SEBI Calls For Institutional Mechanism To Check Front-Running At Mutual Funds
Front-running is an illegal practice, where an individual trades in stocks or other assets based on insider knowledge of a future transaction that could affect the price.
The Securities and Exchange Board of India has revised mutual fund regulations, now obligating asset management companies to put in place an institutional mechanism to detect and prevent malpractices like front-running and insider trading in securities.
The management of AMCs will be responsible for ensuring this institutional mechanism is effective. The market regulator has also mandated that AMCs set up a whistle-blower system.
The review and updation of regulations comes in the wake of SEBI passing two orders in frontrunning cases, involving Axis AMC and Life Insurance Corp.
Front-running is an illegal practice, where an individual trades in stocks or other assets based on insider knowledge of a future transaction that could affect the price. For example, a fund manager, who has identified a stock to add to a mutual fund scheme, purchases it a day before the order is placed by the mutual fund.
According to the notification, the Chief Executive Officer, Managing Director, or another individual of equivalent rank, along with the Chief Compliance Officer of the asset management company, will be responsible for implementing and overseeing the 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.
To give these effect, SEBI has amended mutual fund rules, which will come into force from Nov. 1.
(With Inputs From PTI)
