Portfolio Managers - Regulation of Fees and Charges
Summary
This circular mandates Portfolio Managers to adopt the high water mark principle for computing performance fees and restricts fee levies to actual assets under management. It requires specific disclosures in client agreements, including a separate annexure detailing fees across three portfolio performance scenarios. The measures apply to all fresh agreements from November 1, 2010, with existing clients required to comply by January 1, 2011.
Text
profit / performance shall be computed on the basis of high water mark principle over the life of the investment, for charging of performance / profit sharing fee... frequency shall not be less than quarterly... charge performance based fee only on increase in portfolio value in excess of the previously achieved high water mark.
All fees and charges shall be levied on the actual amount of clients’ assets under management.
High Water Mark shall be applicable for discretionary and non-discretionary services and not for advisory services.
In case of interim contributions/ withdrawals by clients, performance fees may be charged after appropriately adjusting the high water mark on proportionate basis.
Regulation 14(1)(b)(xiii) of the SEBI (Portfolio Managers) Regulations, 1993 provides that the agreement between the portfolio manager and the client shall, inter alia, contain, in case of a discretionary portfolio manager, a condition that the liability of a client shall not exceed his investment with the portfolio manager.
Portfolio managers shall strictly comply with the aforesaid Regulation.
the client agreement shall contain a separate Annexure which shall list all fees and charges payable to the portfolio manager... details of levy of all applicable charges on a sample portfolio of Rs.10 lacs over a period of one year... shown for 3 scenarios viz. when the portfolio value increases by 20%, decreases by 20% or remains unchanged.
All text and figures in the Annexure on fees and charges shall be at least in size 11 font.
All existing clients may be sent a letter as an addendum to the agreement about the applicability of the new high-water mark principle and the resultant new fees/charge structure. This annexure has to be signed by the client and sent back to the portfolio manager.
New clients shall be required to separately sign the annexure on fees and charges and add in their own handwriting that they have understood the fees/ charge structure.
Regulation 14(1) read with clause 18 of Schedule IV of the SEBI (Portfolio Managers) Regulations, 1993 provides for settlement of grievances/disputes and provision for arbitration in the portfolio manager – client agreement.
In case of any dispute regarding fees and charges, the same shall be referred to arbitration for settlement as per the terms of the agreement, under the Arbitration and Conciliation Act, 1996.
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Source: SecMarx — Portfolio Managers - Regulation of Fees and Charges. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.