The Securities and Exchange Board of India (Sebi) on Friday issued a detailed circular placing the onus of protecting mutual fund (MF) trustees on the interests of mutual fund (MF) trustees. These include monitoring fees and expenses, preventing mis-selling and front-running, and conflicts of interest among various stakeholders.

The market regulator stipulates that an Asset Management Company (AMC) shall establish a Unitholder Protection Committee (UHPC) to oversee the protection of the interests of unitholders, the adoption of sound and healthy market practices and compliance with laws/regulations or other relevant processes.

In addition, UHPC must make unitholders fully aware of and educate them about MF products, investor charters and complaint-handling procedures. It shall regularly submit its opinions and recommendations to the AMC Board of Directors.

Accordingly, the asset manager’s board of directors and the trustee company’s board of directors will meet at least once a year to discuss issues about the mutual fund and, if necessary, a future course of action.

The MF Code also states that if a company is appointed as a trustee, the chairman of the company’s board of directors should be an independent director. Accordingly, the MF Trustee appointed by the company shall appoint an independent director as its chairman of the board within six months of the effective date of this circular.

The new framework will come into force on January 1, 2024.

In addition, Sebi clarified certain core responsibilities of fiduciaries, such as ensuring that appropriate systems are in place to prevent mis-selling by employees and that asset managers have mechanisms to check for market abuse by their employees and related parties to avoid front-running, form segmentation, etc.

In addition, they should ensure that no improper or unfair advantage is given to any associated company/group entity and that operations are not unduly influenced by the promoters, their associated companies or other stakeholders. As such, they should be responsible for resolving conflicts of interest between shareholders/stakeholders/associated persons of asset management companies and unitholders.

They must ensure that the fees and expenses charged by asset managers are fair, in addition to comparisons with peers or fundamental benchmarks.

In addition, the trustee will be responsible for regularly reviewing the steps taken by the AMC for portfolios that do not contain all KYC attributes and bank details.

To enable trustees to focus on their core duties, Sebi allows them to engage the services of professional firms such as audit firms, law firms and commercial bankers to conduct due diligence.

Such non-core responsibilities that may be outsourced include:

• Ensuring that the asset manager manages the operational plan independently of other activities.
• Fulfilling the duties of a unitholder asset custodian by regulations and the trust deed.
• Reviewing the net worth of the asset manager regularly to ensure compliance with a specified threshold.