NEW REGULATIONS FOR MUTUAL FUNDS

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Context

• The Securities and Exchange Board of India (SEBI) has introduced new regulations for mutual funds, requiring Asset Management Companies (AMCs) to establish an institutional mechanism to prevent violations like fraudulent transactions and front-running.

READ ALL ABOUT ASSET MANAGEMENT COMPANIES: https://www.iasgyan.in/daily-current-affairs/asset-management-companies

READ ALL ABOUT MUTUAL FUNDS: https://www.iasgyan.in/daily-current-affairs/mutual-fund

Details

Systems and Procedures

• AMCs are now required to implement systems and procedures that generate alerts and establish policies for action in cases of market abuse.
• Possible actions include suspension or termination of employees, brokers, or dealers involved in potential market abuse.
• Additionally, AMCs must review all recorded communications, such as chats, emails, access logs, CCTV footage, and entry logs to the premises.

Objectives of the Regulations

• These regulations aim to identify and prevent front-running and fraudulent transactions in securities managed by AMCs.
• The responsibility for implementing these measures lies with the CEO, managing director, or equivalent officials, as well as the Chief Compliance Officer of the AMC.

Implementation Timeline

• SEBI has set a three-month deadline for larger AMCs to implement the new mechanism, while smaller fund houses have a six-month timeframe.
• Specifically, AMCs with assets under management (AUM) below ₹10,000 crore must comply within six months.

Accountability and Responsibilities

• The chief executive officer, managing director, or equivalent rank, along with the chief compliance officer, will be accountable for implementing the institutional mechanism to deter market abuse, including front-running and fraudulent transactions.

Whistle-Blower Channel

• SEBI has also instructed fund houses to provide a confidential whistle-blower channel for employees, directors, trustees, and others to report suspected fraudulent or unethical practices.

Relaxation of Communication Recording

• Furthermore, SEBI will relax the mandate requiring mutual funds to record face-to-face communication, including out-of-office interactions, effective one year from now.
• Currently, fund houses record all fund manager and dealer communications during market hours.

Standard Operating Framework

• The Association of Mutual Funds in India (AMFI) is developing a standard operating framework for this mechanism. Presently, mutual funds follow varying internal surveillance practices.

Surveillance Systems

• Fund houses must implement a system where alerts for suspicious activity are automatically generated, and they must maintain a record of these alerts, observations, and actions taken.
• This report will be included in the mandatory half-yearly reports submitted to SEBI.

READ ALL ABOUT ASSET MANAGEMENT COMPANIES: https://www.iasgyan.in/daily-current-affairs/asset-management-companies

READ ALL ABOUT MUTUAL FUNDS: https://www.iasgyan.in/daily-current-affairs/mutual-fund 

PRACTICE QUESTION Q. Discuss the role of Asset Management Companies (AMCs) in the financial market. How do recent SEBI regulations aim to enhance transparency and prevent market abuse in the functioning of AMCs? Critically analyze the potential impact of these regulations on the mutual fund industry.

SOURCE: THE HINDU