Fund houses put extra checks in place to curb insider trading

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A leading mutual fund has asked top executives to stop using encrypted messaging platforms such as WhatsApp on their work phones. Some brokerages are installing monitoring applications on the terminals and phones of key employees, while another firm wants to track investments by family members of staff. These are some of the actions that various domestic asset management companies and broking firms are taking or considering in the wake of front-running and insider-trading cases surfacing in recent times. Many of these financial services firms are looking to add such conditions to employee contracts, despite grumbling that this would infringe privacy.

The increased surveillance is to monitor who the employees are in touch with during work hours, to track any leaks of price-sensitive information. Such tools would serve as a deterrent against unethical practices, said market participants.

Some finance firms are employing analytical tools to look for patterns in all the data recorded, akin to how the market regulator and stock exchanges keep tabs on insider trading. In the past few months, at least three cases involving insider trading have come under regulatory scrutiny, said people with direct knowledge of the matter. In such instances, the institution itself could be exposed to regulatory action.

Axis Mutual Fund recently asked two fund managers to leave after a probe into allegations of wrongdoing, which included front-running and taking kickbacks from stock brokers.

Firms are increasingly concerned that transgressions by a few employees will invite regulatory action and bad press.

To be sure, these enhanced surveillance measures are only for key persons dealing with price-sensitive information on a regular basis. Also, job contracts are designed to cover such special measures and, hence, such staff give their consent to be tracked during work hours, said legal experts.

“While one could say this impacts the privacy of the employees, such surveillance measures may be a necessity given the position and access certain roles provide,” said Moin Ladha, partner, Khaitan & Co. “We should keep in mind that regulated entities are also exposed to higher risk should an employee misuse any confidential information and access rights.”

Currently, all calls and messages of important employees of mutual funds and brokerages are recorded and monitored. However, communication on encrypted platforms such as WhatsApp or Telegram may not be captured. If the curb on these is implemented, employees will have to stick to phone calls and SMSes to communicate.

Mutual funds and leading brokers don’t allow a second phone for personal purposes during work, said legal experts. A leading domestic brokerage is learnt to have asked all dealing room employees to submit an undertaking saying they do not own any additional phones, apart from what has been disclosed.