Mkt regulator Sebi notifies mutual fund norms to prevent market abuse

Fund houses to put in place whistle-blower policy, top management to shoulder more responsibilities

The Securities and Exchange Board of India (Sebi) has notified the much-awaited norms for mutual funds that require asset management companies (AMCs) to put in place an institutional mechanism to prevent violations such as fraudulent transactions and front-running.

According to Sebi, the deadline to set up the new mechanism is within three months for bigger players, while smaller fund houses will get a six-month window for implementation.

Sebi has specified that AMCs with assets under management (AUM) under Rs 10,000 crore will have to adhere to the new mechanism after six months.

“The chief executive officer or managing director or such other person of equivalent or analogous rank and chief compliance officer of the asset management company shall be responsible and accountable for implementation of such an institutional mechanism for deterrence of potential market abuse, including front running and fraudulent transactions in securities,” said Sebi, while amending the MF regulations on August 2.

 

AMCs will now have to implement systems and procedures to generate alerts and formulate policies to take action in case of market abuse. These actions may include suspension or termination of such employees, brokers or dealers in case of potential market abuse. Further, AMCs will have to review all recorded communications, including chats, emails, access logs of the dealing room, CCTV footage and entry logs to the firm's premises.

Sebi has also directed fund houses to provide for a confidential channel, also called a whistle-blower policy for employees, directors, trustees and others to raise concerns on suspected fraudulent or unethical practices.

Further, the market regulator will also relax the mandate for mutual funds to record face-to-face communication, including out of office interactions. However, this relaxation will be made effective after a year. Currently, the fund houses record all fund manager and dealer communications during market hours.

For this mechanism, the Association of Mutual Funds in India (Amfi) is formulating a standards operating framework. At present, the mutual funds follow internal practices on surveillance, which varies across the firms.

“While we wait for the SOP, we have already strengthened our internal surveillance systems and are following stringent measures to keep any such possible abuse in check,” said the head of a leading fund house.

The market regulator had first approved the mechanism in its board meeting in April. The move follows instances of front-running in mutual funds by dealers and brokers.

Last month, the market regulator also mandated stock brokers to establish an institutional mechanism for fraud prevention and detection or market abuse. This includes measures such as the implementation of trading activity surveillance systems and internal controls, and the introduction of whistle-blower policies, among other obligations.