Front-Running, and a Complaint Nobody Acknowledged

This is front-running: trading ahead of the firm's own client-facing recommendation, on information not available to clients.

• Information asymmetry. The recommendation was the firm's own product, being prepared for clients. The analyst knew the timing and direction. Trading ahead of it means the clients bought at prices the analyst had already moved - the clients' loss is the analyst's gain.
• Use of a family account. The mother-in-law's account does not insulate him. Trading in connected accounts, with the analyst controlling the decisions, is his trading; nominee/relative accounts are the standard disguise for this conduct and are expressly looked for.
• Rules engaged: the adviser's code of conduct requiring fair dealing and priority to client interests, and the bar on using client-facing information for personal benefit; the firm's own personal-trading/insider-trading policy; and, where the firm and the analyst fall within its ambit, the SEBI insider-trading framework, including the prohibition on contra-trades (buying and selling within a short window) by designated persons and the obligation to pre-clear trades.
• Aggravating facts: size (Rs. 8,000 shares), the 40-minute gap, and the 22% realised gain - all quantifiable for disgorgement.

Immediate steps: preserve all records (emails, chat, research drafts, the recipient list, his and the connected account's holdings and trade logs); suspend his access to pre-publication research; place the security on a restricted list; report to the principal officer/board; assess whether the client recommendations made while the position was open need to be reviewed or the affected clients compensated; review the control gap (pre-clearance, holding disclosures including family accounts, cooling-off before and after a recommendation, and a 'no dealing in research-in-progress' rule). Consider the firm's own reporting obligation to SEBI and take legal advice on it.

The proposal is not acceptable, for four separate reasons.

1. It buys silence, not resolution. A payment conditioned on withdrawal of the complaint and a release suppresses the record. The client's right to approach SEBI cannot be contracted away, and a firm that solicits such a waiver has made its own conduct an enforcement issue.
2. The RM is settling his own alleged misdeed with his own money - a clear conflict. Compensation decisions cannot sit with the person complained against.
3. The 12-day silence is already a breach of process. Complaints must be acknowledged promptly, logged in the complaints register, investigated and redressed within the timeline the firm's policy commits to and in any event within the SEBI/SCORES resolution window (around 30 days). Day 12 with no acknowledgement is the first finding against the firm.
4. The underlying allegation is serious - an unsigned change to a risk profile is a record-integrity failure and a suitability failure at once.

Correct sequence:

• Acknowledge the email in writing today; give a complaint reference number, the escalation matrix and the expected resolution date.
• Log it in the register; notify the principal officer and treat it as a potential compliance breach, not a service issue.
• Pull the audit trail on the risk profile - who changed it, when, from which login - and the original signed profile. Restore the client's record.
• Investigate suitability of the advice given against the original (moderate) profile; quantify the loss properly rather than accepting Rs. 3.4 lakh at face value.
• Decide remediation on merits - reversal of unsuitable transactions where possible, compensation where not - approved by a person independent of the RM.
• Inform the client of her right to escalate to SEBI/SCORES and the ODR route, and of the firm's grievance redressal timeline.
• Root-cause fix: change-control on risk profiles, maker-checker, and training.
• Disclose the complaint, the breach and the remediation in the compliance report to the board/principal officer, and retain all records for the prescribed period.

The two events together point at the control environment, not at two isolated individuals, and the compliance officer's duty runs to the board and to SEBI - not to protecting colleagues or the firm's reputation.

What you must do:

1. Do not let either matter be resolved quietly at desk level. Front-running and complaint suppression both become far worse if the firm can be shown to have known and not acted.
2. Write it up contemporaneously. A factual note to the principal officer/director: what happened, when the firm knew, what was done, what is open. Undated verbal briefings are worthless later.
3. Escalate both to the board/principal officer and place them before the firm's designated committee; if the firm's answer is to bury them, record your dissent in writing.
4. Separate the two roles you are being asked to play - investigating the RM while also being the person the RM reports to on complaints. The investigation should be run at arm's length, with an independent approver for the compensation decision.
5. Fix the systemic causes: personal-trading pre-clearance and holding disclosure covering family accounts; restricted list around research in progress; change-control and audit trail on client risk profiles; a complaints register with ageing that the board sees monthly; and a whistleblower channel that does not route through the line manager.
6. Assess disclosure obligations to SEBI, including any material breach reporting required under the firm's registration conditions, and take external legal advice where the answer is unclear.
7. Keep records - the advisory record-retention obligation (five years) applies to complaints, investigation files and personal-trading records, and in a dispute the firm's file is its only defence.

The test is simple: if SEBI asked for this file in six months, would it show a firm that detected, escalated and remediated - or one that paid someone to go away?