Seminar on Mutual Funds Internal, Concurrent Audit & NAV Certification Process review of RTA & Custodians By CA Hasmukh B Dedhia Organized by WIRC of ICAI July 21, 2012 Process Review of RTA & Custodians 1
Constitution of a Mutual Fund A mutual fund is a pool of savings of a number of investors with common investment goals. The money collected is invested in various capital market instruments and the returns on the same are distributed to the investors by the way of capital appreciation. Thus in order to manage the fund well different roles are played by different teams such as sponsors, AMC, Registrar Transfer Agents (RTAs), Custodian etc A clear idea of Mutual Fund organisation structure can be understood from the following slide 2
Organisation of a Mutual Fund 3
Segregation of duties Different teams carrying out different jobs in order to ease daily transactions and in turn to safeguard investor interests; Operations Investment Fund Accountants Distributors Custodian Registrar and Transfer Agents (RTAs) 4
Custodian- Introduction Custodian is an entity appointed to perform Custodial service for the assets under management of its present and future schemes managed by AMC who is not affiliated to the sponsor and/or its associates. The Custodian is responsible for settlement of trades and ensuring custodial services for the Fund. AMC enters into service level agreement with custodian, which will clearly bring out the service delivery expectations from the custodian. These would be reviewed periodically to reflect at all times the business requirements currently in practice. The entity engaged for custodial services should be registered as custodian under the SEBI (Custodian of Securities) Regulation 1996. 5
Role of custodian For better Internal Audit of custodian, we shall first understand as to what is the Role of CUSTODIAN. The table given below depicts the same; Holds the fund s securities in safe keeping Settles securities transactions for the fund Collects interests and dividends paid on securities Records information on Corporate actions Periodical reconciliation with the fund accountants 6
Internal Audit of Custodian Operations While doing an Internal audit of custodian area the following points need careful consideration:- Review of agreement with custodian should be done so as to ensure the terms thereof and adherence thereto if being followed Verification of Certificate to operate as Custodian of securities It is the responsibility of an internal auditor to ensure if the overall processes and controls are in place at the custodian. This will give a comfort as to how much reliance can be placed on the overall functioning of the custodian High level of understanding of the processes followed and controls maintained in those processes 7
..Internal Audit of Custodian Operations SAS 70 report to be reviewed to find out if any adverse opinion pertaining to the overall functioning of the custodian are given Review of Delivery instruction for purchases (DIP) and Delivery Instruction for sales (DIS) and settlement of trades with respect to the same should be ensured Review Holding Reconciliation as per Fund house, Custody and NSDL records. Review and reconciliation of logical and actual holding tallying with the physical and electronic balances. 8
..Internal Audit of Custodian Operations Review of Income booking process as to Income received vs. receivable (Interest on debt securities, Dividend income etc.) Review process of Corporate Actions booking and settlement. Review accuracy, timeliness, adequacy and periodicity of reports sent by the custodian to the Fund Review compliance with service standards prescribed for Custodial Services. 9
..Internal Audit of Custodian Operations Review of Disaster recovery plan, contingency plan and safe keeping arrangement of documents at custodian with regard to Fund s activities Review of Insurance cover obtained in accordance with SEBI directives 10
Registrar And Transfer Agent (RTA) An entity appointed by the Mutual Fund to render services to its investors/unit holders viz., Receipt and processing of various financial transactions and non financial transactions The RTA also provides customer care support services such as request for latest NAV, request for balance/account statement etc. and also manages the dividend distribution process and commission processing for the MF An AMC generally enters into service level agreement (SLA) with RTA, which will clearly bring out the expectations from the third party service providers. Periodically, the SLA is reviewed and revisited in line with regulatory and business requirements currently in practice. 11
Role of RTA Functions of RTA Financial Transactions Non-Financial Transactions Receipt and processing of financial transactions (subscription, redemption, switch) from investors, dividend processing and payout, Brokerage processing for distributors Processing of bank mandate, nominee, pledge, change of address, change of /Updation of email address, transmission of units related request, name correction etc. 12
Internal Audit of RTA Operations Verification of Certificate to Operate as Registrar under SEBI regulation. Review of Check points for control on R & T Activities, like various reports sent by them, monthly exception report, status report etc. Verify adherence to Time Stamping norms for the application received from various sources Review of procedure and control for handling of Subscription/Redemption Application request received at AMC branches and R&T Branches and its compliance with SEBI 13
Internal Audit of RTA Operations Review of process for handling Investor Complaints, tracking of complaints, follow up mechanism like investor complaints receipt/ resolving framework, escalated complaints resolution framework, complaints received from SEBI etc Brokerage processing review comprising of setting up of brokerage rate in R& TA system, computation of brokerage payable, payment controls, factoring KYD norms and KYC norms for channel partners. Process controls with respect to effecting the change of broker 14
Internal Audit of RTA Operations Process for setting of masters for loads, brokerage structure and dividend declared Review of procedure and controls for brokerage processing by R & T Agent. Checking of brokerage processed with refrence to brokerage rates timely & accurate updation, special rate/incentives calculation, service tax deduction and payment, etc. Procedure and control for collection and handling of Mandatory Documents including Self Declaration and Know Your Distributor code. 15
Internal Audit of RTA Operations Compliance with KYC norms, Prevention of Money Laundering Act, Bank details and PAN related documents as mandated by SEBI/RBI/Govt. from time to time. Verification of adequacy of controls for payout files generated for redemptions, brokerage and dividend payouts. Review of procedures for delay in dispatch of redemption and dividend warrants including computation and payment of compensation for redemption in accordance with SEBI directives. 16
Internal Audit of RTA Operations Verify adherence to TAT for processing the request Vis-a-Vis the time stamped request. Verify adherence to AMFI guidelines, AMC instructions on the documents to be obtained before processing the application. Dispatch of communication and account statement confirming the status of transactions. Disclosure of investor complaints received from all sources on the MF s website and on the AMFI website as well as in annual reports as required in terms of SEBI 17
Internal Audit of RTA Operations Review of SIP & SWP processes Review of Brokerage pay out Review of NFT processes Returns and Reporting 18
Thank Y ou 19