SEBI: framework for MF Unit Holder Protection Committee

July 10, 2023
Posted by: OptimizeIAS Team
Category: DPN Topics

SEBI: framework for MF Unit Holder Protection Committee

Subject: Economy

Section: Capital Market

In News: In order to protect the interests of unit holders of mutual fund schemes, SEBI has asked asset management companies to constitute a Unit Holder Protection Committee (UHPC) by January 1, 2024

Key Points:

UHPC is tasked with safeguarding the rights of mutual fund unit holders in relation to all offerings and services provided by the AMC.
Its responsibilities include promoting ethical practices in investments, sales, marketing, advertising, conflict management, resolution of unit holder complaints, investor education, adherence to laws and regulations, and other relevant processes pertaining to the functioning of the mutual fund industry.
To review the various compliance issues relating to the protection of the interests of the unit holders.
To keep the unit holders well informed of and educated about mutual fund products, the investor charter.
The Unit Holder Protection Committee (UHPC) should be constituted by the board of AMC. The Chairperson of the Committee needs to be an independent director, while the committee will have a minimum of three directors as members.

SEBI also announced changes in the role of mutual fund trustees:

Allowed them to outsource a few of their responsibilities to focus on their fiduciary responsibilities. (An investment fiduciary is anyone with legal responsibility for managing somebody else’s money, such as a member of the investment committee of a charity.)
Shall review the performance of AMC (Asset Management Company) in its schemes vis-à-vis the performance of peers or the appropriate benchmarks.
Shall ensure that the AMCs have put in place adequate systems to prevent mis-selling to increase assets under their management and the valuation of the AMCs

What is the role of Trustees?

Mutual funds in India have a three-tiered structure – mutual fund, the trustees and the AMC. Board of trustees or trustee company holds the property of the mutual fund in trust for the benefit of the unit holders. They appoint an AMC to float schemes for the mutual fund and manage the funds mobilised under various schemes.

They are also expected to exercise supervisory oversight over AMC and its activities so as to ensure that AMC acts in the interest of the unitholders.

The core responsibilities of a mutual fund trustee would include:

Ensuring the fairness of the fees and expenses charged by the AMCs.
Reviewing the performance of its scheme against peers.
Putting in sufficient mechanisms to prevent misselling Ensuring that there is no undue influence in the operations by sponsors, associates, or other stakeholders of the AMC.
Ensuring that there is no undue or unfair advantage given to any associate entities. Addressing conflicts of interest between shareholders, stakeholders, associates of the AMC, and unitholders
Ensuring an adequate system to prevent market misconduct by employees and connected entities of the AMC.

For responsibilities other than core ones, trustees are allowed to seek the assistance of professional firms, such as audit firms, legal firms, and merchant banks. This may include overseeing the management of AMCs, acting as a custodian of assets on behalf of unitholders, or periodically reviewing the activities of the AMCs.