When you look at the details of a mutual fund you will find mention of the various segments of a mutual fund like the AMC, the custodian, the Fund and the Trustee. The trustee has a very important role to play in the mutual fund. We know that a mutual fund collects money from the retail investors and from institutional investors and deploys it in equity and debt market investments. On the other side, mutual fund is regulated by SEBI in all its functions as a recognized market intermediary. In between, there is the need for an independent functioning body that will ensure that the SEBI regulations are complied with and that the interests of the unit holders are protected. It falls upon the Trustee to do this job.
Let us understand the role of trustee in a mutual fund by understand their rights and obligations. There is a difference between sponsor and trustee in mutual fund. The sponsor is the capital provider while the trustee is the internal regulator of the fund. So, who appoints trustee in mutual fund and how do they fit into the structure of a mutual fund.
How trustees fit into the basic mutual fund structure..
Source: Indian Institute of Capital Markets
The role of a trustee becomes critical because the mutual fund, sponsored by the AMC, actually holds money in trust on behalf of millions of investors. The trustees will ensure that the funds are actually managed in the interests of the shareholders. While the trustees will not get into the day to day management of the funds, they will set broad guidelines and compliance check points to ensure that the interests of the small investors are protected. Effectively, the trustee will spell out the responsibilities of the AMC, monitor any new scheme that is introduced and ensure full compliance with all regulatory guidelines.
Every mutual fund must have a minimum of 4 trustees or they can appoint a trustee company with minimum of 4 directors. Two-thirds of the trustees will have to be independent. Also, trustees cannot be appointed from within the same group to which the AMC belongs. The Board of Trustees is appointed by the AMC and is subject to the approval of SEBI.
Key functions played by a mutual fund trustee..
While the functions of a mutual fund trustee are defined very broadly and are actually all-encompassing, some of the key functions that the trustee is expected to discharge are as under:
The trustee must ensure that the AMC has put in place adequate systems for dealing, execution of purchase and sale orders, back office systems through appointment of RTA, proper checks and balances for new flows and redemptions etc.
The trust also ensures that all the key personnel of a mutual fund are appointed with adequate qualifications and skills. This includes the appointment of critical employees like the CEO, CIO, fund managers etc. Additionally, the trustee will also vet that the appointment of auditors, compliance officers and registrars is also done.
A big role that the trustee plays is in putting internal controls in place and demarcates the “maker/checker” roles. This includes the preparation and review of the compliance manual of the fund, design of internal control mechanisms, putting in place internal audit systems etc.
Mutual funds need to appoint brokers and distributors to sell their products and here trustees have to ensure that the process is foolproof. The board of trustees will specify norms for empanelment of brokers and franchisees. It will also lay down norms for broker screening, monitoring securities transactions with brokers and avoiding disproportionate business to a handful of brokers.
The trustee is the custodian of the trust of millions of mutual fund investors. Therefore, their responsibility is a fiduciary responsibility. In the interests of the investors, the trustees need to ensure that the assets of the fund are fairly valued (both debt and equity), there is a clear methodology for valuing illiquid securities and that proxy voting is done fairly.
Keeping arms length with the AMC..
Remember, the Board of Trustees is appointed by the AMC with the approval of SEBI. But the primary responsibility of the trustee is towards the retail investors of the fund. Hence it needs to maintain an arms-length relationship with the AMC. The Board of the Trustees has the authority to request any information from the AMC pertaining to the operations of the fund. The trustee is also authorized to initiate action against the AMC or even penalize the AMC if SEBI regulations are not complied with or if the interests of the unit holders are not protected. While the trustees are appointed by the AMC and receive fees from the AMC, their primary objective has to be protecting the interests of the AMC and ensure SEBI compliance. To that extent, the trustees are also authorized to dismiss the AMC if warranted.