Capital markets regulator Sebi on Saturday proposed that asset management companies (AMCs) set up surveillance and internal control systems for the deterrence of possible market abuse and fraudulent transactions.
It further suggested that senior management of AMCs should be responsible to ensure that an institutional mechanism is put in place to detect and report possible misconduct by its employees, dealers, stock brokers or any other connected entities.
Further, AMCs should have appropriate escalation and reporting mechanism for possible market abuse and fraudulent transactions in securities related to the AMCs’ transactions, Sebi said in its consultation paper.
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.
The Securities and Exchange Board of India (Sebi) has sought comments from the public by June 3 on the proposals.
In its draft paper, Sebi proposed that AMCs should put in place robust surveillance systems and internal control procedures, to deter possible misconduct by employees or other entities which may have information relating to fund management and/or investments of mutual fund schemes.
AMCs should customize their surveillance systems and internal control procedures including alert types, parameters and thresholds based on back testing of historical data to ensure their effectiveness.
In order to determine the likelihood of misconduct, AMCs shall process system-driven alerts in conjunction with soft alerts such as lifestyle checks, recording of communication such as recorded emails, chats and CCTV footage etc.
With regard to taking action in case of possible misconduct, Sebi suggested that AMCs should have a documented policy on types of actions to be taken based on likelihood of wrongdoing and other relevant factors.
Further, the terms of employment/ contract should also clearly specify the actions that may be taken by the AMCs in the case of possible misconduct by the employees of AMCs and connected entities.
Sebi suggested that AMCs should submit Action Taken Report, on actionable alerts at the level of AMCs, to the board of directors of AMCs, trustees of mutual funds and to the market regulator on a periodic basis.
“Escalation processes shall be documented in the SOP (Standard Operation Procedure) and appropriately implemented so as to keep board of directors of AMCs and trustees of mutual funds apprised of status of compliance with the proposed framework,” Sebi said.
In order to keep the costs low, AMCs should be permitted to share resources, systems and infrastructure. Further, mechanisms for sharing of such infrastructure may be suggested by industry body AMFI, in consultation with Sebi.
