Set up mechanism to prevent MF frauds, Sebi directs AMCs

New Delhi, April 30

To curb front-running and insider trading in mutual funds, the Sebi board on Tuesday decided to amend the regulatory framework by requiring Asset Management Companies (AMCs) to put in place an institutional mechanism for identification and deterrence of potential market abuse.

Also, the Securities and Exchange Board of India decided to enhance responsibility and accountability of management of AMCs for such an institutional mechanism. Further, the regulator is looking to foster transparency by requiring AMCs to have a whistle blower mechanism, Sebi said in a press release issued after the conclusion of the board meeting.

This is the second board meeting in as many months after the meeting on March 15.

The institutional mechanism, which is expected to detect and report possible misconduct by AMCs’ employees, dealers, stock brokers or any other connected entities, should consist of enhanced surveillance systems, internal control procedures, and escalation processes to

identify, monitor and address specific types of misconduct including front running, insider trading, misuse of sensitive information among others.

This comes in the wake of Sebi passing orders in two instances of front-running pertaining to Axis AMC and Life Insurance Corporation of India (LIC).

In the Axis AMC case, broker-dealers, certain employees and connected entities were found to have front-run the trades of the AMC and in the case of LIC, an employee of a listed insurance company was observed to be front-running the trades of the company. — PTI

Fostering transparency

• Asset Management Companies (AMCs) will now be required to put in place an institutional mechanism for identification and deterrence of potential market abuse by AMCs’ employees, dealers, stock brokers or any other connected entities
• The mechanism should consist of enhanced surveillance systems, internal control procedures, and escalation processes to identify, monitor and address specific types of misconduct, including front-running, insider trading, misuse of sensitive information among others

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