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Regstreet Law Advisors successfully represented KMPs of a Mutual Fund against charges of front running.

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The Regstreet Law Advisors Team has obtained a significant order representing a former Chief Investment Officer (CIO) and a Group CFO of an Asset Management Company of a Mutual Fund who faced allegations of front running.

The allegations of SEBI pertained to the period when DHFL was facing a crisis including downgrade of its securities. SEBI had alleged that the two key executives were in possession of material nonpublic information in relation to the impending downgrade of DHFL NCDs and switched out their units from one scheme which had exposure to DHFL securities to another scheme which allegedly did not have exposure to DHFL securities.

However, after careful representation by Regstreet Law Advisors before SEBI, in the facts and legal position observed that the act of switching of securities from a mutual fund scheme could not be termed as fraudulent and other than the Noticees being in Key Managerial Positions, there was no other evidence indicating how or when the Noticees came into or were in possession of material nonpublic information on the basis of which they switched their units to avoid loss and hence the act of Noticees could not be termed as either fraudulent or unfair.

The Ld. Adjudicating Officer observed that KMPs of an AMC act as a quasi-fiduciary in respect of the investors of the mutual funds managed by the AMC and are expected to serve in the interest of such investors and hence SEBI has by way of circulars provided several guidelines to be followed by employees of the AMC and Trustee while trading. However, in the present facts and circumstances since there was no significant movement in NAV and secondly there was no change in accounting policy to be communicated to the unit holders, a violation of the circulars could not be established against the Noticees.

The SEBI Order holds significant relevance for officers of Mutual Funds in India. On one hand, they are expected to demonstrate their commitment by having a stake (skin in the game), and on the other, their actions of transferring units from one scheme to another may come under scrutiny.

Mr. Sumit Agrawal (Partner) and Mr. Tarun Toprani (Senior Associate) from Regstreet Law Advisors represented both officers.

For those interested, a copy of the SEBI order as available on its website, is enclosed. We extend an invitation to securities law enthusiasts to share their academic insights on this case and research on the difference between Unpublished Price Sensitive Information and Material Non-Public Information, in the context of fund management.

Your feedback can be provided to info@regstreetlaw.com

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