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Minimum Standards for Code of Conduct for Mutual Funds: Schedule B1

Nikhil Mogha

| Updated: Dec 08, 2022 | Category: SEBI

Minimum Standards for Code of Conduct for Mutual Funds: Schedule B1

The Mutual Funds are a privately pooled investment vehicle that pools funds from the shareholders to invest in bonds, stocks, money market instruments, and other related securities. The mutual funds are usually handled by the money managers who invest the funds and attempt to generate profits and income for the investors. Even though the securities market is more liquid, they are chances of manipulation. The instances of insider trading could be seen in the mutual fund market, affecting the investors’ interests. Henceforth, in lieu of this, the SEBI has made an amendment in the SEBI (Prohibition of Insider Trading) Regulations 2015, which has inserted a new chapter –IIA dedicated specifically to prohibiting and making any act of insider trading as illegal and further enumerates the polices and procedures to be undertaken for minimising any leak of unpublished price sensitive information. The present article will discuss in detail the measures specified under Schedule B1 of the SEBI (Prohibition of Insider Trading) Amendment Regulations 2022[1], which lists out the minimum standards for code of conduct for mutual funds.

What is Code of Conduct under SEBI (Prohibition of Insider Trading) Amendment Regulations 2022?

The governing regulation for Schedule B1 for minimum standards for code of Conduct for Mutual Funds is Regulation 5F. The Regulation 5F requires the CEO or MD of Asset Management Company (AMC) to formulate a code of conduct with the approval of its Board of Directors. The policy for code of conduct will enable the AMC to regulate, monitor, and report dealings of the designated persons and immediate relatives of the designated person dealing in Mutual Funds to ensure compliance with the provisions of these regulations and adopt the minimum standards listed out in Schedule B1.

Schedule B1: SEBI (Prohibition of Insider Trading) Amendment Regulations 2022

The Schedule B1 of the SEBI (Prohibition of Insider Trading) Amendment Regulations 2022 sets out the following minimum standards for code of conduct for mutual funds for regulating, monitoring, and reporting of any trading activity undertaken by the designated persons in the units of its own Mutual Fund Schemes.

Reporting by Compliance officer: The Minimum Standards for Code of conduct for Mutual Funds require the compliance officer to send reports to the following person at such intervals as may be specified by the board of directors provided that in any case, it must not be less than once in a year:

  1. Board of Directors of AMC
  2. Chairman of the Audit Committee of AMC
  3. Trustees

Information is handled on a need-to-know basis: The Minimum Standards for Code of conduct for Mutual Funds is that the information must be handled within the organisation on a need-to-know basis. Further, no communication shall be made in respect of any unpublished price-sensitive information except in furtherance of:

  1. Performance of duties,
  2. Legitimate purposes,
  3. Discharge of legal obligations

Moreover, the code of conduct shall contain the norms for appropriate Chinese Walls procedures & processes for permitting any designated persons to “Cross the Wall”.

Internal Code of Conduct for Relatives: The following persons shall be governed by the internal code of conduct governing dealings in the Mutual Fund:

  1. Designated Persons
  2. Immediate Relative of Designated Persons

Determination of Closure Period: The Minimum Standards for Code of conduct for Mutual Funds require the compliance officer of the AMC to determine the closure period during which the designated persons or class of designated persons is suspected of possessing unpublished price-sensitive information. Further, the closure period shall apply to such scheme to which the unpublished price-sensitive information relates. During such time, the request for transaction in the units of mutual funds by designated persons or immediate relatives of the designated person shall not be processed by the AMC.

Exceptions to Closure Period: The restrictions of the closure period discussed above shall not apply to:

a. The transactions specified in clauses (i) to (iii) to the proviso of Regulation 5D (1).

b. Pledge of Mutual Funds for bonafide purposes subject to pre-clearance from the compliance officer.

Timing of Re-opening Closure Period: The compliance officer shall determine the timing for the reopening of the closure period by taking into account the various factors, including the availability of unpublished price-sensitive information becoming generally available.

Pre-clearance of trades in case of non-applicability of Closure Period: In case of non-applicability of closure period, in that case, the trading by the designated persons or by their immediate relatives in the units of the mutual fund, including at the time of systematic transactions shall require pre-clearance of the compliance officer if the value of the propose trades is above such thresholds as specified by the board of AMC.

