Fund managers may end up losing out on crucial information during market hours, leading to information asymmetry vis-a-vis other institutional investors such as alternative investment funds, insurance players, or foreign portfolio investors.
The Securities and Exchange Board of India’s (Sebi’s) diktat prescribing standards for executing trades may open a Pandora’s box for the mutual fund industry.
The regulations, which were notified in late October and lay down a code of conduct, have raised privacy concerns and may lead to longer working hours for fund managers.
A similar set of guidelines pertaining to trade execution and allocation were released on September 21 and become applicable from January 1.
The notification states all communication by dealers as well as fund managers during market hours should be only through recorded modes and channels.
Currently, dealers’ conversations during market hours are recorded as they operate from dealing-rooms without mobile phones.
Similarly, fund managers’ conversations on landlines are also recorded.
The new norms will require fund houses to record fund managers’ cell phone conversations as well as their offline interactions with business partners, brokers, distributors, analysts, and company officials.
Since such interactions are typically confidential, they may now have to be done after market hours, resulting in longer working hours for fund managers.
This, in turn, could also mean fund managers losing out on crucial information during market hours, leading to information asymmetry vis-a-vis other institutional investors such as alternative investment funds, insurance players, or foreign portfolio investors.
“A fund manager is usually on the move during market hours.
"He could be having a conversation with a company official in the meeting room or could be out for sales calls or distributor meets.
"Should these interactions be recorded? He could be talking to his wife or family during market hours.
"Will recording such private conversations not constitute a breach of privacy?” asked a senior fund official, adding that fund houses will have to figure out apt technology solutions to record and store all mobile conversations in future.
The new norms also require fund managers to record in writing decisions to buy or sell securities with detailed justifications for them.
Market players say preparing detailed notes for all buy-sell decisions during market hours is not feasible, more so for large fund houses that execute hundreds of transactions every day.
“Fund managers may prepare detailed notes the first time they buy a security, or if the trade quantity is high, or if the buy-sell decision is viewed as contrarian.
"Giving detailed reasons for every transaction, however, is not practical,” said the chief executive of a fund house.
The Association of Mutual Funds in India (Amfi) has written to the regulator, highlighting the difficulties in implementing the code.
It wants recording all communication to be applicable only during order placement and execution.
It also seeking a deferment in the code’s implementation to January 1.
According to the regulator’s September circular, AMCs need to use an automated Order Management System, by which orders on equity and equity-related instruments of each scheme are placed by the fund manager(s) of the respective schemes.
According to Amfi, trades of passive and arbitrage schemes should be exempt from this requirement.
This is because unlike active schemes it’s the dealers who punch in the orders for these transactions without explicit instructions from fund managers.
Amfi wants passive funds to be exempt from the requirement that mandates all orders of fund managers to be received by dedicated dealers responsible for order placement and execution.
The circular also says there should be no sharing of information by the dealer through any mode, except for trade execution under the approved internal policy.
This implies trades should be executed by dealers alone.
Industry observers, however, point out fund managers do double up as dealers, especially in the fixed-income space, and restricting trade execution only through dealers isn’t the right approach.
The code of conduct prescribes that investment be made in the “interests of the unit holders” and that fund managers “strive for highest ethical and professional standards”, recommendations which industry players believe are very generic in nature.
