Market regulator, Securities and Exchange Board of India (SEBI) has come out with consultation papers proposing additional surveillance and internal control systems, at asset management companies (AMCs). The move comes after various whistleblower complaints and front running cases in the mutual fund industry. The consultation paper suggests that senior management at AMCs should be responsible for putting surveillance and an internal mechanism in place to reduce fraudulent transactions and any possible misconduct by employees, traders, dealers etc.

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Recently, SEBI took stringent action against chief dealer and fund manager, Viresh Joshi, in the front running case at Axis Mutual Fund. SEBI noted that there are no specific regulatory provisions that cast responsibility on AMCs or their senior management personnel to put in place systems for deterrence, detection or reporting of market abuse or fraudulent transactions.

SEBI has placed activities that fall under the purview of fraudulent transactions. The market watchdog said that front running, insider trading, misselling of products, misuse of information by AMCs, its employees, distributors, broker-dealers etc, all come under fraudulent transactions.

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"Instances of market abuse or fraudulent transactions in securities distort transparency, imperil market integrity and undermine the confidence of investors in the capital market. In view of the above, there is a need for an institutional mechanism for AMCs to ensure that systems are in place for deterrence, detection and reporting of possible misconduct," SEBI said.

Sebi has asked AMCs to customize their surveillance systems and internal control procedures including alert types, parameters and thresholds based on back testing of historical data to ensure their effectiveness.

The market watchdog has also proposed that AMCs shall submit Action Taken Report, on actionable alerts at the level of AMCs, to the Board of Directors of AMCs, Trustees of Mutual Funds and SEBI on a periodic basis.

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Another important point that SEBI has dealt with is the whistleblower policy at AMCs. In the last few years many cases of whistleblowers getting penalised and being terminated from AMCs have come to light. Sebi already has mandated all AMCs who are listed on recognized stock exchanges are proposed to have a vigil whistle blower policy as per SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Now, sebi proposes the policy to be adopted by all AMCs.

“All AMCs irrespective of being listed or not, shall adopt a similar vigil mechanism/ whistle blower policy as applicable to listed AMCs, which specifically addresses market abuse practices. Additionally, the whistle blower policy of AMCs shall also establish procedures to ensure adequate protection of the whistle blowers,” SEBI said.