The markets regulator, in its consultation paper issued last month, 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 or investments of mutual fund schemes.
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.
Also, AMCs should have appropriate escalation and reporting mechanisms for possible market abuse and fraudulent transactions in securities related to the AMCs’ transactions.
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. Under the draft papers, Sebi recommended that AMCs should customise 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 should 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.
