Market regulator Sebi enhances accountability of mutual fund Trustees

Amidst the growing scale of the mutual fund industry, capital markets regulator Sebi on Friday increased the role and accountability of the Trustees in a bid to safeguard unitholders' interest.

In addition, the regulator said that a unit holder protection committee (UHPC) by the board of an AMC would be constituted. This is part of Sebi's attempt to have an independent review mechanism for the decisions of AMC from the perspective of the unit holders' interest across all products and services.

The new framework would come into force from January 1, 2024, the Securities and Exchange Board of India (Sebi) said in a circular.

The regulator has specified the "core" responsibilities of the Trustees of a mutual fund, wherein they will have to ensure that the AMCs have adequate systems to prevent mis-selling to increase their assets base.

Also, Trustees need to ensure that AMC has a system to prevent market abuse by its employees and connected entities.

In addition, Trustees will be responsible for putting in place system-level checks at AMCs' end to prevent fraudulent transactions including front running by employees and mis-selling by distributors.

Besides, they will have to ensure the fairness of the fees and expenses charged by the AMCs, review the performance of AMC in its schemes vis-a-vis the performance of peers or the appropriate benchmarks.

Also, the Trustees would be responsible for periodically reviewing the steps taken by AMCs for the folios which do not contain all KYC attributes with bank details.

To focus on the core responsibilities, the Trustees can rely on professional firms such as audit firms, legal firms, merchant bankers, etc for carrying out due diligence on their behalf.

In case a company is appointed as the Trustee of a mutual fund, the chairperson of the board of directors of that Trustee company would be an independent director.

The Trustee company, which has already been appointed as the Trustee of a mutual fund, will have to ensure compliance with this rule within six months from the date of this circular coming into force.

The board of directors of the AMCs and the board of directors of the Trustee company will meet at least once a year to discuss the issues concerning the mutual fund, and future course of action, wherever required.

Under the rules, Trustees hold the property of the mutual fund in trust for the benefit of the unit holders. The Trustees appoint an AMC to float schemes for the mutual fund and manage the funds mobilized under various schemes, by the investment objectives.

Sebi said that Unit Holder Protection Committee or UHPC will be responsible for the protection of the interest of unit holders of mutual fund schemes vis-a-vis all products and services provided by the AMC.

The committee will ensure adoption of sound and healthy market practices in terms of investments, sales, marketing, advertisement, management of conflict of interests, redressal of unit holders' grievances, and investor awareness.

UHPC has been mandated to review the various compliance issues relating to the protection of the interests of the unit holders and keep the unit holders well informed of and educated about mutual fund products, investor charter, and complaint handling procedures.

It would report its findings to the board of directors of AMC along with recommendations for action.