SEBI proposes easing of restrictions on business activities of Mutual Funds, floats consultation paper
Sebi has proposed review of regulatory framework for the business activities of an Asset Management Companies (AMCs) of Mutual Funds. Sebi has proposed allowing mutual funds to act as point of presence for pension funds to act as global distributor of funds, subject to conditions. Sebi has also proposed relaxation in broad basing requirements, offering investment management and advisory services to pooled funds such as family offices or offshore funds with a few investors.
Sebi consultation paper has proposed that, subsidiaries of the AMCs which are registered as pension funds may be allowed to provide Point of Presence (POP) service and receive the compensation allowed by PFRDA for such services. However, the AMC may be required to ensure that the interest of the mutual fund investors is protected and not compromised while providing such services.
Sebi paper also said that, with respect to request of AMC or its subsidiary to act as global distributor of funds, presently, AMCs are allowed to market or sell only direct plans of the mutual funds scheme managed by them. Sebi, AMCs may continue to be allowed to register as distributor through overseas subsidiary. However, AMCs may be required to ensure that no commission or fees is received for such distribution of direct plans of mutual funds schemes of the AMCs.
With respect to the funds managed and advised by AMC other than mutual funds schemes and outside India, it is proposed that AMCs may be allowed to distribute funds managed and advised by the AMCs other than mutual fund schemes through its subsidiary, provided such distribution activities and fund management activities are regulated by a foreign regulator or jurisdiction and follows the regulatory framework specified by such foreign regulator or jurisdiction.
Currently, Regulation 24(b) of MF Regulations restricts AMCs from undertaking any business activity other than in the nature of management and advisory services provided to pooled assets including offshore funds, insurance funds, pension funds, provident funds, or such categories of foreign portfolio investor as may be permitted by Sebi. Mutual Fund industry association AMFI had asked for the review and Sebi as part of Ease of Doing Business has proposed the easing of activities of mutual funds.
On the broad basing requirements, Sebi in its consultation paper proposed that, based on representation from AMFI, it was decided to review and consider relaxing the broad basing requirement and permitting AMCs to serve pooled non-broad-based funds as well, subject to strong governance and regulatory controls that would address any concerns related to conflicts of interest situations.
Sebi consultation paper said, to address the concern relating to diversion of resources towards non-broad-based funds, it is proposed that AMCs may be required to ensure that the resources dedicated to pooled non-broad-based funds should be proportionate to the fee earned by AMC from such funds as compared to fees from investors in mutual fund schemes and that mutual fund investors are not made to bear the cost of servicing mandates for pooled non-broad based funds.
Also to address the issue of front running by pooled non-broad based funds, Sebi has proposed that the principle of fair and equitable treatment requires AMCs to put in place a written policy that clearly defines the roles and responsibilities of various teams involved in fund management, order placement, execution etc., use an automated Order Management System with clear order instructions to employees placing order on behalf of AMCs etc., may be extended to cover investors across all pooled vehicles managed by the AMC, whether broad based or pooled non-broad based funds.
Sebi has also proposed that to protect the interest of the mutual funds investors and to avoid any transfer of securities to or from mutual fund scheme on unfavourable terms, at this stage it is proposed that the transfer of securities between pooled non-broad-based fund and mutual fund schemes may not be allowed.
Hence, fees charged from pooled non-broad-based clients may be mandated to be within a certain specified range. A range of fees may be prescribed for AMCs to charge from their pooled non-broad-based funds. To avoid any preferential treatment to pooled non-broad-based funds, charging of any performance related fees by AMCs may be restricted.
To deal with risk of trading based on inside information of Mutual Fund operations, AMC will be required to ensure that the activity performed for pooled non-broad-based funds does not emanate from any information obtained through Mutual Funds operations. Also, any information used for the advantage of pooled non-broad-based fund should not put mutual fund investors at any disadvantage. Sebi has sought comments from all stake holders till July 28.Also read: Sebi likely to probe if Jane Street violated index position limits in F&O segment