Regulator asks fund houses to be more ‘transparent’ in providing info

In a detailed circular issued on Friday evening, securities market regulator SEBI has asked mutual funds to be more “transparent” and make more information available to unit holders, including the commissions paid to distributors and the salaries that the asset management company pays to its senior executives.

Starting May 2016, the offer information for every scheme should also inform the investor of the name of the fund manager and for how long he has been managing that particular scheme, the top 10 holdings in the scheme’s portfolio and by how much the total expense ratio (that is, the fee the investor pays the mutual fund) will reduce his/her returns.

The AMC will also have to disclose whether board of directors, fund managers other key managers have put their own money into the scheme, widely referred to as “skin in the game investments.”

SEBI has also asked all AMCs to have their own teams to carry out credit assessment of assets which is used to measure the credit risk of corporate bonds that a fund house buys and to cut down reliance of third-party credit rating agencies. Last year, investors in two of JP Morgan AMC’s funds were hit when auto parts maker Amtek Auto defaulted on bonds that it had sold to the mutual fund.

Additionally, AMCs should disclose “soft-dollar arrangements” that AMCs have with brokers. According to the circular, a “soft-dollar arrangement refers to an arrangement between AMCs and brokers in which the AMC executes trades through a particular broker and in turn the broker may provide benefits such as free research, hardware, software or even non-research-related services, etc, to the AMC.”

SEBI also limited the scope of such arrangements to only benefits (such as free research report) that are in the interest of investors. Finally, mutual funds are no longer allowed to charge investors management fees when funds are deployed in collateralised borrowing and lending obligation (CBLO, a short-term money market instrument) during a new fund offer period. However, any benefits such as interest income arising from such investments should be passed on to investors.