SEBI proposes institutional mechanisms for AMCs to prevent market abuse, frauds

SEBI has proposed that asset management companies (AMCs) should establish measures to prevent market abuse and fraudulent transactions. The market regulator also suggested that senior management of AMCs should be responsible for detecting and reporting any misconduct by employees, dealers, stock brokers, or related entities.

SEBI emphasized the need for AMCs to have a reporting system in place to address potential market abuse and fraudulent transactions. This recommendation follows SEBI's recent orders regarding front-running cases involving Axis AMC and Life Insurance Corporation of India (LIC).

SEBI has requested public feedback on these proposals until June 3. According to the draft paper, SEBI proposed that AMCs should implement effective surveillance systems and internal controls to prevent misconduct by employees and entities with access to information about fund management and investments.

AMCs are encouraged to customize their surveillance systems and control procedures based on historical data to ensure their effectiveness. In addition to automated alerts, AMCs should consider softer indicators, such as lifestyle checks and monitoring communication channels like emails, chats, and CCTV footage, to identify potential misconduct.

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When it comes to addressing misconduct, SEBI suggested that AMCs should have a documented policy outlining the appropriate actions to be taken based on the likelihood of wrongdoing and other relevant factors. The terms of employment or contracts should also clearly specify the actions that AMCs can take in response to misconduct by employees and related entities.

SEBI advised that escalation processes should be documented in the Standard Operating Procedure (SOP) and effectively implemented to keep the board of directors of AMCs and mutual fund trustees informed about compliance with the proposed framework.

SEBI further recommends that AMCs regularly submit an Action Taken Report on actionable alerts to the board of directors of AMCs, mutual fund trustees, and the market regulator.

"Escalation processes shall be documented in the SOP (Standard Operation Procedure) and appropriately implemented so as to keep the board of directors of AMCs and trustees of mutual funds apprised of the status of compliance with the proposed framework," SEBI said.

To reduce costs, SEBI suggests that AMCs should be allowed to share resources, systems, and infrastructure. The industry body AMFI, in consultation with SEBI, may propose mechanisms for such infrastructure sharing.