Regulator, stakeholders hammer out changes

Proposed changes in seed capital requirements for mutual funds by the Securities and Exchange Commission of Pakistan (SECP) may sow the seeds for lengthy discussion among stakeholders in coming days.
Late last week, the SECP published half a dozen amendments that the regulator intends to make to the existing Non-Banking Financial Companies Regulations 2008. Feedback from stakeholders has been invited before the pitched changes are ratified into law.
As far as mutual funds are concerned, the jury is still out over the impact of the proposed changes. "The representatives of various funds will meet on Monday, 16th May to discuss the pitched changes," chief executive NAFA, Amjad Waheed told BR research.
However, market analysts have raised issues with at least two of the suggested changes. The first issue of contention is the replacement of seed capital requirement with minimum fund size. With a view to enhance flexibility of funds, the regulator has progressively scaled down the requirement for holding seed capital for at least two years.
Initially, NBFCs were obligated to hold at least Rs200 million as seed capital for a minimum of two years, which was reduced to Rs50 million by 2008. The proposed change would do away with this limitation altogether.
"The seed capital requirement ensures that funds will not take their money and flee the market if the going gets tough," commented InvestCap analyst Mazhar Sabir. While acknowledging this vulnerability, former chief executive NIT Tariq Iqbal pointed out that, "By doing away with this requirement, the regulator has also opened up the field for qualified individuals to enter the market, even if they do not have a significant amount of money to invest as seed capital".
But Iqbal cautioned that the regulator will have to increase vigilance over funds to ensure that their financial positions remain strong, especially during times of crises at the bourses.
The other debatable proposal relates to limiting annual equity brokerage paid by a mutual fund to a single broker to 10 percent of its total brokerage expenses. The obvious intent of the regulator behind this clause is to limit the risk to mutual funds from broker default as well as enhancing competitiveness among brokerages in the market.
But critics assert that benchmarking with total brokerage expenses may encourage frivolous trading by funds, in order to lower the proportion of trades executed through the brokerages of their choice. It may be advisable to link this limit to multiple criteria in addition to the proposed change. For instance, the same may be linked to total brokerage expenses and net assets held by a fund.
SECP has proposed lowering the cap on investments into a fund by a single unit holder from 10 percent to 5 percent. Empowerment of unit holders and enhancing the role of trustees has also been envisioned, along with a prohibition on trustees from investing in the relevant fund.
While these proposals are steps in the right direction, the practical application of some may be easier envisioned than done. Tariq Iqbal opined that obtaining unit holders approval for implementing changes within the fund or to its portfolio may not be feasible.
Enhancing the role of trustees will definitely help improve oversight of the industry. However, the creation of a separate ombudsmans office for the industry similar to the banking ombudsman is also an option worth considering. By providing a third-party, independent dispute resolution mechanism, the regulator can take another stride on its path to increasing investor protection.