MFs rush to SEBI to resolve call recording conundrum

The regulatory diktat to record calls of fund managers during market hours continues to trouble mutual funds, three years after it was first mandated.

The industry has aired its grievances afresh on the matter with the Securities and Exchange Board of India (SEBI) a few days ago, said two people in the know.

Dealers and fund managers were mandated to conduct all communication during market hours only through recorded modes and channels in October 2020. The aim was to curb illegal trades by mutual funds’ investment team. But the impact has been much wider.

Earlier, dealers’ conversations during market hours were recorded as they operated from dealing-rooms without mobile phones. Similarly, fund managers’ conversations on landlines were also recorded.

Fund houses now record fund managers’ conversations with business partners, brokers, distributors, analysts, and company officials on cell phones, recording machines and landline. The recordings are stored and reviewed by compliance and risk teams. SEBI inspectors also periodically assess samples of the recordings.

“This has become a nuisance because corporates, in particular, don’t want to talk to fund managers during market hours, knowing their conversations will be recorded,” said an industry official.

Privacy hit

Some of these interactions are being done after market hours. This may lead to information asymmetry vis-a-vis other institutional investors such as alternative investment funds, insurance players and foreign portfolio investors.

“Right now, every conversation that fund managers make during market hours is recorded, even if its personal conversation with family members. This is not a healthy practice and may violate the right to privacy,” said another official.

The regulator, however, seems to have thrown the ball back into the industry’s court. It has told the fund houses that they will have to take ownership for any individual wrongdoings in the future, if the regulator decides to do away with the requirement for call recording of fund managers. And put in place a foolproof mechanism to deal with rogue dealers or managers.

An email sent to SEBI did not get a response.

AMFI’s efforts

The Association of Mutual Funds in India is now trying to find some viable solutions to the call recording conundrum. It could, for instance, suggest that recording all communication be made applicable only during order placement and execution.

“Based on recent discussions we have had, we have been told to submit our recommendations,” said an AMFI official.

“Given all the front running episodes that the industry has seen in the past, it is understandable why the regulator will want to be a bit rigid on these guidelines,” said Vicky Mehta, an independent MF research analyst. “While fund managers may be aggrieved, this is something that comes with the territory, given that they are working with billions of dollars in a fiduciary capacity.”

Earlier this year, SEBI barred Axis MF chief dealer Viresh Joshi and 20 others from accessing the securities markets in a case of alleged front-running. These individuals are said to have earned ₹30.56 crore through this activity.

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