AMCs Under Scanner: SEBI’s New Rules for Market Abuse

Asset management companies (AMCs) are now required to establish robust institutional mechanisms to detect and prevent potential market abuse, including front-running and fraudulent securities transactions.

In a circular issued on Monday, the Securities and Exchange Board of India (SEBI) mandated that AMCs set up comprehensive surveillance systems, internal controls, and escalation procedures to identify, monitor, and address misconduct. The circular also instructs the Association of Mutual Funds in India (AMFI) to ensure consistent implementation of these mechanisms across the industry, with AMFI required to issue detailed implementation standards within 15 days.

The circular states, “The detailed implementation standards issued by AMFI shall mandatorily be followed by all AMCs.”

This directive follows SEBI’s recent search and seizure operations in a suspected front-running case involving Quant Mutual Fund. The fund house has asserted its cooperation with the regulator and its commitment to delivering superior risk-adjusted returns.

Key takeaways from the circular include:

1. Accountability: The CEO/MD and Chief Compliance Officer of each AMC will be held responsible for implementing the mechanisms to deter market abuse.
2. Alert-based Surveillance: AMCs must develop and use systems to generate and handle alerts promptly.
3. Processing Alerts: AMCs need to review all communications, including chats, emails, access logs, and CCTV footage (where available), and maintain entry logs to their premises.
4. Standard Operating Procedures: AMCs must establish written policies and procedures to investigate and address potential market abuse by employees and connected entities, with board approval required.
5. Action on Suspicious Alerts: AMCs must take appropriate action against employees or brokers/dealers suspected of market abuse, including possible suspension or termination.
6. Escalation Process: AMCs must have a process to inform their board of directors and trustees about potential market abuse and the outcomes of investigations.
7. Whistleblower Policy: AMCs must implement a documented whistleblower policy.
8. Periodic Review: Procedures and systems must be reviewed and updated regularly.
9. Data Sharing: Stock exchanges and depositories should work with AMFI to develop systems that facilitate data sharing with AMCs.
10. Reporting to SEBI: AMCs are required to report all examined alerts and the actions taken to SEBI in their Compliance Test Report (CTR) and Half-yearly Trustee Report (HYTR).

These measures are designed to strengthen oversight and enhance the integrity of market operations.

Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. It is based on several secondary sources on the internet and is subject to changes. Please consult an expert before making related decisions.