Onus of preventing front running, insider trading to fall on AMCs

Sebi proposal wants AMCs to design internal systems to identify misconduct of employees

The Securities and Exchange Board of India (Sebi) plans to ask asset management companies (AMCs) to set up surveillance and internal control systems to detect instances of front running, insider trading, mis-selling of products, misuse of information by key employees and delay in execution of orders of the AMCs by their broker-dealers.

The present proposal, for which Sebi has sought public comments, wants AMCs to design an alert system to identify possible instances of misconduct through lifestyle checks of employees, scanning of recorded communications and CCTV footage, among others.

"If the AMCs detect any alert, suspicion or exceptions relating to possible misconduct, such instances shall be adequately investigated. For the purpose of such investigation AMCs shall examine all information including recorded communication, trading activity, lifestyle, etc," the regulator stated in the consultation paper.

By specifically mentioning tracking of employees' lifestyle, the regulator might be nudging AMCs to take learnings from the recent front-running episode at Axis MF involving its chief dealer Viresh Joshi, who is reported to have led a lavish life before being caught in the scandal.

Further, according to the present proposal, all AMCs irrespective of being listed or not, will be asked to adopt a vigil mechanism or whistleblower policy similar to those applicable to listed AMCs to address market abuse practices. "The whistleblower policy of the AMCs shall also establish procedures to ensure adequate protection of the whistleblowers," the paper states.

The responsibility for proper implementation of the mechanism will rest on top officials including the CEO, managing director and compliance officer.