SEBI Framework

SEBI Framework: Strengthening Defenses against Market Abuse


Ethical Dilemma Questions

Multiple Choice

Alert Surveillance and Reporting

You are part of the compliance team. During routine surveillance, an alert is generated for suspicious trades by a portfolio manager. The trades are borderline, but not clearly in violation of policy. The portfolio manager is a high-performing employee. What should you do?

• Ignore the alert since the trades are not clearly in violation.

• Investigate further, review all recorded communications, and document your findings.

• Discuss the alert only with the portfolio manager and close the case.

• Wait for more alerts before taking any action.

Multiple Choice

Whistleblower Policy

An anonymous tip is received through the whistleblower channel about a senior investment analyst sharing sensitive fund information with an external party. The tip is credible but lacks concrete evidence. What is the appropriate action?

• Ignore the tip due to lack of evidence.

• Escalate the matter internally for investigation and protect the whistleblower’s identity.

• Inform the senior analyst about the tip and ask for an explanation.

• Discuss the tip only with the compliance officer and take no further action.

Multiple Choice

Escalation to the Board

A member of the risk team uncovers potential front-running by a dealer. The case is still under investigation, but initial findings are concerning. When should the Board of Directors be informed?

• Only after the investigation is completed and conclusive evidence is found.

• Immediately upon suspicion, with regular updates as the investigation progresses.

• Never, unless the dealer is found guilty.

• Only if the case involves significant financial loss.

Multiple Choice

Data Sharing and Internal Controls

The investment team is considering a new trading strategy that may overlap with pending client orders. The team is debating whether to share this information with the surveillance team for monitoring. What should they do?

• Keep the information within the investment team to avoid operational delays.

• Share all relevant information with the surveillance team for monitoring and compliance.

• Only share information if explicitly requested by compliance.

• Discuss the strategy only with the fund manager.

Multiple Choice

Periodic Review and Policy Updates

The compliance team has just completed a periodic review of the surveillance procedures. No issues were found in the last review. Should the team update the policies anyway?

• No, since no issues were found, policies do not need to be updated.

• Yes, policies and procedures should be reviewed and updated regularly, regardless of findings.

• Only update policies if there are new regulatory requirements.

• Wait for the next scheduled review to consider updates.

Multiple Choice

The "Personal Trading" Dilemma

A senior fund manager, Ms. Sharma, holds a significant personal position in a small-cap stock. The investment team is discussing a potential large buy order for the same stock across several AMC schemes, which is likely to impact the stock's price significantly. Ms. Sharma believes the stock is undervalued and the AMC's large order will confirm her long-held conviction. She is aware of the AMC's personal trading policy, which restricts trading in securities where the AMC has a pending order. Still, she also feels a fiduciary duty to her personal portfolio.

What is the most ethical and compliant action for Ms. Sharma?

• Immediately sell a portion of her personal holdings to capitalize on the anticipated price increase before the AMC's order is executed, as she had the conviction before the AMC's decision.

• Hold her personal position, but disclose it to the Head of Compliance and recuse herself from any further discussions or decisions related to the AMC's order in that specific stock.

• Disclose her personal holdings to her immediate team, but continue to participate in the discussions, arguing that her personal conviction aligns with the AMC's strategy.

• Liquidate all her personal holdings in the stock immediately, regardless of personal loss, to avoid any perception of front-running.

Multiple Choice

The "Information Leak" Dilemma

During a casual conversation at an industry event, a junior analyst from your AMC overhears a competitor's fund manager mentioning their large, impending block trade in a specific mid-cap stock. The junior analyst immediately relays this information to their investment team. Your AMC does not have any current plans to trade in that stock. However, a less scrupulous trader on your team suggests that this "market intelligence" could be used to make a quick profit by taking a small, short-term position.

What is the most appropriate action for the AMC's compliance team upon learning of this situation?

• Allow the trader to take a small, short-term position, as the information was overheard and not actively sought or leaked internally from your AMC.

• Immediately prohibit any trading in that stock and initiate an internal investigation to understand the extent of the information dissemination and reinforce the code of conduct.

• Document the information received and monitor the market movement of that stock, but take no immediate action as it didn't originate from your AMC's internal information.

• Advise the junior analyst to be more discreet in public, but otherwise, take no further action since no internal confidential information was compromised.

Multiple Choice

The "Alert Fatigue" Dilemma

Your AMC's new alert-based surveillance system, mandated by the SEBI circular, generates a high volume of alerts daily. The compliance team, already stretched, finds it challenging to thoroughly investigate every "low-risk" alert, leading to a backlog. A team member suggests prioritizing only "high-risk" alerts and selectively reviewing low-risk ones to manage the workload, citing the sheer volume makes full compliance impractical.

What is the most ethical and compliant approach for the compliance team?

• Implement the suggestion of prioritizing high-risk alerts and selectively reviewing low-risk ones, while documenting the rationale for this approach.

• Seek an immediate extension from SEBI on the implementation of the alert system, citing resource constraints.

• Redesign the alert parameters in consultation with the risk and investment teams to reduce false positives, while ensuring all alerts are still reviewed within defined timelines.

• Continue to attempt to review all alerts, even if it means delays, to ensure complete adherence to the spirit of the regulation.

Multiple Choice

The "Whistleblower Anonymity" Dilemma

Your AMC has recently implemented a whistleblower policy as per SEBI's directive. An anonymous whistleblower submits a detailed complaint alleging that a mid-level trader is routinely front-running client orders. The compliance team begins an investigation, but to verify some details, they believe they need to indirectly identify the whistleblower, which could potentially compromise their anonymity, despite the policy guaranteeing it.

What is the most ethical and compliant approach for the compliance team in this situation?

• Proceed with efforts to indirectly identify the whistleblower if it is deemed crucial for the investigation's success, prioritizing the integrity of the market over absolute anonymity.

• Immediately inform the whistleblower that their anonymity might be compromised and give them the option to withdraw the complaint.

• Conduct the investigation solely based on the information provided by the whistleblower and internal data, without attempting to identify them, even if it makes the investigation more challenging.

• Seek guidance from SEBI on how to balance whistleblower anonymity with the need for thorough investigation in such complex cases.