Sebi proposes to include mutual fund shares in insider trading

The market regulator plans to subject mutual fund share trading to insider trading regulations after the 2020 Franklin Templeton episode highlighted the need for greater scrutiny.

“There are plans to include a separate chapter in the Insider Trading Prohibition (ITP) regulations specifically to cover trading in mutual fund shares,” a Securities and Exchange Fund working paper said. Exchange Board of India (Sebi). Currently, these units are specifically excluded from the PIT rules.

“A few key staff members of a mutual fund were found to have redeemed their holdings in the schemes while in possession of certain sensitive information not disclosed to unitholders,” Sebi said in the document. of discussing.

Franklin Templeton senior executives, including Vivek Kudva, head of Asia-Pacific distribution, and related entities redeemed mutual fund units worth 56 crores in March and April 2020 before the asset manager closed six debt repayment programs on April 23. The regulator viewed these actions as a breach of fiduciary duty, banning these people from the securities market and imposing a penalty in June last year. Officials challenged the order in the Securities Appellate Tribunal (SAT).

“The need has therefore arisen to harmonize the provisions of the PIT regulations in order to take serious repressive actions against those who misuse, directly or indirectly, sensitive non-public information relating to mutual fund schemes. to which they have access, by virtue of their fiduciary capacity,” the regulator added.

According to a person familiar with the matter, Sebi thought about the proposal for more than a year but wanted to strike the right balance between punishing misconduct and making the regulations too onerous. However, a market expert said the working paper took a tough stance on defining price-sensitive information and connected people.

“The current proposals are worded very broadly, which will make it onerous to trade or hold mutual fund units. Many trustees don’t trade shares to avoid insider trading charges; rather, they own shares of mutual funds. Such a broad proposal will make investing in mutual funds a problem for trustees,” said Sandeep Parekh, Managing Partner, FinSec Law Advisors.

Insiders would include people with supposedly unpublished price-sensitive information and related people.

The discussion paper defines a range of events as price sensitive, including changes in investment objectives, accounting policy, plan liquidity position and asset valuation, in addition to plan wind-ups, restrictions on redemptions , the creation of a separate portfolio and defaults of underlying securities. .

The definition of related persons is also broad, covering auditors, rating agencies, legal advisers or consultants of mutual fund and asset management companies (AMCs).

“Any person who is or has been, during the two months preceding the relevant act, associated with the common fund, the AMC and the trustees, directly or indirectly, in any capacity whatsoever, including by reason frequent communications with its officers or by being in a contractual, fiduciary or employment relationship or by being a director, officer or employee of the CMA and fiduciary or holding a position involving a professional or business relationship between himself and the MF/AMC/Trustees, whether temporary or permanent, who permits such person, directly or indirectly, access to sensitive unpublished price information or who is reasonably likely to permit such access shall be deemed be related persons, unless otherwise established,” the regulator said.

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Dolores W. Simon