Sebi Proposes Insider Trading Rules Applicability In Mutual Fund Dealings

Capital markets regulator Sebi on Friday proposed the applicability of insider trading rules to dealing in mutual fund units to initiate serious enforcement actions against those who misuse the sensitive non-public information pertaining to such investment products.

At present, insider trading rules are applicable to dealing in securities of listed companies or proposed to be listed, when in possession of unpublished price-sensitive information 'UPSI' . The units of mutual funds (MF) are specifically excluded from the definition of securities under the rules.

The proposal comes after Sebi observed that a Registrar and Transfer Agent of a mutual fund had redeemed all its units from a scheme, being privy to certain sensitive information pertaining to the scheme of a mutual fund, which was not yet communicated to the unit holders of a particular scheme.

Similarly, in another instance, a few key personnel of a mutual fund were found to have redeemed their holdings in the schemes, while in possession of certain sensitive information not communicated to the unit holders of the schemes.

In its consultation paper, the regulator has proposed to amend the definition of securities, trading and insider trading, and recommended that the applicability of insider trading rules should be inserted with respect to dealing in the units of a mutual fund.

The amended definition of "trading" includes subscribing, redeeming, switching, buying, selling, dealing, or agreeing to subscribe, redeem, switch, buy, sell, or deal, in any securities.

It has been proposed to make asset management companies (AMC) disclose the details of holdings in the units of the mutual fund schemes held by the designated persons of AMC /Trustees and their immediate relatives on an independent platform and on the date as specified by Sebi and to require disclosures on a quarterly basis thereafter.

Sebi has proposed to make it mandatory to report all the tradings of mutual fund units executed by the Designated Persons of AMC /Trustees, their immediate relatives and by any other person for whom such person takes trading decisions to the Compliance Officer of AMC within seven days from the date of transaction and to specify that all such transactions above the value of Rs 10 lakh are to be disclosed by the AMC on an independent platform as decided by the regulator within 48 hours of receipt of the same.

Further, the compliance officer of the AMC should determine the closure period during which a designated person cannot transact in units of the mutual fund.

Also, the regulator has suggested prescribing a minimum standard of code of conduct for designated persons in line with provisions of existing insider trading rules.

The Securities and Exchange Board of India (Sebi) has sought comments from the public till July 29 on the proposals.

The regulator felt the need to harmonise the provisions in PIT (Prohibition of Insider Trading) norms to initiate serious enforcement actions against those who misuse the sensitive non-public information pertaining to the scheme of mutual funds, directly or indirectly, which they have access, by virtue of their fiduciary capacity.

At the same time, it is also felt that the regulatory approach should not be onerous.