The logo of the Securities and Exchange Board of India (SEBI), at its headquarters in Mumbai. file | Photo Credit: Reuters
Capital markets regulator Sebi on Saturday proposed that asset management companies (AMCs) put in place monitoring and internal control systems to prevent potential market abuse and fraudulent transactions.
It further suggested that the senior management of the AMC should be responsible for ensuring that an institutional mechanism is put in place to detect and report potential misconduct by its employees, dealers, stock brokers or any other related entities.
Further, AMCs should have appropriate escalation and reporting mechanisms for potential market abuse and fraudulent transactions in securities relating to transactions of AMCs, Sebi said in its consultation paper.
This comes in the wake of Sebi’s order in two front-running cases relating to Axis AMC and Life Insurance Corporation of India (LIC).
In the Axis AMC case, broker-dealers, certain employees and affiliated entities were found to be front-running the trades of the AMC and in the case of LIC, an employee of a listed insurance company was found to be front-running the trades. Company’s
The Securities and Exchange Board of India (SEBI) has sought comments from the public on the proposals till June 3.
In its draft paper, SEBI proposed that AMCs should put in place robust monitoring systems and internal control procedures to prevent potential misconduct by employees or other entities having access to fund management and/or investment-related information of mutual fund schemes. Might be possible.
AMCs should adapt their monitoring systems and internal control procedures including alert types, parameters and thresholds based on back testing of historical data to ensure their effectiveness.
To determine the likelihood of malpractice, AMC will process system-driven alerts along with lifestyle checks, recording of communications such as recorded emails, chats and soft alerts such as CCTV footage etc.
With regard to taking action in case of potential misconduct, SEBI suggested that AMCs should have a documented policy on the types of action to be taken depending on the likelihood of wrongdoing and other relevant factors.
Further, the terms of employment/contract should also clearly specify the actions that can be taken by the AMC in case of possible misconduct by the employees of the AMC and related entities.
SEBI suggested that AMCs should submit actionable reports at the level of AMCs to the Board of Directors of AMCs, trustees of mutual funds and the market regulator from time to time on actionable alerts.
“The escalation procedures will be documented in the SOP (standard operating procedure) and implemented appropriately so that the board of directors of the AMC and the trustees of the mutual fund are apprised of the status of compliance with the proposed framework,” SEBI said.
AMCs should be allowed to share resources, systems and infrastructure to keep costs down. Further, the mechanism for sharing such infrastructure may be suggested by industry body AMFI in consultation with SEBI.