SEBI adds new teeth to its Mutual Fund regulations

Larger AMCs have three-month deadline to implement changes

MUMBAI: The Securities and Exchange Board of India (Sebi) has announced new regulations for mutual funds, requiring asset management companies (AMCs) to establish an institutional mechanism to prevent violations like fraudulent transactions and front-running.

According to Sebi, larger AMCs have a three-month deadline to implement these changes, while smaller fund houses, with assets under management (AUM) under Rs10,000 crore, are given six months.

“The chief executive officer or managing director or a person of equivalent rank, along with the chief compliance officer of the AMC, will be responsible and accountable for implementing this institutional mechanism to deter potential market abuse, including front-running and fraudulent transactions in securities,” Sebi stated, amending the MF regulations on August 2.

Action against market abuse

AMCs must now set up systems and procedures to generate alerts and create policies for action against market abuse. Potential measures include the suspension or termination of employees, brokers, or dealers involved in such activities. Additionally, AMCs are required to review all recorded communications, including chats, emails, dealing room access logs, CCTV footage, and entry logs to the firm’s premises.

Sebi has also mandated the establishment of a confidential whistle-blower policy for employees, directors, trustees, and others to report suspected fraudulent or unethical practices.

Moreover, Sebi will relax the requirement for mutual funds to record face-to-face communication, including out-of-office interactions, starting one year from now. Currently, all communications between fund managers and dealers during market hours are recorded.

Varied internal surveillance practices

The Association of Mutual Funds in India (Amfi) is working on a standard operating framework for this mechanism. Meanwhile, mutual funds currently follow varied internal surveillance practices.

“We have already strengthened our internal surveillance systems and are following stringent measures to prevent any potential abuse,” said the head of a leading fund house.

The mechanism was first approved by Sebi in its board meeting in April, following instances of front-running in mutual funds by dealers and brokers.

Last month, Sebi also mandated stock brokers to establish an institutional mechanism for fraud prevention and market abuse detection, including measures like trading activity surveillance systems, internal controls, and whistle-blower policies.