Can trustees stop frauds in MFs?

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In an effort to safeguard unitholders’ interests, the Securities and Exchange Board of India or SEBI recently proposed revision of role of mutual fund trustees in its consultation paper. With the mutual fund industry size booming day by day, there is a urgent need to review the roles played by various categories of people that are a part of mutual fund industry. Today, the size of industry AUM has increased from 30 lakh crore rupees in November 2020 to over 40 lakh crore rupees by end of March 2023.

Trustees in MF industry Structure of a mutual fund has three layers. These are AMC,  sponsors and the Trustee. Mutual fund houses collect funds from retail and institutional investors and invests them in equities and debt markets. There is a distinction between mutual fund sponsors and trustees. The sponsor provides capital, while the trustee serves as the fund’s internal regulator.  So, who appoints mutual fund trustees, and how do they fit into the mutual fund structure? The Sponsor Is comparable to a company’s promoter. Sponsor’s responsibilities include appointing trustees with SEBI’s permission. It also includes establishing an AMC under the Companies Act of 1956 along with registeration of the trust. The Trustees are expected to exercise supervision over AMCs. It also has to ensure that AMC operates in the  best interests of unitholders.

Key responsibilities Among the trustees’ primary responsibilities is signing investment management agreement with the AMC to establish its operations.

In addition to this, trustees are responsible for ensuring that the AMC has followed all necessary  procedures.  Trustees should ensure that all essential employees, such as the CEO, CIO, fund managers, and analysts, are appointed after  due diligence.

Before the scheme launch,  trustees must approve every scheme offered by the AMC. The trustees will conduct a quarterly assessment of all AMC transactions and will submit reports to SEBI every six months.

What’s new So, what new has Sebi proposed for trustees in the recent consultation paper?

Sebi has recommended that trustees are responsible for implementing system-level inspections to avoid fraudulent transactions. Sebi has advised  trustees to seek help of audit firms, legal firms, and merchant bankers for due diligence on their behalf so that they can focus on their main tasks. To improve  asset base, trustees of mutual funds should focus and bring to light instances of market abuse and mis-selling by AMCs. The trustees should be accountable for routinely monitoring the actions taken by AMCs for folios lacking all KYC criteria and bank information. Also,  Sebi has asked comments from public on the above listed proposals till February 2023.

How will this benefit investors? Once these proposals are finalised, the trustees will make sure that the AMCs do not favour the AMC’s stakeholders in its actions. Their primary focus will be on the reasonableness of AMC’s fees and expenses, as well as misconduct, such as market abuse or the improper use of information by AMC personnel or distributors.  Shweta Jain, CFP, Founder of Investography, said, “With the growth of mutual funds in India, it is important for the regulator to ensure unit holders’ safety. The trustee’s role is to ensure compliance and perpetuity, and investor protection; the new recommendations by Sebi will benefit the investors in a big way going ahead,”