The Securities and Exchange Board of India (SEBI) issued strict guidelines for asset management companies (AMCs) on Monday (5 August, 2024), aimed at reducing market misconduct and ensuring greater accountability.

According to SEBI, AMCs must now establish strong surveillance systems, internal control procedures, and escalation processes to detect and address misconduct, such as front-running and fraudulent transactions in securities.

Furthermore, the Association of Mutual Funds in India (AMFI) has been tasked to ensure that these measures are uniformly implemented across the industry. AMFI has 15 days from the circular’s release to develop and prescribe detailed implementation standards. This move highlights SEBI’s commitment to protecting investors and maintaining a fair and transparent market.

“In order to ensure uniform implementation of the abovementioned institutional mechanism across the industry, AMFI in consultation with SEBI, shall prescribe the detailed implementation standards within fifteen days from the date of this circular. The detailed implementation standards issued by AMFI shall mandatorily be followed by all AMCs,” said SEBI.

This system will include advanced surveillance systems, internal control procedures, and escalation processes to effectively identify, monitor, and address various types of misconduct, such as front-running, insider trading, and misuse of sensitive information. The system is designed to ensure the following:

Accountability

The CEO/MD and Chief Compliance Officer of each AMC will now be responsible for implementing mechanisms to prevent market abuses, including front-running and fraudulent transactions.

Alert-Based Surveillance Mechanism

AMCs are required to develop systems that can generate and process alerts quickly to detect any suspicious activities.

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Alert Processing

AMCs must review all communications, such as chats and emails, and access logs from the dealing room and, if available, CCTV footage. Entry logs to the AMC premises must also be maintained and monitored.

Standard Operating Procedures

Written policies and procedures must be formulated and approved by the AMCs’ board of directors to investigate and address potential market abuses by employees and connected entities.

Action on Suspicious Alerts

AMCs must take appropriate action, such as suspension or termination, against employees or brokers/dealers found involved in potential market abuses.

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Escalation Process

AMCs need to have a process to promptly inform their board of directors and trustees about any potential market abuses and the outcomes of their investigations.

Whistleblower Policy

AMCs should have a documented policy to protect whistleblowers who report any misconduct.

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Periodic Review

The procedures and systems implemented must be reviewed and updated regularly to ensure their effectiveness.

Data Sharing

Stock exchanges and depositories, in consultation with the Association of Mutual Funds in India (AMFI), must develop systems for data sharing with AMCs.

Reporting to SEBI

AMCs are required to report all investigated alerts and the actions taken to SEBI through the Compliance Test Report (CTR) and the Half-Yearly Trustee Report (HYTR).

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FAQs

1. What are SEBI’s new regulations for AMCs?

SEBI has mandated stricter surveillance, real-time reporting of trades, and enhanced audits for Asset Management Companies (AMCs) to curb unethical practices like front-running and insider trading.

2. Why is SEBI focusing on AMCs now?

Recent cases of unfair trade practices in mutual funds prompted SEBI to tighten oversight, ensuring investor trust and market integrity.

3. How does front-running impact mutual fund investors?

Front-running inflates costs for investors by allowing insiders to profit from advance knowledge of large trades, skewing market prices.

4. What penalties will AMCs face for non-compliance?

AMCs may face hefty fines, suspension of operations, or legal action against involved employees for violating SEBI’s guidelines.

5. Are individual fund managers under scrutiny?

Yes, SEBI now requires AMCs to monitor fund managers’ personal trades and disclose potential conflicts of interest.

6. How will this improve transparency in mutual funds?

Mandatory real-time trade disclosures and third-party audits will reduce information asymmetry and unethical practices.

7. Will compliance costs increase for AMCs?

Yes, but SEBI argues this is essential to safeguard investors. AMCs may pass some costs to investors via marginally higher fees.

8. Can investors report suspicious activities?

Yes, SEBI’s SCORES portal allows investors to report front-running or insider trading concerns anonymously.

9. Does this affect existing mutual fund schemes?

All existing and new schemes under SEBI-registered AMCs must comply with the tightened rules effective immediately.

10. What steps should AMCs take to comply?

AMCs must upgrade surveillance systems, conduct employee training, and appoint independent auditors to review trade practices.