SEBI strengthens mutual fund regulations to combat insider trading and front-running
By MYBRANDBOOK
In order to combat front-running and insider trading, capital market regulator Securities and Exchange Board of India (SEBI) has modified the rules governing mutual funds, necessitating that asset management firms set up a whistle-blower system. The new regulations require AMCs to set up processes to recognise and stop market abuse starting on November 1.
Also, the AMC management will ensure the effectiveness of the institutional mechanism.
The development took place after Sebi passed two orders regarding front-running cases involving Axis AMC and Life Insurance Corporation of India (LIC).
In a gazette notification dated August 1, Sebi said, "Asset management companies shall put in place an institutional mechanism, as may be specified by the Board, for the identification and deterrence of potential market abuse including front-running and fraudulent transactions in securities".
The term front-running means an illegal practice where an entity trades based on advanced information from a stock broker or analyst before the information has been made available to clients.
The notification also said that the Chief Executive Officer (CEO) or Managing Director (MD) or such other person of equivalent or analogous rank and Chief Compliance Officer of the asset management company will be responsible and accountable for the implementation of such an institutional mechanism.
"The asset management company shall establish, implement and maintain a documented whistle-blower policy that shall provide for a confidential channel for employees, directors, trustees, and other stakeholders to raise concerns about suspected fraudulent, unfair or unethical practices, violations of regulatory or legal requirements or governance vulnerability, and establish procedures to ensure adequate protection of the whistleblowers," Sebi said.
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