BRAC Bank may withdraw from custodianship of 60 mutual funds. Here's why

BRAC Bank is considering gradually withdrawing custodianship from 60 mutual funds (MFs) if it does not get its authority strengthened over the management of assets in the funds' portfolios.

It has come to this position following bitter experiences regarding the alleged misappropriation of two pooled funds by their fund manager.

The Bangladesh Securities and Exchange Commission (BSEC), in an investigation in early 2023, found that Kh. Asadul Islam, chief executive officer of the award-winning company Alliance Capital Asset Management, had embezzled Tk 450 million from the MFs.

Later, both the anti-corruption watchdog and the securities regulator pointed the finger at BRAC Bank, the custodian of the funds - MTB Unit Fund and Alliance Shandhani Life Unit Fund.

As per the existing rules, the role of a custodian is limited to ensuring the protection of assets purchased by the asset management company (AMC). But the cash fund and transactions are under the control of the AMC.

"We were blamed for not securing investors' funds although we didn't have any say over cash transactions," said Md Shaheen Iqbal, deputy managing director (DMD) of BRAC Bank.

Meanwhile, BRAC Bank has already expressed its intention to discontinue as custodian of SEML Lecture Equity Management Fund, which is about to be converted into an open-ended fund.

Upon completion of the tenure of the fund, 93 per cent of the unitholders present at a meeting on October 28 voted in favour of the fund's conversion. At that meeting, BRAC Bank said it did not want to remain as custodian of the converted fund because it was not satisfied with how the asset manager had handled the fund.

The unitholders were then informed that the Investment Corporation of Bangladesh (ICB) had expressed interest in playing the role of custodian of the open-ended fund. But the fund investors opposed the proposition.

The BRAC Bank DMD gave an assurance that his organisation would keep custodianship of the fund until a new custodian takes over the charge.

All this has happened at a time when the market regulator is set to put in place revised mutual fund rules through a gazette notification, promising that the rules would grant greater powers to custodians.

BSEC officials said the revised rules, when enforced, would enhance the responsibilities of custodians along with increasing the fees for the role.

Under the new rules, bank accounts of the pooled funds will be managed by the custodians, and the AMCs will only conduct buy-sell operations in the secondary market.

BRAC Bank submitted its opinions on the draft of the mutual fund rules.

"After the gazette notification, we will see whether our opinions have been taken into account in the revised rules," said Mr Iqbal.

In the revised rules, the BSEC said the bank accounts meant for the execution of buy-sell operations would be transferred from the custody of the AMCs to that of the custodians. That would not be enough, according to Mr Iqbal, to ensure transparency in fund management.

"For example, AMCs can invest unitholders' funds in junk stocks with bad intentions. The regulator will have to clarify whether custodians will be made responsible for the misdeeds committed by AMCs," said Mr Iqbal.

There are other cash accounts maintained by the AMCs - collection accounts opened for fund collection through IPOs from investors, equity accounts used to receive money from investors by issuing units of open-ended MFs, and dividend accounts meant for the disbursement of dividends.

A custodian's control over overall cash transactions by AMCs would not be ensured unless these accounts too are maintained by the custodians.

"These matters are not clear in the revised rules for MFs. The custodians should also have the authority to choose banks for opening the accounts to ensure the safety of investors' funds," added Mr Iqbal.

The revised rules also require custodians to have a minimum paid-up capital of Tk 2 billion.

As banks usually have such a large paid-up capital, the BSEC wants well-performing banks, such as HSBC and BRAC Bank, to act as custodians in the interest of unitholders.

The BSEC has proposed increasing the custodian fee to up to 0.50 per cent from the existing 0.10 per cent of a fund to encourage banks to work as custodians of MFs.

But the incentive seems to have fallen short of persuading BRAC Bank to remain as a custodian of pooled funds.

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