SEBI Consultation paper on review of requirements of alignment of interest of the Designated Employees of the AMC with the interest of the unitholders 

The Securities and Exchange Board of India (SEBI) is pushing forward requirements for Asset Management Companies (AMCs), aiming to align the interests of AMC employees with those of investors. SEBI’s latest consultation paper invites public feedback on these proposals, which impact different levels of AMC employees in terms of investment requirements, lock-in periods, and disclosure obligations. Key Aspects of the Proposed Framework includes:

Tailored Investment Requirements by Role
SEBI’s guidelines suggest varying “skin in the game” investment obligations based on employees’ responsibilities. Senior executives, such as the CEO, Chief Investment Officer (CIO), and fund managers, must invest a specified percentage of their compensation (CTC) into the schemes they oversee. This investment directly ties their performance and interests to the fund’s success. Additionally, Chief Risk Officers (CROs) and Compliance Officers, who play critical roles in managing risk and regulatory compliance, are also required to follow CTC-based slabs.

Flexibility for Operational Roles
Not all AMC employees engage directly with fund performance. For operational roles—like Chief Information Security Officer (CISO) and Chief Operating Officer (COO)—the AMC has the discretion to decide whether these employees fall under Slab 0 or Slab 1 of investment requirements. This flexibility helps reduce undue financial burden for employees whose roles are indirectly linked to fund outcomes.

Liquid Fund Schemes and Exemptions
SEBI is reconsidering its stance on liquid fund schemes, which are generally low-risk and short-term. Currently, liquid fund managers must lock in a portion of their CTC in these schemes, but this mandate might hinder their own asset allocation. To address this, SEBI proposes allowing 75% of the required investment to be in higher-risk schemes managed by the AMC, while maintaining a 3-year lock-in period for alignment with investor interests.

Lock-in Period Adjustments for Early Exit
For employees who resign or retire before the superannuation age, SEBI proposes reducing the lock-in period to one year instead of the standard three. This allows employees who have left the AMC to access their invested funds sooner, recognizing that their influence on the scheme ends with their tenure, yet maintaining alignment with investors for a reasonable period post-exit.

Quarterly Disclosure Over Monthly
Current regulations require AMCs to disclose aggregated employee investments in fund schemes monthly. SEBI now proposes shifting this to a quarterly disclosure, which aligns with the broader goal of easing compliance without sacrificing transparency. This would harmonize disclosures with insider trading regulations, enabling investors to stay informed while reducing administrative workload.

Clawback Mechanisms and Enforcement Flexibility
SEBI recommends empowering the AMC’s Nomination and Remuneration Committee to take preliminary actions in cases of Code of Conduct violations. This committee would assess non-compliance issues and provide recommendations to SEBI, ensuring that the AMC has a say in disciplinary actions related to “skin in the game” investments.

Stress Testing and Transparency Enhancements
In a move to promote investor awareness, SEBI proposes mandatory disclosure of stress testing results for all open-ended schemes. This aims to provide investors with insights into the risks associated with each mutual fund scheme. The Financial Stability Board (FSB) has also advocated for such disclosures globally, citing the importance of addressing structural vulnerabilities in open-ended funds.

SEBI’s consultation paper is open for public feedback until November 21, 2024, allowing industry experts, AMC employees, and investors to weigh in on the proposed framework.

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