Role of Trustees in mutual funds
The role of a trustee becomes vital because they hold money in trust
Every mutual fund must have at least four trustees.
The role of a trustee becomes vital because they hold money in trust on behalf of millions of investors. The AMC sponsors the mutual fund, but the trustees’ job is to ensure that the funds are managed in the interests of the shareholders. The trustees do not get involved in the day-to-day management of the funds. Instead, they set broad guidelines and compliance checkpoints to ensure that the interests of the small investors are protected. The trustees also set the responsibilities of the AMC and monitor that the introduction of any new scheme fully complies with all regulatory guidelines.
How many trustees does a fund require?
Every mutual fund must have at least four trustees. If a trustee company has been appointed, then that company should have at least four directors on the board. In addition, 2/3rd of the trustees should be independent.
Who appoints the board of trustees?
The Board of Trustees is appointed by the AMC (sponsor) and is subject to the approval of SEBI. However, the trustees cannot be appointed from the same group to which the AMC belongs.
What functions does a mutual fund trustee perform?
The functions of a mutual fund trustee are broadly defined and are all-encompassing. Some of the key functions of the trustees are as under:
- The trustee must ensure that the AMC has arranged adequate systems for dealing and accounting, execution of purchase and sale orders, back-office systems through RTA appointments, proper checks and balances for new flows and redemptions, etc.
- The trust also ensures that all the key personnel of a mutual fund is appointed, and they should have adequate qualifications and skills. The appointment of critical employees includes the CEO, CIO, fund managers for the various schemes, etc. The trustee will also see that auditors, compliance officers and registrars are appointed.
- The trustee plays a significant role in establishing internal controls and demarcating the “maker/checker” roles. It includes preparing and reviewing the funds’ compliance manual, design of internal control mechanisms, internal audit systems, etc.
- Mutual funds appoint brokers and distributors to sell their products, and trustees must ensure that the process is fool-proof. The board of trustees will specify norms for the empanelment of brokers and franchisees or marketing agents. It will also lay down standards for broker screening, monitoring securities transactions with brokers and avoiding allotment of business disproportionately to a handful of brokers.
- The trustee’s responsibility is a fiduciary responsibility who is the custodian of millions of mutual fund investors’ trusts. Therefore, the trustees need to ensure that the fund’s assets are reasonably priced (debt and equity) with a transparent methodology for valuing illiquid securities and fair proxy voting in the interest of unitholders.
- The trustees shall ensure that the AMC has not provided any undue or unfair advantage to any associates or dealt with any of the associates of the AMC in any manner detrimental to the interest of unitholders.
- The trustees shall ensure that the Asset Management Company enters the transactions as per the regulations of SEBI and the scheme.