Sebi to MF trustees: Do not rely on assurances, evaluate independently

The Securities and Exchange Board of India (Sebi) has proposed an overhaul of the roles and responsibilities of mutual fund (MF) trustees in a bid to safeguard the interest of unit holders and curb potential misconduct by asset management companies (AMCs). In a consultation paper issued on Thursday, the capital markets regulator has spelt out ‘core responsibilities’ for trustees to ensure that the actions taken by asset managers are not skewed towards their stakeholders.

These responsibilities include preventing undue influence of sponsors, market abuse by employees, unfair advantage to associates, conflict of interest between various parties and mis-selling. The proposed measures come at a time when the responsibilities and functioning of trustees have come under the spotlight following instances of front-running and misconduct at a few fund houses.

At present, trustees rely on the AMCs for regulatory compliance. Sebi has recommended that they do independent evaluation and do not just rely on the company’s assurance and submissions. Trustees will also be allowed to receive help from third parties like audit and legal firms, and merchant bankers to carry due diligence on MF transactions and the operations.

“The trustees shall also be responsible for taking steps to ensure that there are system level checks in place to prevent fraudulent transactions and such checks are reviewed periodically,” Sebi has said in a paper.

Currently, there should be at least four trustees in an AMC. They act as an internal regulator for the fund house, keeping in check the compliance and investor interest. AMCs can appoint a trustee company with four directors or appoint a board of trustees upon Sebi approval. The trustees also play a key role in checking that only qualified individuals are appointed as key managerial people.

Under the proposed norms, AMCs with a board of trustees will have to shift to a trustee company format and the minimum number of trustees may also be reviewed. Further, Sebi has recommended the constitution of a unit holder protection committee (UHPC) for an independent review of AMCs’ decisions and compliance issues. This committee will have at least three directors and the chairperson will also have to be an independent director.