Securities and Exchange Board of India (SEBI) issued a circular for Asset Management Companies (AMCs) to enable them to identify, tackle, and deter potential market abuse, including front-running and fraudulent transactions in securities.
The circular mandates that AMCs implement an institutional mechanism that includes advanced surveillance systems internal control procedures, and an escalation process to inform their Board of Directors about potential market abuse.
The changes have come in the wake of the Securities and Exchange Board (SEBI) investigating Quant mutual funds on alleged front-running and also issuing orders regarding front-running cases on two other mutual funds earlier. To provide for these revisions, the Sebi has amended mutual fund rules regarding insider trading, effective from November 1, 2024.
The CEO or Managing Director, along with the Chief Compliance Officer, are responsible for implementing these measures, Sebi said. The circular also mandated the Association of Mutual Funds in India (AMFI) to ensure consistent implementation across the industry and prescribe detailed standards for implementation within 15 days. "In line with our dedication to safeguarding the interests of our investors, the institutional mechanism to prevent any potential market abuse is a new operational initiative, initiated by the industry and guided by the Securities and Exchange Board of India (Sebi)," AMFI said in a release on August 7.
"We believe that these standards, developed by AMFI after consultation with industry, will not only enhance the integrity of our processes but also ensure that our investors can make informed and confident investment decisions. We remain steadfast in our mission to support and advance the principles of investor protection, and we look forward to working collaboratively with SEBI to implement these essential standards," AMFI added.
Surveillance System & Whistle Blower Policy
AMCs must develop alert-based surveillance systems to process alerts timely and ensure review of recorded communications and access logs during investigations. The circular emphasizes the importance of a whistleblower policy, periodic reviews of procedures and systems, and reporting examined alerts to Sebi with detailed observations and actions taken.
“An AMC 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,” the circular said.
AMCs must formulate written policies and procedures for examinations to detect and address potential market abuse, including front-running and fraudulent transactions, which should be approved by its board of directors.
The circular added, "AMCs shall take suitable action upon becoming aware of any potential market abuse by its employees or brokers or dealers, including suspension or termination of such persons or entities."