                Exceptions: The exceptions are:

  1. The transitions in units by the Designated Person in pursuance to mandatory requirement under “Alignment of Interests of Key Employees of AMC with the unit holders of the Mutual Funds schemes”.
  2. The requirement for pre-clearance of trades by designated persons must not apply for trading in the Index fund & Exchange Trade Funds and Overnight Schemes.

Declaration before approving Trades: Before approving any trade, the compliance officer shall seek a declaration signifiying that the applicant for pre-clearance does not possess any unpublished price-sensitive information while giving due regard as to whether such declaration is capable of being rendered inaccurate.

Timeframe for Code of Conduct: The Minimum Standards for the code of conduct for Mutual Funds require that the code of conduct specify a reasonable timeframe, but in any event, it shall be at most 7 business days. It is further required that the designated person shall, within these days, execute the trades, failing which fresh clearance shall be required for the trading.

Period of Code of Conduct: The following points for the period ofcode of conduct are:

  1. The period for code of conduct shall be at least 2 months, within which the designated person shall not execute a contra trade.
  2. The compliance officer may relax the restrictions mentioned above by recording the reason in writing, provided such relaxation does not violate any provisions of the regulations.
  3. If the contra trade is executed inadvertently in violation of the above restriction, any profit or loss avoided from such trade shall be discharged from the AMC and credited in the IEPF.

Formats for making applications: The code of conduct shall also contain the formats for making applications for reporting executed trades and level of holdings in the units of Mutual Funds at such intervals as necessary to monitor the compliance with these regulations.

Internal sanctions and Disciplinary Actions: The Minimum Standards for Code of conduct for Mutual Funds require that the code of conduct shall contain the provision for internal sanctions and disciplinary actions, including a Wage freeze, recovery, suspension etc., that may be imposed by the AMC for nay contraventions of the act. Further, any amount collected under this provision shall be discharged from the AMC and be credited to the IEPF.

Informing the Stock exchange of any violation: The Minimum Standards for Code of conduct for Mutual Funds require the code of conduct to contain a provision wherein if it is observed by the AMC that there is a violation of the provisions of the regulations, it shall immediately inform such violation to the stock exchange in the manner as specified by the board.

Disclose names and PAN to the Mutual Fund: The Minimum Standards for Code of conduct for Mutual Funds requires the designated person to disclose the name, Pan and such other informations of the following persons to the MF on annual basis and when the information changes:

  1. Immediate Relatives
  2. Persons with whom the designated person shares a material financial relationship. It means a relationship in which the person receives any kind of payment, including by way of a gift or loan from a designated person immediately for a period of 12 months and it is equivalent to 25% of the annual income of such Designate Person.
  3. Phone, cell and Mobile numbers of used by them.

Apart from the above information, the name or educational qualification of the designated person and names of the last employer of the Designated Person shall be disclosed on a one-time basis.

Procedure for allowing the individual to access sensitive information: The Minimum Standards for Code of conduct for Mutual Funds requires the mutual funds to establish a procedure for determining how:

  1. An individual is brought as an “Insider” to access the sensitive information.
  2. The duties and responsibilities attached when receiving such sensitive information.
  3. The liability attached to the unwanted and misuse of such information.

Conclusion

The SEBI (Prohibition of Insider Trading) Amendment Regulations 2022 has brought significant developments in eliminating the risk of insider trading in the units of Mutual funds. The framing of the code of conduct under the amended regulations will aid the AMC in regulating, monitoring or reporting trading by the designated person in the Mutual Funds. Further, the manner of framing the code of conduct is described in Schedule B1 of the regulation, which states the Minimum Standards for Code of conduct for Mutual Funds. The schedule determines the points of consideration which is to be taken by the board of directors while framing the code of conduct. The minimum standards sets out in the regulations protect the interests of the investors and further increase the scrutiny over the activities of AMC.

Read Our Article: Key highlights of the SEBI Board Meeting held on 30th September 2022

Nikhil Mogha

An Advocate by profession, Nikhil Mogha holds experience in the field of Business and Securities law. He has done his Masters of Law in Corporate Law from Guru Gobind Singh Indraprastha University, New Delhi. He is also versed with the drafting and research work in the field of Company Law, Banking Laws and Contract Laws.

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