The ruling by the Securities and Exchange Board of India (Sebi) prescribing standards for the execution of trades could open a Pandora’s box for the mutual fund industry.
The regulations, which were notified in late October and establish a code of conduct, have raised privacy concerns and may lead to longer working hours for fund managers. A similar set of guidelines regarding the execution and allocation of trades was published on September 21 and will apply from January 1.
The notice states that all communications from distributors and fund managers during market hours are to be made only through recorded modes and channels.
Currently, all dealer conversations during market hours are recorded while operating from trading rooms without mobile phones. Similarly, conversations of fund managers on landlines are also recorded.
The new rules will require fund houses to record fund managers’ phone conversations, as well as their offline interactions with business partners, brokers, distributors, analysts, and company officials. Since these interactions are often confidential, they may now need to take place after market hours, resulting in more work hours for fund managers. This, in turn, could also mean that fund managers lose crucial information during market hours, leading to an information asymmetry vis-à-vis other institutional investors, such as alternative mutual funds, insurance players or foreign investors of wallet.
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“A fund manager is usually on the go during market hours. You could be having a conversation with a company official in the meeting room, or you could be out for sales calls or dealer meetings. Should these interactions be recorded? You could be talking to your wife or family during market hours. Isn’t recording those private conversations a privacy violation? “said a senior fund official, adding that fund houses will have to find suitable technological solutions to record and store all mobile conversations in the future.
The new regulations also require fund managers to record securities purchase or sale decisions in writing along with detailed justifications for them.
Market players believe that preparing detailed notes for all buy-sell decisions during market hours is no more feasible for large fund houses that execute hundreds of transactions every day. “Fund managers can prepare detailed notes the first time they buy a security or if the amount of negotiation is high or if the buy-sell decision is considered contrary. However, giving detailed reasons for each transaction is not practical, ”said the CEO of a fund house.
The Mutual Fund Association of India (Amfi) has written to the regulator highlighting the practical difficulties in implementing the code. You want the requirement to record all communications to apply only during order placement and execution. It also seeks a postponement in the implementation of the code until January 1.
According to the regulator’s September circular, AMCs must use an automated order management system, in which orders for capital and capital-related instruments of each scheme are placed by the fund managers of the respective schemes. .
However, according to Amfi, arbitrage and passive scheme exchanges should be excluded from this requirement. This is because, unlike active schemes, it is the dealers who enter the orders for these transactions without explicit instructions from the fund managers. Amfi also wants passive funds to be excluded from the requirement that all fund managers’ orders be received by dedicated dealers responsible for order placement and execution.
The circular also says that a distributor should not share information through any way, except for commercial execution under the approved internal policy. This implies that the operations must be executed only by the distributors. Industry observers, however, point out that fund managers double down as intermediaries, especially in the fixed income space, and restricting the execution of trades only through intermediaries is not the right approach.
The code of conduct prescribes that investments be made in the “interest of shareholders” and that fund managers “strive to achieve the highest ethical and professional standards,” recommendations that industry players believe are highly relevant in nature. generic.
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