimer

Explanation

The code of conduct requires fair dealing and care appropriate to the client's level of understanding, including clear disclosure of risks and terms. Treating all clients identically ignores the duty of care owed to less sophisticated investors. A signed disclaimer alone does not discharge the obligation to explain material risks.