The Securities and Exchange Board of India (“SEBI”) has by way of circular dated July 7, 2023 introduced a regulatory framework outlining the roles and responsibilities of Trustees and Board of Directors of Asset Management Companies (“AMCs”) of Mutual Funds.
According to SEBI's regulatory framework, the Trustees are responsible for holding the assets of the mutual fund. Their primary role is to ensure that the interests of unitholders are not compromised in any way. If any conflicts of interest arise, it is the duty of the Trustees to resolve them. However, there are certain restrictions outlined in the SEBI Regulations of 1996 that limit the Trustee's ability to address certain conflicts of interest beyond their scope of power.
The framework provides following guidelines:
A. Core Responsibility of the Trustee of Form
1.As per Regulation 18(25)(C) of the Mutual Fund Regulations, the Trustees are required to demonstrate careful and thorough investigation on matters specified by the SEBI periodically. In accordance with this specific regulation, the Trustees are expected to independently conduct due diligence on specific "core responsibilities" outlined in the notification are as follows:
The Trustees shall oversee fairness of fees and expenses charged by the AMCs.
The Trustees will have to review AMC performance compared to peers or benchmarks,
The Trustee shall ensure systems to prevent mis-selling to increase the asset under the management and valuation of the AMCs.
The Trustee shall also ensure that there must not be any influence on AMCs from any sponsorship, its Associates and other stakeholders.
The Trustee shall ensure that AMCs should not provide unfair or undue advantage to any of its shareholder/stakeholders/associates.
The Trustee shall address conflicts of interest, if any between shareholders/stakeholders/associates of the AMCs and unitholders.
The Trustee shall also prevent misconduct by employees, AMCs and connected entities of the AMCs.
2.Trustees should ensure that all the system level checks are in place at AMCs to prevent fraudulent transactions and review them periodically. Trustee should independently evaluate AMC compliance for eg key areas and avoiding reliance on AMC submissions or external assurance.
3.The Trustees shall ensure that appropriate mechanisms/systems by AMCs to generate system-based information/data/reports for evaluation and due diligence. Additionally, the Trustees shall ensure periodic review of these systems. AMCs are required to provide exception reports/analytical information to the Trustees, who will assess the effectiveness and handling of alerts by the AMCs.
4.The Trustees shall mandate AMCs to provide accurate reports and alerts based on predetermined parameters, including the core responsibilities mentioned in above paragraph. In order to take appropriate action, additionally, the Trustees will conduct regular reviews of AMCs' efforts to update KYC attributes, specifically related to bank details, PAN, and mobile phone numbers, for folios lacking complete or updated KYC information.
B. Third Party Assurances:
The Trustees have the option to engage third-party fiduciaries for the following tasks:
Ensuring that AMCs manage the operations of Mutual Fund schemes from other operations.
Fulfilling their duty as custodians of assets on behalf of unitholders, as per Mutual Fund Regulations and the trust deed.
Regularly reviewing the net worth of the AMC to ensure compliance with specified thresholds.
Also should ensure that the transaction of Mutual Funds are as per provisions of Trust Deed.
C. The UHPC (Unit Holders' Protection Committee)
UHPC is entrusted with the following responsibilities:
To Protect the interest and review the compliance issue relating to protection of the Unit Holder;
To adopt market best practices, ensuring compliance with regulations, and addressing investor grievances.
Ensuring unit holders are well-informed and educated about mutual fund products, investor charter, and complaint handling procedures.
The UHPC will submit its findings and recommendations for action to the AMC's board of directors.
Detailed guidelines for the UHPC are provided in the attached circular.
D. Appointment of Trustee
Pursuant to Regulation 16 (7) of the Mutual Fund Regulations, in case the company is appointed as Trustee of a Mutual Fund, it is mandated that the Chairperson of the board of directors of Trustee company must be an independent director. Furthermore, a Trustee company that has already been appointed as the Trustee of a Mutual Fund must adhere to this requirement within a timeframe specified by SEBI.
Trustee company which already appointed as the Trustee of a Mutual Fund, must ensure compliance with the appointment of an independent director as the Chairperson of its board of directors. This compliance is to be accomplished within a period of six months from the effective date of this circular.
E. Meetings
According to Regulation 25A of the Mutual Fund Regulations, the board of directors of both the Trustee company and the AMC, including their committees, shall meet at such frequency as may be specified by SEBI from time to time. The board of directors of the AMCs and the Trustee Company must meet at least once a year to discuss any relevant issues and plan future actions.
This circular will be effective from January 01, 2024.
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