Sebi considers bringing MF transactions under insider trading ambit

The Securities and Exchange Board of India (Sebi) on Friday proposed bringing mutual fund (MF) transactions under the purview of stringent insider-trading regulations to prevent abuse of sensitive information by key personnel in the MF industry.

Currently, MF units are excluded from the definition of ‘securities’ under the Prohibition of Insider Trading (PIT) Regulations, and buying and selling of MF units is excluded from the definition of ‘trading’. The market regulator had sought public comments on whether the PIT Regulations need to be amended to also cover the MF industry.

The proposal comes close on the heels of allegations of front-running at a large fund house. In the discussion paper floated on Friday, Sebi has said it has observed that a MF Registrar and Transfer Agent (RTA) had redeemed all its units from a scheme while being privy to certain sensitive information. Similarly, it observed a few key personnel of the MF industry redeemed their holdings in the schemes while in possession of certain sensitive information not communicated to the unit holders of the schemes. 

“MF units are specifically excluded from the purview of PIT Regulations. A need has, therefore, been felt to harmonise the provisions in PIT Regulations to initiate serious enforcement actions against those who misuse the sensitive non-public information pertaining to MF schemes, directly or indirectly, which they have access, by virtue of their fiduciary capacity,” Sebi said in a discussion paper, which is open for public comments until July 29.

Sebi has mulled applying ideas like connected persons, designated persons, closure period, and pre-clearance for MF transactions. It has also considered putting in place a code of conduct for designated persons. This would be applicable to every person who is required to handle unpublished price sensitive information (UPSI) relating to a MF scheme or its units in the course of business operations.

The rules, if applied, would bring transacting in MF units at par with shares and would put the responsibility on top industry officials. However, it won’t be as straightforward as it is in case of shares.

“For instance, though a person may possess an UPSI pertaining to a security, he may not have the knowledge of the existing portfolio of the MF scheme or have any control over the fund manager’s decision,” the discussion paper observes.

Sebi has mulled extending the concepts used for insider trading of shares to MFs but has said these thorough considerations “to avoid complexities and unintended consequences.”

On the cards

Concepts that could be extended to MF industry

• Pre-clearance of transactions: Trades by designated persons and their immediate relatives shall be subject to pre-clearance by compliance officer
• Closure period: Period during which designated persons wont’ be allowed to transact in MF units
• Code of conduct: Minimum standard to be followed by ‘fiduciaries’
• Reporting of transactions: Mandatory to report trades of MF units by designated persons