Capital markets regulator Sebi has amended mutual fund norms requiring Asset Management Companies (AMCs) to put in place an institutional mechanism to identify and deter front-running and insider trading in securities.
This mechanism will consist of enhanced surveillance systems, internal control procedures, and escalation processes such that the overall mechanism is able to identify, monitor and address specific types of misconduct, including front-running, insider trading, misuse of sensitive information etc, Sebi said in a circular on Monday.
Additionally, the management of AMCs will be responsible for ensuring the effectiveness of the institutional mechanism. Also, the regulator has directed AMCs to have a whistle-blower mechanism.
This came in the wake of Sebi passing two orders regarding front-running cases involving Axis AMC and Life Insurance Corporation of India (LIC).
In a separate gazette notification dated August 1, Sebi said, “Asset management companies shall put in place an institutional mechanism, as may be specified by the Board, for the identification and deterrence of potential market abuse including front-running and fraudulent transactions in securities”.
Front-running refers to an illegal practice, where an entity trades based on advanced information from a stock broker or analyst before the information has been made available to clients.
As per the circular, AMCs will develop and implement systems and procedures to generate and process alerts in a timely manner. During the processing of alerts, AMCs will consider and review all recorded communications including chats, emails, access logs of the dealing room and CCTV footage (if available). Also, they will maintain and monitor entry logs to the AMCs’ premises.
Further, Chief Executive Officer (CEO) or Managing Director (MD)or such other person of equivalent or analogous rank and Chief Compliance Officer of the AMC will be responsible and accountable for the implementation of the institutional mechanism to deter potential market abuse.
AMCs will formulate written policies and procedures for conducting examination and taking action in case of potential market abuse including front-running and fraudulent transactions in securities by its employees and connected entities. Such policies will be approved by AMCs’ Board of Directors.
Further, AMCs will have an escalation process to promptly inform its board of directors and trustees, regarding instances of potential market abuse, if any, and results of the examination conducted by them.
“The asset management company shall establish, implement and maintain a documented whistle-blower policy that shall provide for a confidential channel for employees, directors, trustees, and other stakeholders to raise concerns about suspected fraudulent, unfair or unethical practices, violations of regulatory or legal requirements or governance vulnerability, and establish procedures to ensure adequate protection of the whistleblowers,” Sebi said.
To this effect, the Securities and Exchange Board of India (Sebi) has amended mutual fund rules, which will come into force from November 1.
For effective functioning of the institutional mechanism, stock exchanges and depositories will develop systems, in consultation with AMFI, to enable data sharing with AMCs, Sebi said.
