Sebi proposes to remove some operational responsibilities from Trustees of Mutual Funds and replace them with fiduciary duties. The proposals circulated for public feedback also elaborate on the roles of Asset Management Companies.
The Mutual Fund industry's assets under management are showing stupendous growth crossing Rs 39.89 lakh crore last year. Due to this growing scale, the Securities and Exchange Board of India (Sebi) intends to streamline the responsibilities of trustees of mutual funds, so they can handle operational responsibilities and engage in fiduciary duties.
Sebi drafted a set of proposals to this effect, and on February 9, 2023, it invited public comments on these amendments, which will review the roles and obligations of mutual fund trustees and Asset Management Companies (AMC).
Role of Trustees & AMCs
Trustees hold the property of the mutual fund in trust for the benefit of unit holders. Trustees appoint AMCs to float schemes and manage funds mobilised under various schemes. Trustees are expected to supervise their activities and ensure that the AMC acts in the best interests of the unitholders.
Trustees should ensure AMC's sponsor is not getting any undue advantage when the MF makes investments or avails services. In addition, sponsor group companies indulging in insider trading/front running by taking advantage of access to MF's insider information should also be prohibited. Sebi has laid regulations to this effect.
The new proposals outlined by Sebi include the need for trustees to ensure fairness in fees and expenses charged by the AMC, to compare its performance with peers, and to ensure sponsors do not exert undue influence. Apart from seeking public comments on these suggestions, it sought whether the Trustees need to focus on any other specific area apart from the new responsibilities mentioned.
Presently, the trustees primarily rely on the AMCs to ensure compliance with the applicable regulations and confirm compliance under periodic reporting to Sebi. However, Sebi, in new guidelines, said it is crucial that the Trustees independently evaluate the extent of compliance by AMC and not merely rely on AMC's submissions. To facilitate trustees' supervision, AMCs should provide them with analytical information.
Sebi proposed that the board of the asset management company ensures that an asset management company has been diligent in empanelling the brokers, monitoring securities transactions with brokers, and avoiding undue concentration of business with any broker.
Sebi observed that a significant number of folios do not provide bank account details or do not provide a bank account number with 15 or 16 digits. As these folios are vulnerable to fraud, trustees should periodically review the steps taken by AMCs for the folios which do not contain all KYC attributes with bank details.
“To have an independent review mechanism for the decisions of AMC from the perspective of the unit holders' interest, across all products and services, it is proposed to mandate that a 'Unit Holder Protection Committee' (UHPC) may be constituted by board of AMC,” Sebi said.
The Sebi also listed some duties trustees can delegate to AMCs. Among them are ensuring that all systems are in place prior to the launch of any scheme by the AMC, as well as calculating any income in the mutual fund due to the fund and any income received in the mutual fund for unit holders.
The format for public feedback and further information on the proposals regarding the roles of trustees, asset management companies, and the UHPC is available here. (hyperlink here, https://www.sebi.gov.in/reports-and-statistics/reports/feb-2023/consultation-paper-on-review-of-role-and-obligations-of-mutual-fund-trustees_67946.html)