To protect the interests of investors and to ensure that mutual funds render high standard of service, the capital market regulator Securities Exchange Board Of India (SEBI) has come out with a revised risk management framework.
The bond schemes closure by Franklin Templeton AMC has left many investors in the lurch. After reviewing the risk management framework for mutual funds in the Mutual Funds Advisory Committee (MFAC), the recommendations of the panel have been incorporated by the regulator in the new risk management framework (RMF).
SEBI’s new RMF terms risk management as an independent and specific function of the asset management company. For each risk such as investment risk, compliance risk, operational risk, and cyber security the asset management company should appoint a dedicated risk officer. In addition to these officials, there should be a chief risk officer (CRO) in each asset management company.
The RMF seeks to clearly define the roles of risk personnel and mention the same on the fund house’s website. Though the CRO is responsible for the overall risk, along with the management, both board of AMC and trustees should also be responsible.
The RMF specifies the policies, procedures, roles and risk management functions of the management, board of the AMC and board of the Trustees. “The elements of RMF, wherever applicable, have been segregated into ‘mandatory elements' which should be implemented by the AMCs and ‘recommendatory elements' which address other leading industry practices that can be considered for implementation by the AMCs, to the extent relevant to them,” said the circular issued by SEBI.
The fund houses are asked to prepare a roadmap for the implementation of the new RMF. The fund houses are also asked to conduct a self-assessment of their risk management framework. “Compliance with the RMF should be reviewed annually by the AMC,” the circular added.
New RMF clearly defines the role of all CXO in the asset management company pertaining to the risk management in the mutual fund. It has further dealt with guidelines pertaining to identification, measurement and management of the risks. For the aforesaid key risks to which the mutual fund is exposed, the RMF has given comprehensive guidelines – both mandatory as well as recommendatory.
SEBI's revised RMF also expressed the need of monitoring risks associated with managing distribution channels and processes around commission payouts. The AMC shall also be responsible for the mis-selling done by the persons associated with selling of mutual funds including distributors, the circular said. All the sales sales staff and distributors must be NISM certified and the mutual funds are asked to carry out detailed analysis to ascertain if there is miss-selling at AMC level.