SEBI wants mutual funds to catch front running, insider trading frauds

SEBI wants the CEO and chief compliance officer(CCO) to be made responsible for implementing survelillance systems, so that the top management cannot escape accountability even if someone below commits the crime.

The capital market regulator, Securities and Exchange Board of India (SEBI) has proposed setting up surveillance and internal control systems to catch frauds like front running and insider trading. At the minimum, SEBI has said that such a system should be able to catch front-running, insider trading, misselling of products, misuse of information by the asset management company (AMC), its employees, distributors, brokers dealers and so on and delay in execution of orders by their brokers and dealers.

In recent times, SEBI has caught instances of front – running in some fund houses in the Rs 40 trillion India mutual funds (MF) industry. In February 2023, it barred its former chief dealer and 19 others in a front – running case  that was caught at Axis MF. In October 2022, SEBI had issued an order wherein it found that the fund manager of the erstwhile Deutsche Mutual Fund and his parents had employed a scheme to 'front run' the orders of the fund house.

Now typically, front-running and insider trading frauds are detected by stock market exchanges that use their surveillance systems in conjunction with SEBI. But with the proliferation of fund houses and brokerage houses over the years, this puts pressure on SEBI as well as the exchanges to constantly monitor and fish out culprits. By putting onus on the fund houses to put in place such systems, it wants fund houses to be more proactive.

Additionally, SEBI also wants the chief executive officer (CEO) and chief compliance officer(CCO) to be made responsible for implementing these systems, so that the top management cannot escape accountability even if someone below commits the crime.

A whistleblower policy is also sought to have been set up by SEBI. Infact by law, all listed fund houses are expected to have a whistleblower policy. But SEBI has now proposed that all fund houses, irrespective of being listed or not, must have a “vigil mechanism/ whistle blower policy as applicable to listed AMCs, which specifically addresses market abuse practices.”

Curiously, SEBI has also mentioned that a mutual fund’s intelligence should also be able to spot the softer sides of any possible violation such as lifestyle changes. This appears to have stemmed from media reports of the lavish lifestyle that Axis MF’s chief dealer was rumoured to have been leading, prior to him being sacked by the fund house in May 2022.

SEBI has invited comments from the public by June 3, 2023.