Fraud detection framework: Quant MF affair triggers rush to apply new rules
Mumbai, July 16, 2024
Large AMCs to expedite setting up of institutional mechanism
The possible instances of front running at Quant Mutual Fund have likely pushed the Securities and Exchange Board of India (Sebi) to expedite the implementation of an institutional mechanism framework designed to curb such market abuses.
This framework, approved by the Sebi board in April, was slated to take effect six months after its notification. But, recent developments have set the wheels of regulation turning faster.
At the board meeting in June, the regulator proposed a new “glide path”, wherein large asset management companies (AMCs) would be nudged towards rapid implementation of the new framework. This development was revealed through the recently released agenda papers from the board meeting.
“Certain large AMCs are open to implementing the institutional mechanism before the approved timeline of six months,” Sebi noted in the papers. The regulator is currently “examining allegations regarding front-running of trades of an AMC, which merits consideration for expediting the implementation of the institutional mechanism at the end of AMCs.”
Sebi’s board meeting was held on June 27, nearly a week after the regulator’s search and seizure operation at Quant Mutual Fund’s premises over front-running allegations. Last week, the fund house confirmed that the Sebi inquiry was “a court-approved search and seizure operation”, underscoring the seriousness of the allegations.
According to people in the know, the emergence of front-running allegations at Quant Mutual Fund, a notable player in the industry, prompted Sebi to brief its board on the necessity of speeding up the framework’s implementation. The response from most large fund houses was reportedly supportive, the sources said.
The regulator has increased vigil on the mutual fund industry amid burgeoning growth, with assets under management (AUM) doubling since early 2021 and the investor count more than doubling from less than 21 million in March 2020 to over 46 million.
The new mechanism, which is yet to be notified, aims to establish uniform surveillance and internal control procedures within AMCs to identify misconduct and the misuse of sensitive information such as front-running. It also places greater accountability on AMC management.
This mechanism will draw on the standard operating procedure (SOP) formulated by industry body, the Association of Mutual Funds in India (Amfi). However, it’s unclear if Amfi has sent the SOP to Sebi yet. In early May, Amfi stated that the SOP would be ready within a month, but queries to Amfi remain unanswered until press time.
Currently, surveillance practices vary across fund houses, with a common measure being the recording of all fund manager and dealer communications during market hours, as mandated by Sebi. The regulator plans to relax this norm once AMCs adopt the new framework.
Earlier this month, Sebi issued a circular mandating stock brokers to establish an institutional mechanism for fraud prevention and detection or market abuse. This includes measures such as the implementation of trading activity surveillance systems and internal controls, and the introduction of whistle-blower policies, among other obligations.
Curbing market abuse
> Currently, MF regulations don’t call for a structured institutional mechanism
> Market abuse is often blamed on “rogue employees”, and not on AMCs
> The new mechanism mandates AMCs to put in a system to identify and deter market abuse, including front-running
> It will include enhanced surveillance, internal controls, and escalation processes
> It also mandates a whistle-blower policy and vigil mechanism
> Global frameworks use a mix of principles and regulations
> The EU and Singapore have implemented such structured frameworks
[The Business Standard]
