Gap Between Letter and Spirit in the Role of Mutual Fund Trustees

Trustees of asset management companies (AMCs) have a fiduciary duty to manage the interests of mutual fund (MF) unitholders. Trustees must ensure that there is no breach of compliance or procedures that could lead to failures in the investment process and, therefore, be detrimental to investors. Recent episodes of liquidation of some MF programs and alleged malpractices in MF houses such as front-running, tailgating and kickbacks to distributors have shed light on the role of trustees who are the regulators first level of Industry of 38 billion MF. These incidents call into question the responsibilities of trustees under the market regulator Securities and Exchange Board of India (Sebi) MF Regulations 1996, which include ensuring due diligence in the operations and compliance of AMCs of so that the interests of investors are protected.

The question now is whether the trustees perform their duties effectively. The April 2020 plan wind-up episode draws attention to clause 39(2a) of the Sebi MF Regulations. It states that an MF plan may be terminated “…upon the occurrence of any event which, in the opinion of the administrators, requires the winding up of the plan.” This liquidation was pinned to the notice of the administrators. The question here is whether such a decision was independently assessed by the trustees in the interests of the unitholders or driven by the AMCs. Thus, if the AMC-trustee distance is only in the letter and not in the mind, then it is an obstacle to good governance.

The other responsibility of trustees, as stipulated in Regulation (18)(23)(b) of the Sebi MF Regulation, is to certify that they have not “satisfied themselves with any instance of insider or front -running by one of the trustees”. , trustees and key GAC staff.” While trustees have been given this responsibility, the questions that arise are: do trustees monitor the performance of fund managers; do they look for reasons for underperformance? funds in the missing MF?

Other fiduciary duties of trustees on fair treatment of clients, cost of plans, valuation, are also questionable. The culture of gifts and bribes flourished and took innovative forms even after strict elimination rules. It is therefore necessary to assess whether trustees are effectively discharging their responsibilities. Do they ensure that GAC activities are carried out in accordance with stipulated regulations? Are they able to apply best practices?

Overall accountability of Trustees to Unitholders is strongly desired. Trustees should communicate frequently with Unitholders and share their views on the operation of CMAs. Regarding their fiduciary duties, they must prove that “mutual funds sahin hain” and “trustees hain na” for investors. This will be a much-desired boost to investor confidence.

The role of trustees has been given great prominence since several steps have been taken towards their effective functioning over the past two decades. The PK Kaul committee set up by Sebi in 2003 suggested several things that involved increased trustee accountability. It was felt that the administrative support to trustees should be improved so that there is less dependence on AMCs. In 2020, Sebi clarified the appointment of a dedicated administrator to provide administrative assistance to administrators in monitoring the various activities of an AMC and enable them to perform their duties effectively. But how to control the independence and responsibility of these fiduciary agents.

Perhaps the ideal framework for trustees could be to work in splendid isolation from the CMA or adopt the far-sighted framework suggested by the Kaul Committee of having the concept of professional trust companies that would be completely independent of the CMA and its promoters. This can be done through a three-pronged approach – first, the institution of trustees should be endowed with its own capital to reduce reliance on AMCs in any form (salaries, operations, infrastructure, etc.); second, they should be appointed by the regulator and mandated to report directly to it. And third, the trustee’s office should have a team of knowledgeable people who understand MF’s specialist business. Removing the directors’ dependence on the AMCs will reduce any conflicts of interest and help them to perform their duties effectively and protect the interests of unitholders.

Mitu Bhardwaj and Rasmeet Kohli work with the National Institute of Securities Markets. Views are personal.

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Dolores W. Simon