BSEC suspends BO accounts of Race-managed funds
Race manages ten closed-end mutual funds with holdings totalling approximately Tk3,000 crore
The Bangladesh Securities and Exchange Commission (BSEC) has suspended all beneficiary owner (BO) accounts opened in the name of mutual funds managed by Bangladesh RACE Management PCL.
This suspension follows a BSEC inquiry that revealed the fund manager's failure to "protect unit holders' interests."
"The respective trustees of the mutual funds managed by Bangladesh RACE Management shall take control of all BOs opened and maintained with any stock broker in the names of their respective mutual funds and report to the commission with detailed holding statuses within the next seven working days from the issuance of this order," read a BSEC order issued today (24 June).
The stock market regulator also directed that every custodian of the mutual funds under RACE's management ensure the closure of BOs opened and maintained in broker houses and ensure the transfer of all the securities held by the funds to the custodian's accounts within seven days.
If it fails to transfer the securities, any type of trading of securities in the name of the mutual funds shall be suspended till further instruction of the commission, the order said.
It further instructed that each of the concerned parties – asset manager, trustee, and custodian – shall report to the commission in detail about their steps and compliance status under this order within 10 working days.
RACE manages 10 closed-end mutual funds – EBL First, Trust Bank First, IFIC Bank First, First Janata Bank, Popular Life First, PHP First, EBL NRB, AB Bank First, Exim Bank First, and First Bangladesh Fixed Income Fund; and two open-end funds – RACE Financial Inclusion Unit Fund and RACE Special Opportunities Unit Fund.
Total assets under RACE were over Tk3,000 crore, according to the BSEC.
A senior official at BSEC said RACE will not be able to manage these funds as a result of this directive from the commission.
According to the fund manager's website, Investment Corporation of Bangladesh (ICB) played the custodian role for six closed-end funds and BRAC Bank for four funds.
Moreover, ICB acts as trustee of six closed-end funds, Bangladesh General Insurance Company (BGIC) for four funds.
Earlier, the BSEC formed an inquiry committee on 6 June on the allegation of fund mismanagement by the RACE. With the recommendation of the inquiry committee, the commission asked the bourses to suspend any trading of underlying securities of the funds in the block market to protect the possibility of funds diversion.
The Bangladesh Financial Intelligence Unit (BFIU) has ordered all the country's scheduled banks to halt all banking transactions by the 12 mutual funds being managed by Bangladesh RACE Management.
The order issued on 10 June was for 30 days, which means the bank accounts of the mutual funds will remain frozen till 9 July, according to the BFIU.
Meanwhile, BSEC sources said, RACE Managing Director Hasan Taher Imam has been fighting two separate legal battles – one case filed in November by a mutual fund investor named Ruhul Amin Akand, alleging that Imam embezzled public investors' money; and the other case filed by RACE Chairman Chowdhury Nafeez Sarafat.
RACE officials said in a statement to TBS that two cases regarding fund management are pending in the High Court. RACE has written to the BSEC, the bourses, and the BFIU, asking them not to take any action until the cases are resolved.
What RACE did
A BSEC source said that usually mutual fund assets, such as shares and FDRs, are held by custodians. The custodians hold these shares by opening BO accounts. However, shares cannot be bought or sold from these accounts.
In that case, the asset manager opens a separate BO account with the brokerage house, known as a trading account. Only trading can be done there, but shares cannot be stored, he added.
Meanwhile, the trading account is linked to the custodian's BO account. Shares are deposited in the custodian's BO account at the end of transaction settlement as trading.
Essentially, the asset manager cannot sell any shares of the fund without the permission of the custodian, and the trustee acts as a guardian to ensure that the fund manager is working within the law.
However, RACE Multi Securities, Smart Trades Limited, and Trust Bank Securities open BO accounts without trading accounts in the name of mutual funds, allowing RACE to keep shares bought with fund money there.
A RACE official said that from the beginning, the company has been managing funds through BO accounts instead of trading accounts. Shares are deposited as custodians on time through link accounts.
Additionally, regular reports are submitted to custodians, trustees, and the BSEC. So far, there has been no untoward incident in fund management, he added.