The standards of governance in the mutual fund industry have justifiably come under the scanner lately. Conflict of interest issues surfaced in HDFC Mutual Fund’s shares allotment to its distributors ahead of its IPO as well as in ICICI Mutual Fund’s alleged move to bail out ICICI Securities when the latter’s IPO was in dire straits. SEBI pulled up mutual fund trustees in a meeting called by it recently for a series of violations by fund houses. These ranged from operational ones such as laxity in collection of KYC documents or inappropriate apportioning of advertising expenses to the more serious ones such as lack of documentation of rationale for inter-scheme transfers, distribution of dividends without the consent of trustees and denying investors the correct NAV. These are serious violations and there’s little doubt that investor interest has been compromised through such acts.

While the regulator is correct in chiding trustees who are really the first level regulators in mutual funds , the question that SEBI needs to answer is why it took so long to act. SEBI stumbled upon the violations during an inspection carried out between April 2014 and March 2016. Data from the Association of Mutual Funds in India (AMFI) show that about 60 per cent of investors in equity funds and 70 per cent in non-equity funds don’t stick on beyond two years. With constant churn of investors, time is of essence if wrongs to an investor at a point in time have to be set right.

Again, while hauling up trustees, the culpability of the compliance officers within the asset management companies (AMCs) needs to be examined too. Trustees are one of the layers of the three-tier structure under which mutual funds work, the sponsor and the AMC being the other two. Compliance officers work inside the AMC and are responsible for monitoring compliance of the Act and other rules and regulations. Being hands on, they are better placed to spot operational irregularities. It appears improbable that they were not aware of these serious transgressions. This however does not absolve the trustees from their failure to fulfil their fiduciary responsibility to investors. To protect investors, SEBI (Mutual Fund) Regulations, 1996, endows trustees with the power to take whatever remedial steps necessary if they believe that there are violations in the conduct of the business. At a time when assets under management for mutual funds have trebled to ₹23 lakh crore in the last five years, the role of trustees in protecting investor interest becomes paramount. It’s time that trustees took their jobs more seriously in protecting investors’ interests. SEBI needs to take its findings to the logical conclusion by holding fund houses and compliance officers accountable for the violations that it has discovered. Where possible, remedial action to protect investor interests needs to be taken, while penal action against the concerned fund houses must follow.