The Securities and Exchange Board of India (SEBI) has put forth proposals for asset management companies (AMCs) to establish institutional mechanisms aimed at preventing market abuse and fraudulent transactions. According to SEBI, senior management within AMCs should bear the responsibility of detecting and reporting any misconduct by employees, dealers, stock brokers, or related entities. The market regulator emphasizes the necessity for AMCs to have a robust reporting system in place to address potential instances of market abuse and fraud. This move by SEBI follows recent cases of front-running involving Axis AMC and Life Insurance Corporation of India (LIC).
SEBI has sought public feedback on these proposals, with a deadline of June 3. As per the draft paper, SEBI recommends that AMCs implement effective surveillance systems and internal controls to prevent misconduct by individuals with access to fund management and investment-related information. Customizing surveillance systems and control procedures based on historical data is encouraged to ensure effectiveness. Additionally, apart from automated alerts, AMCs should consider softer indicators like lifestyle checks and monitoring communication channels (e.g., emails, chats, and CCTV footage) to identify potential misconduct.
Regarding addressing misconduct, SEBI suggests that AMCs document a policy specifying appropriate actions based on the likelihood of wrongdoing and other relevant factors. Employment terms or contracts should also explicitly outline the actions that can be taken by AMCs in response to misconduct by employees and related entities.
SEBI further advises documenting escalation processes in the Standard Operating Procedure (SOP) and implementing them effectively to keep the board of directors and mutual fund trustees informed about compliance with the proposed framework. Regular submission of an Action Taken Report on actionable alerts to the relevant parties is also recommended.
To reduce costs, SEBI proposes allowing AMCs to share resources, systems, and infrastructure, with the industry body AMFI working alongside SEBI to propose mechanisms for such sharing of infrastructure.