(See Regulation 5F of Chapter – IIA)
Minimum Standards of Code of Conduct for Mutual Funds to regulate, monitor and report trading by the Designated Persons in the units of own mutual fund schemes
1. The compliance officer shall report to the board of directors of asset management company and provide reports to the Chairman of the Audit Committee of the asset management company and to the trustees, at such frequency as may be stipulated by the board of directors, but in any case not less than once in a year.
2. The information shall be handled within the organisation on a need-to-know basis and no unpublished price sensitive information shall be communicated to any person except in furtherance of legitimate purpose, performance of duties or discharge of legal obligations. The code of conduct shall contain norms for appropriate Chinese Walls procedures and processes for permitting any designated person to “cross the wall”.
3. Designated Persons and immediate relatives of designated persons in the organisation shall be governed by an internal code of conduct governing dealings in units of the mutual fund.
4. (1)Designated persons may deal in the units of the mutual fund subject to compliance with these regulations. The compliance officer of the asset management company 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period during which a Designated Person or class of Designated Persons can reasonably be expected to have possession of unpublished price sensitive information. Such closure period shall be imposed in relation to such schemes to which such unpublished price sensitive information relates. During such time, any requests to transact in the units of the mutual funds by the Designated Persons and/or their immediate relatives shall not be processed by the asset management company.
(2) The closure period restrictions mentioned in sub-clause (1) shall not apply in respect of
transactions specified in clauses (i) to (iii) of the proviso to sub-regulation (1) of regulation 5D and in respect to the pledge of mutual fund units for a bonafide purpose, subject to pre-clearance by the compliance officer and compliance with the other requirements, if any, as may be specified by the Board.
5. The timing for re-opening of the closure period shall be determined by the compliance officer taking into account various factors including the unpublished price sensitive information in question becoming generally available and being capable of assimilation by the market.
6. When the closure period is not applicable, trading in the mutual fund units by Designated Persons and their immediate relatives including at the time of initiation of systematic transactions shall be subject to pre-clearance by the compliance officer, if the value of the proposed trades is above such thresholds (separate thresholds for systematic transactions and lumpsum payments) as the Board of AMCs may stipulate:
Provided that for transactions in units by the Designated Persons pursuant to the mandatory requirement under „Alignment of interest of Key Employees („Designated Employees‟) of asset management companies with the unit holders of the mutual fund schemes‟ or otherwise shall be as specified by the Board in this regard:
Provided further that the requirement of pre-clearance of trades by Designated Persons shall not apply for trading in Overnight Schemes, Index funds and Exchange Traded Funds.
7. Prior to approving any trades, the compliance officer shall be entitled to seek a declaration to the effect that the applicant for pre-clearance is not in possession of any unpublished price sensitive information with due regard to whether any such declaration is reasonably capable of being rendered inaccurate.
8. The code of conduct formulated by the chief executive officer or managing director of the asset management company shall specify any reasonable timeframe, which in any event shall not be more than seven business days, within which trades that have been pre-cleared have to be executed by the Designated Person, failing which fresh pre-clearance shall be required for the trades to be executed.
9. The code of conduct shall also specify the period, which in any event shall not be less than two months, within which a Designated Person who is permitted to trade shall not execute a contra trade. The compliance officer may be empowered to grant relaxation from the strict application of such restriction for reasons to be recorded in writing provided that such relaxation does not violate these regulations or other requirements specified by the Board. In case a contra trade is executed, inadvertently or otherwise, in violation of such a restriction, the profits or loss avoided from such trade shall be liable to be disgorged by the asset management company and credited under intimation to the Board, to the Investor Protection and Education Fund established by the Board under the Act:
Provided that trading restrictions imposed for contra trade shall not be applicable for Overnight Schemes.
10. The code of conduct shall also stipulate such formats as the board of directors deem necessary for making applications for reporting of trades executed and for reporting level of holdings in units of mutual funds at such intervals as may be determined as being necessary to monitor compliance with these regulations.
11. The code of conduct shall stipulate the internal sanctions and disciplinary actions, including wage freeze, suspension, recovery, etc., that may be imposed by the asset management company for the contravention of the code of conduct. Any amount collected under this clause shall be disgorged by the asset management company and credited under intimation to the Board, to the Investor Protection and Education Fund established by the Board under the Act.
12. The code of conduct shall specify that in case it is observed by the asset management company that there has been a violation of these regulations, it shall promptly inform to the stock exchange(s), in such form and such manner as may be specified by the Board from time to time.
13. Designated Persons shall be required to disclose names and Permanent Account Number or any other identifier authorized by law of the following persons to the mutual fund on an annual basis and as and when the information changes:
a) immediate relatives
b) persons with whom such Designated Person(s) shares a material financial relationship
c) Phone, mobile and cell numbers which are used by them
In addition, the names of educational institutions from which Designated Persons have graduated and names of their past employers shall also be disclosed on a one time basis.
Explanation – The term “material financial relationship” shall mean a relationship in which one person is a recipient of any kind of payment such as by way of a loan or gift from a Designated Person during the immediately preceding twelve months, equivalent to at least 25% of the annual income of such Designated Person but shall exclude relationships in which the payment is based on arm’s length transactions.
14. Mutual funds shall have a process that would determine how an individual is brought “inside‟ to access sensitive transactions and shall be made aware of the duties and responsibilities attached to the receipt of such Inside Information and the liability that is attached to the misuse or unwarranted use of such information.