In recent news, we heard that one of the Indian largest fund houses is under the radar of SEBI (Securities and Exchange Board of India) due to irregularities in the funds.
SEBI in past has imposed many control requirements and restrictions to prevent deformities due to insider trading or front-running. Such controls also involve a mandate for conducting yearly cyber security audits to identify the cyber security readiness of financial institutions.
Insider trading happens when an insider takes advantage of unpublished information to trade in the listed company's stock for booking profits. This presents an individual with an unfair advantage over other investors.
On another side, the front-running happens when the broker builds a position knowingly that the mutual fund is going to buy a certain stock in large quantity. As the price rises due to large quantity buy-in, the broker will sell it to book profit. The same is applicable in shorting the stock where the dealer had knowledge that a mutual fund is about to sell a stock.
This impacts an individual portfolio value over time who invests in such large mutual fund houses.
As per Mutual Fund houses, WFH has made it difficult to impose such controls
Mutual funds have strong controls in place to ensure a situation like front-running doesn't happen. Controls such as "segregation of access" are in place for restricting access to the dealing room. No BYOD devices are allowed inside the dealing room. All conversations are supposed to happen over recorded lines as per SEBI notification. All actions are to be validated before execution by following a chain of authorization.
However, such controls cannot be implemented while working from home which made it difficult to protect the fund transactions from insider trading and front-running. The fund houses are taking measures to remain in compliance with market risk management policies and keeping eye on such transactions.
In past, we have identified issues pertaining to logical access controls being missing during Cyber Security and Dealing Room Audits. To know more connect with us.