Action against delinquent mutual funds planned; United Money Market Fund launched

KARACHI (November 06 2002) : The Securities Exchange Commission of Pakistan has noted several irregularities in mutual funds management and it intends to take action in respect of such delinquencies including weeding out management in default as they engender consolidation of the industry, warned SECP Chairman Khalid A Mirza. Addressing a gathering of businessmen and financial leaders at the launch of United Bank's money market fund, in Karachi, on Tuesday, he stated that the country's track record with mutual fund of equity investing variety had “been at best mixed and in some respects quite poor”. He said by allowing UBL to go ahead with this fund without fulfilling certain requirements – ordinarily insisted upon in case of equity based funds – was “a carefully considered decision”. “I cannot help but feel that it is some what like a man getting married for the second time, which they often say is the triumph of hope over experience.” Khalid Mirza regretted that large number of funds have capital of less than the prescribed minimum of Rs 100 million – effective from earlier this year. “Had the prescribed minimum been on NAV basis, the situation would have been worse,” he added. Further, he said, prudential policies have been ignored, securities not kept with custodian and funds invested in violation of rules (e.g. for control purposes). “Simply put, most mutual fund management have not just performed which has been to the detriment of the investor, the mutual fund industry and the capital market as a whole”. He warned in clear terms all the concerned that the SECP does not intend to tolerate this situation any longer and would proceed in accordance with the law. He accepted that the paucity of investable money market investments might be one of the impediments to overcome. Describing it as a “Chicken-and-egg” type situation with many corporates finding it difficult to issue debt securities in the absence of money market mutual funds and money market funds not being promoted due to scarcity of corporate debt securities. “Money market funds certainly fill the demand side of the equation, and should, therefore, encourage the supply side,” hoped Mirza. He said SECP has only recently issued guidelines for issuance of commercial paper by corporates and hopefully this would help the supply side. The Chairman SECP expects money market mutual funds to be proactive and perhaps team up with investment banks or investment banking arms of commercial banks to encourage the issue of debt securities by corporates. He said if managers of money market mutual funds are competent and business-like they will find a way to ensure that investable securities are available. “The excuses put forward by management of equity based mutual funds for their inability to make a headway like tax anomalies, high returns on government securities are really a copout and simply demonstrate their incompetence,” he emphasised. “It is not a perfect world, never has been, nor will it ever be! If you are competent you will know how to deal with difficulties and make progress,” he added. FUTURE DIRECTION: The SECP Chairman chartered out the future course in his discourse. First, he said, SECP is strengthening its capacity to regulate through reorganisation, automation and training. Second, he said, was to move to a single regulatory regime with a single investment management license inclusive of pension fund, insurance monies and other funds placed for management to give economies of scale and make it commercially attractive. Third, there was a need for graded regulatory penalties to enforce compliance replacing the current system ie do nothing or sack the management. Fourth, we need, the flexibility to convert close-end funds under the trust format, float special purpose funds, rationalise remuneration of fund managers, etc. And, lastly, he said, the Mutual Fund Association of Pakistan must convert itself into a investment management association to enforce transparency, project the investor, raise standard of corporate governance, improve disclosure standards and curb the use of insider trading and other forms of market abuse. Earlier, UBL President Amar Zafar Khan while welcoming the guests said that the launch of United Money Market Fund was delayed due to privatisation and he thanked the State Bank of Pakistan for framing the rules and the SECP for guiding them in launching of the Fund. He pledged to fulfil the vision of the new owners of UBL for new products and consumer satisfaction.