SEBI – Circular for Mutual Funds – Circular No. Cir/ IMD/ DF/13/ 2011, Dated- August 22, 2011

Clarification for Mutual Funds on Transaction charges/Distributors of Mutual Fund products/Transparency of information/Assets Under Management (AUM) disclosure/Commission disclosure

 CIRCULAR

Cir/ IMD/ DF/13/ 2011 August 22, 2011

All Registered Mutual Funds/ Approved Asset Management Companies (AMCs)

Sir/Madam,

Sub: Circular for Mutual Funds

A. Transaction charges

3. In order to enable people with small saving potential and to increase reach of Mutual Fund products in urban areas and smaller towns, it has been decided that a transaction charge per subscription of Rs. 10,000/- and above be allowed to be paid to the distributors of the Mutual Fund products from the date of this circular. However, there shall be no transaction charges on direct investments. The transaction charge shall be subject to the following:

6. It is also clarified that as per SEBI circular no. SEBI/IMD/CIR No. 4/ 168230/09, dated June 30, 2009, upfront commission to distributors shall continue to be paid by the investor directly to the distributor by a separate cheque based on his assessment of various factors including the service rendered by the distributor.

B. Distributors of Mutual Fund products

1. It has been felt that in the interest of investors there is a need to regulate the distributors through AMCs by putting in place a due diligence process to be conducted by AMCs as follows:

i.The due diligence process shall be initially applicable for distributors satisfying one or more of the following criteria:

a. Multiple point presence (More than 20 locations)
b. AUM raised over ` 100 Crore across industry in the non institutional category but including high networth individuals (HNIs)
c. Commission received of over Rs.  1 Crore p.a. across industry
d. Commission received of over Rs.  50 Lakh from a single Mutual Fund

ii.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 that incorporate, amongst others, the following factors:

a. Business model, experience and proficiency in the business.
b. Record of regulatory / statutory levies, fines and penalties, legal suits, customer compensations made; causes for these and resultant corrective actions taken.
c. Review of associates and subsidiaries on above factors.
d. Organizational controls to ensure that the following processes are delinked from sales and relationship management processes and personnel:

i.) Customer risk / investment objective evaluation.
ii.) MF scheme evaluation and defining its appropriateness to various customer risk categories.

iii.In this respect, customer relationship and transactions shall be categorized as:

a. 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. Appropriateness is defined as selling only that product categorization that is identified as best suited for investors within a defined upper ceiling of risk appetite. No exception shall be made.

b. Execution Only – in case of transactions that are not booked as ‘advisory’, it shall still require:

i.) 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. The communication shall have to be duly acknowledged and accepted by investor.
ii.) 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.
iii.) That on all such ‘execution only’ transactions, the customer is not required to pay the distributor anything other than the standard flat transaction charge, as mentioned in part ‘A’ above.

c. There shall be no third categorization of customer relationship / transaction.

d. 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.

iv.Compliance and risk management functions of the distributor shall include review of defined management processes for:

g. Findings of ongoing review from sample survey of investors

2. Mutual Funds/AMCs may implement additional measures as deemed appropriate to help achieve greater investor protection.

i.Point-to-point returns on a standard investment of Rs.  10,000/- shall also be shown in addition to CAGR for a scheme in order to provide ease of understanding to retail investors.

ii.Performance advertisement shall be provided since inception and for as many twelve month periods as possible for the last 3 years, such periods being counted from the last day of the calendar quarter preceding the date of advertisement, along with benchmark index performance for the same periods.

3.Where scheme has been in existence for more than one year but less than three years, performance advertisement of scheme(s) shall be provided for as many as twelve month periods as possible, such periods being counted from the last day of the calendar quarter preceding the date of advertisement, alongwith benchmark index performance for the same periods.

4. Where the scheme has been in existence for less than one year, past performance shall not be provided.

5. For the sake of standardization, a similar return in INR and by way of CAGR must be shown for the following apart from the scheme benchmarks:

These disclosures shall form a part of the Statement of Additional Information and all advertisements of Mutual Funds.

In case the number of schemes managed by a fund manager is more than six, then the AMC may disclose the total number of schemes managed by that fund manager along with the performance data of top 3 and bottom 3 schemes (in addition to the performance data of the scheme for which the advertisement is being made) managed by that fund manager in all performance related advertisement. However, in such cases AMCs shall ensure that true and fair view of the performance of the fund manager is communicated by providing additional disclosures, if required.