SEBI comes out with New Trading Guidelines for MF Employees

In the light of the Templeton fiasco last April and the subsequent SEBI order on the role ostensibly played by the senior managers of the fund, SEBI has opted to tighten the screws. It has barred employees and directors of AMCs and trustees of the fund from buying or selling units when having non-public information like pertaining to winding up of schemes.

In the case of Templeton, which had shut down 6 funds citing illiquidity, it was later found that the senior managers and their family members had redeemed units of the fund just ahead of the winding up announcement. That was a clear case of misuse of information at the cost of existing unit holders and SEBI wants to tighten the screws on this side.

The complete list of dos and don’ts are expected to be communicated explicitly to the funds. However, for starters it does appear like any connected person having some degree of inside information about the change in investment objectives, major defaults, major liquidity crisis in the fund, major redemptions etc must not indulge in buying and selling units of these funds.

Currently, the code of conduct for mutual fund directors, employees, fund managers and traders only extend to the actual buying and selling of underlying shares. There is no mention of the transactions on mutual fund units. Under the new dispensation, such rules and code of conduct will extend to the units of the specific fund too.

For example, currently employees of the fund are only required to report to the compliance officer about any purchases or sales of stocks on a regular basis. However, going ahead, they will also have to report any buying and selling in units of the mutual fund to ensure that there is no trading ahead of any news flow. Such compliance reporting will have to happen on a weekly basis.

The idea is to ensure that the interests of the key employees of the mutual fund are aligned with the long term interests of the unit holders of the fund. Under this alignment principle, a stipulated percentage of compensation shall be paid in units of the mutual fund to ensure skin in the teeth for these personnel.