SEBI moots mechanism for AMCs to deter possible market abuse, fraud

Capital markets regulator SEBI on Saturday proposed that asset management companies (AMCs) set up surveillance and internal control systems for the deterrence of possible market abuse and fraudulent transactions.

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.

Further, AMCs should have appropriate escalation and reporting mechanism for possible market abuse and fraudulent transactions in securities related to the AMCs' transactions, SEBI said in its consultation paper.

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.

The Securities and Exchange Board of India (SEBI) has sought comments from the public by June 3.

In its draft paper, the regulator proposed that AMCs should put in place robust surveillance systems and internal controls to deter possible misconduct by employees or other entities that may have information relating to fund management and/or investments of mutual fund schemes.

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.

System-driven alerts

In order to determine the likelihood of misconduct, AMCs shall process system-driven alerts in conjunction with soft alerts such as lifestyle checks, recording of communication such as recorded e-mails, 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.