Fund Manager Trades in Spouse Account and Tips a Distributor
An AMC's fund manager for a mid-cap scheme learns on 8 September that a portfolio company's audit committee has found a ₹140 crore receivable impairment, likely to be disclosed on 12 September. On 9 September he sells 60,000 shares held in his spouse's demat account, avoiding a loss later estimated at ₹21 lakh. The AMC's code requires pre-clearance for trades above ₹5 lakh and prohibits communication of unpublished price-sensitive information. The fund manager did not seek pre-clearance. On 10 September, at a client meeting, he tells a distributor to 'avoid that stock for now'. The compliance officer sees the trade in the quarterly disclosure and the distributor's WhatsApp message. The fund manager is a designated person under the code, and the spouse's account is disclosed as a relative's account.
1. Is this a case of unpublished price-sensitive information, and what violations are involved?
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Yes. The impairment finding is material, specific and not public until 12 September, so it is unpublished price-sensitive information. The fund manager is a designated person and received it in the course of his duties. Selling shares in his spouse's disclosed account is an indirect trade by the designated person and required pre-clearance because the value exceeded ₹5 lakh. He did not obtain pre-clearance. Telling the distributor to avoid the stock communicated UPSI and is tipping. The conduct violates the AMC's code of conduct and the SEBI insider-trading framework, and breaches the fiduciary duty not to use fund information for personal or third-party benefit. The ₹21 lakh avoided loss is a useful measure of the benefit and the potential disgorgement amount.
2. What should the compliance officer do immediately?
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Preserve the trade records, the spouse's holdings, the audit committee minutes, the WhatsApp message and the distributor's communications. Restrict the fund manager's access to UPSI and remove him from dealing in that stock while the investigation is open. Initiate an internal investigation, inform the code committee or audit committee, and report the matter to SEBI as required. Consider disgorgement of the ₹21 lakh benefit and any further action under the AMC's code. Review the spouse's other trades and the distributor's client trades for related activity. Do not tip off the fund manager or the distributor beyond what is necessary for the investigation, and do not allow the fund manager to handle the scheme's trades in that stock.
3. How should the distributor be handled, and what does the spouse's account add to the analysis?
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The distributor received UPSI through the fund manager's instruction. The AMC should ask the distributor to confirm whether any trades were made, instruct that no further trades be made on the information, obtain the relevant records and report the communication to SEBI. The AMC should not rely on an oral assurance that the distributor did nothing. The spouse's account matters because the code applies to trades by designated persons and their relatives; using a relative's account does not remove the pre-clearance and disclosure obligations. The compliance officer should verify whether the spouse's account was included in the designated person's annual disclosure and whether the trade was reported. If the trade was not reported, that is a separate code violation. The AMC should also review its pre-clearance system to detect trades in relatives' accounts.