Circular for Mutual Funds

Cir/ IMD/ DF/13/ 2011 · 2011-08-22 · SEBI

Summary

This SEBI circular permits transaction charges for mutual fund distributors on subscriptions of ₹10,000 or above while prohibiting such charges on direct investments. It mandates that Asset Management Companies conduct due diligence on distributors and categorize customer relationships as either advisory or execution-only. Additionally, the document standardizes performance advertising requirements and imposes specific disclosure obligations regarding Assets Under Management and distributor commissions.

Text

a transaction charge per subscription of `10,000/- and above be allowed to be paid to the distributors... However, there shall be no transaction charges on direct investments.

For existing investors in a Mutual Fund, the distributor may be paid ` 100/- as transaction charge per subscription of ` 10,000/- and above.

As an incentive to attract new investors, the distributor may be paid ` 150/- as transaction charge for a first time investor in Mutual Funds.

Distributors shall be able to choose to opt out of charging the transaction charge. However, the ‘opt-out’ shall be at distributor level and not investor level

The AMCs shall be responsible for any malpractice/mis-selling by the distributor while charging transaction costs.

Mutual Funds shall institute systems to detect if a distributor is splitting investments in order to enhance the amount of transaction charges and take stringent action

Mutual Funds/AMCs shall carry out an exercise of de-duplication of folios across all Mutual Funds within a period of 6 months from the date of this circular.

At the time of empanelling distributors and during the period i.e. review process, Mutual Funds/AMCs shall undertake a due diligence process to satisfy ‘fit and proper’ criteria

Advisory – where a distributor represents to offer advice while distributing the product, it will be subject to the principle of ‘appropriateness’ of products to that customer category.

The distributor has information to believe that the transaction is not appropriate for the customer, a written communication be made to the investor regarding the unsuitability of the product.

A customer confirmation to the effect that the transaction is ‘execution only’ notwithstanding the advice of in-appropriateness from that distributor be obtained prior to the execution of the transaction.

While selling Mutual Fund products of the distributors’ group/affiliate/associates, the distributor shall make disclosure to the customer regarding the conflict of interest arising from the distributor selling of such products.

Source: SecMarx — Circular for Mutual Funds. Verbatim text is public record; SecMarx structuring (linkage to applying orders) is cited to us.