Front-running, insider trading: Amfi rulebook to curb misconduct in a month

Move follows Sebi nod for institutional mechanism to curb front-running and insider trading

The Association of Mutual Funds in India (Amfi) will formulate a standard operating procedure (SOP) for asset management companies (AMCs) to prevent misconduct like front-running and insider trading.

The SOP, which will be ready within a month, is being developed after the market regulator approved an enhanced institutional mechanism in its previous board meeting to prevent potential market abuse.

“We are discussing these measures with a committee. We will publish it within a month and communicate it to the AMCs. After deliberations with the committee, a standard operating procedure (SOP) will be formulated and will then communicate it after getting vetted by Sebi,” said Venkat Nageswar Chalasani, Chief Executive, Amfi.

The Securities and Exchange Board of India (Sebi) approved the decision to introduce such a mechanism in its April 30 board meeting. The regulator will specify the broad framework while Amfi will formulate the standards.

Sebi has directed AMCs to set up more surveillance and internal control procedures to identify instances of misconduct and misuse of sensitive information. Under the framework, the regulator will also put more onus and accountability on the management of AMCs in such instances.

AMCs will also be required to have a whistle-blower mechanism to bring transparency.

Following several cases where employees of mutual funds were accused of front-running trades for personal gains, the market regulator imposed stricter norms for MF staff and fund managers.

At present, AMC employees are required to record face-to-face communication during market hours, including out-of-office interactions. Sebi may grant exemption to AMC employees after the institutional mechanism comes into force.

In an earlier attempt, the market regulator had brought mutual fund units under its prohibition of insider trading regulations. This was a step to curb any dealings by employees and key staff of MFs while they have unpublished price-sensitive information (UPSI).

In certain cases, some key personnel were found to have redeemed their holdings in the scheme before the information was shared with the other unit holders.