SEBI proposes surveillance system by MFs to check frauds

Further, AMCs should have appropriate escalation and reporting mechanism for possible market abuse and fraudulent transactions in securities related to the AMCs’ transactions, SEBI said. In the Axis AMC front running case, broker- dealers, certain employees and connected entities were found to have front-run the trades of the AMC and in the case of a leading insurance company, an employee of a listed insurance company was observed to be front-running the trades of the company. SEBI proposed that AMCs should put in place robust surveillance systems and internal control procedures, to deter possible misconduct by employees or other entities which may have information relating to fund management and/or investments of mutual fund schemes.

AMCs should customise their surveillance systems and internal control procedures including alert types, parameters and thresholds based on back testing of historical data to ensure their effectiveness.

AMCs should process system-driven alerts in conjunction with soft alerts such as lifestyle checks, recording of communication such as recorded emails, chats and CCTV footage in order to determine the likelihood of misconduct. With regard to taking action in case of possible misconduct, Sebi suggested that AMCs should have a documented policy on types of actions to be taken based on likelihood of wrongdoing and other relevant factors.

Further, the terms of employment/ contract should also clearly specify the actions that may be taken by the AMCs in the case of possible misconduct by the employees of AMCs and connected entities.