Capital market regulator SEBI has directed asset management companies to adopt an institutional mechanism for identification and deterrence of market abuse including front-running and fraudulent transactions in securities. The mechanism consists of enhanced surveillance systems, internal control procedures and escalation processes to deter misuse of sensitive information.
The circular comes at a time when the regulator is investigating an alleged front-running case against Quant Mutual Fund after conducting search and seizure operations in Mumbai and Hyderabad.
Front-running occurs when a mutual fund manager or trader executes orders on a security for their own account before executing orders for their clients. This gives the trader an unfair advantage, allowing them to profit from the expected movement in the security’s price, resulting from the larger client orders that follow.
Earlier, SEBI has passed stringent orders against Axis Mutual Fund and Life Insurance Corporation in front running cases.
In order to ensure uniform implementation of institutional mechanism across the industry, AMFI in consultation with SEBI, will prescribe detailed implementation standards in 15 days to be mandatorily followed by AMCs.
The measures taken will identify, monitor and address specific types of misconduct, including front running and insider trading, said SEBI on Monday.
The Chief Executive Officer or Managing Director and Chief Compliance Officer will be responsible and accountable for implementation of the institutional mechanism for deterrence of potential market abuse.
AMCs shall develop and implement systems and procedures to generate and process alerts in a timely manner. AMCs should consider and review all recorded communications including chats, emails, access logs of dealing room and CCTV footage, it said.
Board-approved policy
The AMCs have to put in place a Board-approved policy and procedure for conducting examination and taking action in case of fraudulent transactions in securities by its employees and connected entities.
On getting alert on potential market abuse, AMCs should suspend or terminate the service of employee or brokers indulging in market manipulation and esclate the process to the Board of Directors and Trustees.
AMCs have been directed to put in a whistle blower policy and ensure that the procedures are reviewed and updated at appropriate periodic intervals.
For effective functioning of the institutional mechanism, the stock exchanges and depositories will develop systems, in consultation with AMFI, to enable data sharing with AMCs.