BSEC blocks BO accounts of Race-managed funds

The Bangladesh Securities and Exchange Commission (BSEC) has frozen all beneficiary accounts (BO) opened in the name of mutual funds managed by Bangladesh RACE Management PCL.

This suspension followed a BSEC investigation which uncovered the fund manager’s failure to “protect the interests of shareholders”.

“The respective trustees of the mutual funds managed by Bangladesh RACE Management shall take control of all the BOs opened and maintained with any stock broker in the name of their respective mutual funds and shall submit detailed report of the holding status to the Commission within the next seven working days from the date of issuance of this order,” said a BSEC order issued today (June 24).

The Securities and Exchange Commission also ordered all custodians of the mutual funds managed by RACE to ensure closure of BOs opened and maintained with brokerage houses and transfer of all securities held by the funds to the custodians’ accounts within seven days.

If the transfer of securities fails, any securities trading on behalf of the investment funds will be suspended by the Commission until further notice, the order said.

It further directed that all concerned parties – asset managers, trustees and custodians – must report to the Commission in detail on their steps and status of compliance with 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.

According to BSEC, the total assets under RACE were over Taka 3,000 crore.

A senior BSEC official explained that due to this instruction from the Commission, RACE will not be able to manage these funds.

According to the fund manager’s website, Investment Corporation of Bangladesh (ICB) acted as custodian for six closed-end funds and BRAC Bank for four funds.

In addition, ICB acts as trustee for six closed-end funds and Bangladesh General Insurance Company (BGIC) for four funds.

Earlier, on June 6, the BSEC set up a committee of inquiry into allegations of fund mismanagement by RACE. On the recommendation of the committee of inquiry, the commission asked the stock exchanges to stop trading in the securities underlying the funds on the block market to prevent the possibility of misappropriation of funds.

The Bangladesh Financial Intelligence Unit (BFIU) has ordered all government-regulated banks in the country to cease all banking activities of the twelve mutual funds managed by Bangladesh RACE Management.

The order, issued on June 10, was valid for 30 days, meaning the mutual funds’ bank accounts will remain frozen until July 9, the BFIU said.

Meanwhile, according to sources at the BSEC, RACE managing director Hasan Taher Imam is battling two separate legal battles – one was filed in November by a mutual fund investor named Ruhul Amin Akand, who accuses Imam of embezzling funds of public investors; the other was filed by RACE chairman Chowdhury Nafeez Sarafat.

RACE officials said in a statement to TBS that two cases relating to fund management are pending in the Supreme Court. RACE has written to the BSEC, the stock exchanges and the BFIU, asking them not to take any action until the cases are resolved.

What RACE did

A source at BSEC said that mutual fund assets like shares and FDRs are usually held by custodian banks. The custodian banks hold these shares by opening BO accounts. However, shares cannot be bought or sold from these accounts.

In this case, the asset manager opens a separate BO account, a so-called trading account, with the brokerage house. Only trading can be carried out there, but no shares can be stored, he added.

Meanwhile, the trading account is linked to the custodian’s BO account. Shares are deposited as a trade in the custodian’s BO account at the end of the transaction settlement.

The asset manager generally cannot sell shares in the fund without the permission of the custodian, and the trustee acts as a watchdog to ensure that the fund manager acts within the law.

However, RACE Multi Securities, Smart Trades Limited and Trust Bank Securities open BO accounts without trading accounts on behalf of mutual funds so that RACE can hold units purchased with fund money there.

A RACE representative said that from the beginning, the company has managed its funds through BO accounts rather than trading accounts, with shares deposited on time through Link accounts as a custodian.

In addition, regular reports are submitted to the custodian banks, trustees and the BSEC. So far, there have been no untoward incidents in the fund management, he added.