In a significant move to enhance transparency and prevent market abuse, the Association of Mutual Funds in India (AMFI) has introduced new standards for institutional mechanisms aimed at detecting and deterring market manipulation, including front-running and fraudulent transactions within asset management companies (AMCs). This initiative comes in response to recent regulations by the Securities and Exchange Board of India (SEBI), which will bring mutual funds under the purview of the SEBI (Prohibition of Insider Trading) Regulations, 2015, starting November 1.
Roadmap for Implementation
The institutional mechanism will be rolled out in phases, beginning with equity mutual funds. Here’s how the timeline breaks down:
- November 2, 2024: All equity securities trades (excluding international equities) in mutual fund schemes with assets exceeding Rs 10,000 crore will be subject to the new standards.
- February 2, 2025: The standards will extend to equity schemes with assets under Rs 10,000 crore.
- May 2, 2025: Trades involving passive schemes, arbitrage schemes, and overseas securities will need to comply with the new regulations across all schemes, regardless of AUM.
- August 2, 2025: The final phase will cover debt securities and other types of investments such as commodities, real estate investment trusts (REITs), and infrastructure investment trusts (InvITs).
Key Measures and Requirements
Institutional Oversight:
- Compliance Officers: CEOs, managing directors, or individuals in equivalent positions, along with chief compliance officers, must establish mechanisms to adhere to the new standards.
- Alert Systems: AMCs are required to develop systems for generating, processing, and reviewing alerts related to potential market abuse. Alerts must be generated weekly and reported to the board of directors and trustees.
Brokerage Actions:
- Suspicious Activities: If alerts indicate market abuse by brokers, AMCs must take appropriate action, including possible termination of broker agreements. Reports on these actions must be submitted to trustees and SEBI quarterly.
- Broker Agreements: AMCs must include clauses in broker agreements that allow for actions against brokers suspected of market abuse.
Employee Transactions:
- Personal Transaction Reviews: AMCs must review the personal transactions of specified employees (e.g., chief investment officers, fund managers) and their immediate relatives if linked to suspicious activities.
- Mandatory Leave: Fund managers and dealers are required to take mandatory leave of at least 10 business days within a financial or calendar year, with at least five consecutive days off.
Resource Sharing:
- Cost Efficiency: Mutual fund houses are encouraged to share knowledge on surveillance systems, internal controls, and escalation processes to minimize costs and enhance overall compliance.
Broader Impact
These measures aim to prevent scenarios where market insiders exploit confidential information to their advantage, such as withdrawing personal units from mutual fund schemes before negative market events affect the funds. By extending insider trading norms to a broader range of individuals and enforcing stricter compliance measures, SEBI and AMFI seek to safeguard investor interests and promote fairness in the mutual fund industry.
The implementation of these new SOPs by AMFI represents a robust step towards curbing market abuse and ensuring greater integrity within the mutual fund sector. By adhering to these standards, AMCs will contribute to a more transparent and equitable investment environment, benefiting both investors and the financial markets at large.