Securities and Exchange Board of India (SEBI) has amended the mutual fund norms, under which asset management companies (AMCs) will have to establish an institutional mechanism to identify and prevent ‘front-running’ and insider trading in securities. In addition, the management of the AMC will be responsible for ensuring the efficiency of the institutional mechanism. The regulator has also directed the AMC to create a ‘whistle-blower’ mechanism. SEBI’s decision comes after passing two orders regarding ‘front-running’ cases involving Axis AMC and Life Insurance Corporation of India (LIC). SEBI said in an August gazette notification, “Asset management companies will establish institutional mechanisms specified by the board to identify and prevent potential market abuse, including ‘front-running’ and insider trading in securities.
What is ‘front-running’?
‘Front-running’ is the trading of a stock or any other financial asset by a broker who has insider information about a future transaction that is likely to significantly affect the price of that transaction. According to the notification, the Chief Executive Officer (CEO) or Managing Director or any other person of equivalent rank and the Chief Compliance Officer of the asset management company will be responsible and accountable for the implementation of such institutional mechanism.
The changes will come into effect from November 1
SEBI said, “The asset management company shall establish and implement a ‘whistle-blower’ policy, which shall be a confidential mechanism for employees, directors, trustees and other stakeholders to raise concerns about suspected fraud, improper or unethical behaviour, violation of regulatory or legal requirement or conduct of business. Steps shall also be taken to ensure adequate protection of the whistle-blower. ” For all these changes, the Securities and Exchange Board of India has amended the mutual fund rules. These changes will come into effect from November 1.
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