In an effort to identify and deter instances of front-running and fraudulent transactions in securities at asset management companies, capital market regulator has put in place an 'institutional mechanism', a circular by Sebi said on August 5.
The measures are aimed at curbing misconducts such as front running, insider trading, or misuse of sensitive information, putting the onus of responsible conduct on the CEO or managing director, and the Chief Compliance Officer of the AMC to implement the deterrence.
AMCs shall also have to lay down written policies and take action in case of potential market abuse by employees and connected entities, and these policies will have to be approved by the board of the asset management company. Any potential market abuse will have to be dealt with sternly by the AMC, including suspension or termination of such persons/entities.
The fund houses will have to implement a mechanism by way of alerts get automatically generated in the system, if there is any suspicious activity detected. SEBI has said that AMCs will need to record a list of such alerts, their observations and what they action they take. This report will be part of the mandatory half-yearly reports that AMCs give to SEBI.
Additionally, an escalation policy shall have to be drafted by AMCs for alerting the board regarding instances of potential market abuse, and results of the exams being conducted by the AMCs.
A clearly documented whistle-blower policy too shall have to be codified by the AMC, according to the latest Sebi guidelines.
To ensure the institutional mechanism works most effectively, Sebi has asked the stock exchanges and depositories to develop systems in consultation with AMFI, so that data can be shared by them to mutual funds. All AMCs shall have to report alerts along with action taken, in the Half-yearly Trustee Report to the Sebi.
AMFI has been asked to prescribe a detailed implementation standard within the next 15 days, according to Sebi.
SEBI had floated a consultation paper in May 2023 in this regard, after some front-running cases in AMCs came to light. Now, many of the resultant suggestions have been accepted and will come into effect from November.
Separately- but on a related note- trading in mutual fund units will also now be part of SEBI Prohibition of Insider Trading regulations, effective November 1.
The circular has gone to the board of all mutual funds and AMCs, Association of Mutual Funds in India (AMFI), stock exchanges and depositories. Within 15 days the AMFI is now to prescribe detailed implementation standards that all fund houses will have to mandatorily follow.
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