Sebi considers bringing MF transactions into the realm of insider trading

The Securities and Exchange Board of India (Sebi) proposed on Friday that mutual fund (MF) transactions come under the purview of strict insider trading regulations to prevent abuse of confidential information by some of the key personnel in the MF industry.

Currently, MF units are excluded from the definition of “securities” under the Prohibition of Insider Trading (PIT) Regulations, and the buying and selling of MF units is excluded from the definition of “trading”. The market regulator had sought public comment on whether the PIT Regulations need to be amended to cover the MF industry as well.

The proposal comes shortly after accusations of being at the helm of a large fund house. In the discussion paper filed on Friday, Sebi has said that she has observed that an MF Registrar and Transfer Agent (RTA) had redeemed all her units from a scheme while being aware of some sensitive information. Similarly, she noted that some key MF industry personnel redeemed their shares in the schemes while in possession of certain confidential information not disclosed to the schemes’ shareholder(s).

“MF units are specifically excluded from the scope of the PIT Regulations. Therefore, the need has been felt to harmonize the provisions of the Personal Income Tax Regulations to initiate serious enforcement actions against those who misuse non-public confidential information related to MF schemes, directly or indirectly, to which have access, by virtue of their fiduciary capacity. Sebi said in a discussion paper, which is open for public comment until July 29.

Sebi has thought about applying ideas such as connected persons, designated persons, closing period and prior authorization for MF transactions. She has also considered establishing a code of conduct for appointees. This would apply to all persons who are required to handle unpublished confidential pricing information (UPSI) related to an MF scheme or its units in the course of business operations.

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The rules, if enforced, would make trading in MF units on a par with stocks and put the onus on top industry officials. However, it will not be as simple as in the case of shares.

“For example, although a person may hold a UPSI related to a security, they may not be aware of the MF scheme’s existing portfolio or have any control over the fund manager’s decision,” the discussion paper observes.

Sebi has considered extending the concepts used for insider trading to MFs, but has said such comprehensive considerations “to avoid complexities and unintended consequences”.

in the cards

Concepts that could be extended to the MF industry

  • Prior Authorization of Transactions: Transactions conducted by Designated Persons and their immediate family members will be subject to prior authorization by the Compliance Officer.
  • Closing period: Period during which the designated persons will not be able to carry out transactions in MF units
  • Code of conduct: minimum standard to be followed by ‘fiduciaries’
  • Transaction reporting: Required to report exchanges of MF units by designated persons

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