The Securities and Exchange Board of India (Sebi) has sought public feedback in a consultation paper on its proposed changes in the internal mechanisms of the asset management companies (AMCs) that are expected to bring far-reaching changes in how they conduct their businesses.
The primary focus is on preventing possible fraud and market abuse by strengthening the AMCs’ internal systems to boost surveillance, oversight, and accountability of senior management.
The request for feedback comes after its discussions with AMCs on various proposals like setting up effective surveillance and control systems, strengthening their escalation and reporting mechanisms, and enhancing the accountability of senior management and compliance.
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Sebi has asked the AMCs and the Association of Mutual Funds in India (Amfi) to implement safeguards to deter possible misconduct by employees or entities that may have information regarding the AMCs’ fund management or their investments in mutual fund schemes.
The Proposals
The suggestions include customising internal control procedures for alerts, including "parameters and thresholds based on back-testing of historical data" to detect possible misconduct.
It said AMCs would need to process system-driven alerts, conduct "lifestyle checks," and monitor emails, chats, CCTV footage, etc., to determine possible misconduct.
In addition, they must “adequately” investigate by examining all information, “including recorded communication, trading activity, lifestyle, etc.,” if they notice any suspicious activity.
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It also asked the stock exchanges to provide them with relevant data to help in their probe. Sebi said the improved standard operation procedure (SOP) would enable the AMCs to determine possible "wrongdoing" and help classify the alerts as “actionable” or “nonactionable”.
They must also have a “documented policy on the types of actions to be taken based on the threat levels and other related factors,” it said.
Further, they must specify in the employment contract of the employees or the connected entities the actions to be taken against them if they are directly or indirectly involved in misconduct.
Regarding reporting and escalation mechanisms, Sebi said the AMCs must periodically submit an “action-taken report on actionable alerts” to the board, trustees and the market regulatorn
They must also document the escalation processes in the SOP and appropriately apprise their boards and trustees of the compliance status with the proposed framework for review and updation of procedures at least on a half-yearly basis to thwart possible misconduct.
Sebi said the AMCs’ board of directors “shall regularly review and update the systems and control procedures” to keep pace with market developments and regulatory changes.
Furthermore, Sebi proposed that to keep the costs low, AMCs may share resources, systems, and infrastructure as may be suggested by Amfi in consultation with the market regulator.
All AMCs, regardless of being listed or not on the stock exchanges, must have a “whistle-blower policy” as per Sebi’s (Listing Obligations and Disclosure Requirements) Regulations, 2015, to address market abuse and misconduct.
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Underscoring the responsibility and accountability of the AMCs’ senior management in deterring market abuse, Sebi said persons holding important positions must “ensure that an institutional mechanism is put in place to deter, detect, and report possible misconduct by its employees, dealers, stock brokers or any other connected entities.”
These changes are expected to help protect investors’ interests. Sebi said ensuring appropriate escalation and reporting mechanisms and other changes will act as a deterrence against possible market abuse and fraudulent transactions in securities related to the AMCs’ transactions.
