SEBI puts onus for distributors on asset management companies

The Securities and Exchange Board of India (SEBI) on Monday released a note requiring asset management companies, or AMCs, to take greater responsibility for their distribution channels.
Mutual funds will have to evaluate the track records of their distributors as well as take steps to minimise mis-selling, said the circular. “It has been felt that in the interest of investors there is a need to regulate the distributors through AMCs...”

SEBI asked AMCs to carry out a due diligence process for distributors who have a presence in more than 20 locations, assets of Rs100 crore, commissions of Rs1 crore from the industry or Rs50 lakh from a single mutual fund.

The AMCs would have to evaluate the regulator record of distributors and their associates as well as the distributor’s organisational controls.

The AMCs would also have to disclose the total commissions and payments made to such distributors.

Distributors would also have to disclose any conflicts of interest arising out of selling group products.

“There is a certain amount of responsibility that AMCs will have to bear. We will be working towards identifying and solving any execution challenges involved in discharge these duties,” said Rajan Krishnan, CEO at Baroda Pioneer AMC.

Sebi also clarified on the transaction fees announced in its last board meeting.

Distributors can charge a transaction charge of Rs100 for all new investments of Rs10,000 or more for existing investors and Rs150 for first time investors in mutual funds.

Direct investments will continue to be free of transaction charges and service-based commissions that the investors pay directly to distributors via a separate check would also continue.

The amount would be deducted from the invested amount and paid to the distributor. For example, if an existing mutual fund investor puts an additional Rs10,000 in a scheme, of this Rs100 would go to the distributor and the remaining Rs9,900 would be invested in the scheme.

In the case of systematic investment plans, where investors split their investments over a period of time, the transaction fee would only be applicable if the investor plans to invest Rs10,000 or more.

“In such cases, the transaction charge shall be recovered in 3-4 installments,” said the SEBI circular.

Asset management companies will be held responsible for the distributor’s mis-selling or malpractices involving transaction costs.

SEBI has asked AMCs to put in place systems to detect if a distributor is splitting investments in order to enhance the amount of transaction charges and take action against such distributors.
Distributors are free not to charge a transaction fee, but if they chose to do so it must apply to all investors.

SEBI has also moved to ensure greater transparency for mutual funds.

Mutual funds would have to provide geographic distribution of assets under management as well as the various categories in which their funds lie when declaring AUMs.

“The transaction charges would help to bring in more retail investors to equity mutual funds and high disclosure will help credibilityin the long run,” said Sundeep Sikka, CEO of Reliance Mutual Fund.

Information released on any one mutual fund scheme would also have to include the track record of all other schemes managed by the fund manager of that scheme.

Past performance would have to be disclosed both in terms of the compounded annual growth rate(CAGR), which is a measure of average annual returns in percentage terms, and a simpler method of showing returns in terms of how much a hypothetical investment of Rs10,000 would have grown to in various periods of time.

Mutual funds have also been asked to resolve instances where the same investor has multiple folios (investor accounts) within six months.