Introduction
On August 5, 2024, the Securities and Exchange Board of India (SEBI) issued a crucial circular addressing market abuse in securities, including front-running and fraudulent transactions. This circular mandates AMCs to establish an institutional mechanism to proactively identify and deter market abuse. The objective is to fortify AMCs’ internal controls against front-running and other fraudulent activities in securities markets.
Key Amendments to SEBI (Mutual Funds) Regulations, 1996
The SEBI (Mutual Funds) Regulations, 1996, have been amended as of August 1, 2024, to incorporate the new requirements for AMCs. These changes are aimed at enhancing surveillance and control within AMCs to better address market abuse.
Institutional Mechanism Requirements
The circular outlines several requirements for AMCs to build an effective mechanism:
Accountability-: The Chief Executive Officer (CEO), Managing Director (MD), or an equivalent senior executive, along with the Chief Compliance Officer, will be responsible for implementing and maintaining the new mechanism.
Alert-Based Surveillance- AMCs must develop systems to generate and process alerts promptly. This includes creating mechanisms to identify suspicious trading activities.
Processing of Alert- AMCs are required to review all relevant communications, including emails and access logs, during the investigation of alerts. They must also monitor entry logs to their premises.
Standard Operating Procedures (SOPs)- Written policies and procedures must be established for handling potential market abuse, with approval from the AMC’s Board of Directors.
Action on Suspicious Alerts- AMCs must take appropriate actions, such as suspension or termination, against individuals or entities involved in market abuse.
Escalation Process- An escalation process must be in place to inform the Board of Directors and Trustees about potential market abuse incidents and the results of the investigations.
Whistleblower Policy- A documented whistleblower policy is required, in compliance with SEBI’s regulations, to facilitate reporting of misconduct.
Periodic Review- AMCs must periodically review and update their procedures and systems to ensure ongoing effectiveness.
Reporting Obligations
AMCs are obligated to report examined alerts and the corresponding actions taken to SEBI. This includes detailed reports in the Compliance Test Report (CTR) and the Half-Yearly Trustee Report (HYTR). The format for these reports will be standardized to ensure consistency.
Conclusion
SEBI's new circular represents a significant step towards enhancing the integrity of the securities market by equipping AMCs with better tools and protocols to prevent market abuse. By enforcing stringent internal controls and promoting transparency, SEBI aims to protect investors and uphold market fairness.
This initiative underscores SEBI’s commitment to maintaining market discipline and safeguarding investor interests, marking a proactive approach to combatting fraudulent activities in the financial sector.
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