SEBI proposes to extend the applicability of insider trading norms to the units of Mutual Funds

Consultation Paper, Dated, 08.07.2022

The SEBI has floated a consultation paper on the applicability of SEBI (PIT), Regulations, 2015 to Mutual Fund (MF) units. The objective of the consultation paper is to solicit public views on the proposal to cover dealing in units of Mutual Funds under “PIT Regulations so as to harmonize the regulations governing trading in securities, while in possession of Unpublished Price Sensitive Information (UPSI).

SEBI stated that a need was felt to harmonise the provisions in PIT Regulations to initiate serious enforcement actions against those who misuse the sensitive non-public information pertaining to scheme of Mutual fund, directly or indirectly, which they have access, by virtue of their fiduciary capacity. At the same time, it was also felt that the regulatory approach should not be onerous. For instance, though a person may possess an UPSI pertaining to a security, he may not have the knowledge of the existing portfolio of the Mutual Fund scheme or have any control over the fund manager’s decision.

The SEBI considered to include a separate chapter in PIT Regulations, specifically to cover transactions in the units of Mutual Fund schemes, both close ended and open ended, so as to avoid complexities and such unintended consequences. Accordingly, the SEBI has proposed the following amendments:

(a) To amend the definition of the term ‘securities’ to do away the exclusion of MF units. The term ‘trading’ has also been proposed to be amended to include redeeming, switching or agreeing to redeem or switch securities.

To specify that the board of directors of an AMC, shall with the approval of the Trustees, make a policy for determination of “legitimate purposes”.

(b) To make all other definition in chapter-I, ipso facto, be applicable to transactions in the units of Mutual Funds.

(c) To make AMC disclose the details of holdings in the units of the Mutual Fund schemes held by the Designated Persons of AMC /Trustees, their immediate relatives and any other person for whom such person takes trading decisions on an independent platform and on the date as specified by SEBI and to require disclosures on quarterly basis thereafter.

(d) To prescribe minimum standard of code of conduct for designated persons as Schedule B1 which will be in line with provisions of existing Schedule B of PIT Regulations.

(e) To specify that the compliance officer of the AMC shall determine the Closure period during which a designated person or class of designated persons can reasonably be expected to have possession of unpublished price sensitive information, their immediate relatives and any other person for whom such person takes trading decisions cannot transact in units of the Mutual Fund.

Such closure period proposed to be imposed in relation to such schemes to which such unpublished price sensitive information relates. During such time, no request in transactions in the units of the Mutual Funds by the designated persons or those persons specified above shall be processed by the AMC.

(f) Proposal to specify that when the closure period is not applicable, trading in the Mutual Fund Units by designated persons, their immediate relatives and any other person for whom such person takes trading decisions including for initiation of systematic transactions shall be subject to pre-clearance by the compliance officer.

Click Here To Read The Full Update