Mutual fund distributors can’t offer incidental advice, asserts Sebi
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In spite of several representations from the mutual fund industry and the Association of Mutual Funds in India (Amfi), the market regulator is unwilling to allow mutual fund distributors to offer incidental advice, said two people with direct knowledge of the matter, including a Securities and Exchange Board of India (Sebi) official, on condition of anonymity.
Sebi had on 7 October released a discussion paper where it proposed that mutual fund distributors be disallowed from providing incidental or basic investment advice in respect of mutual fund products. Another restriction on advising on financial products includes a ban on providing trading tips via messages and social media platforms such as WhatsApp, Twitter and Facebook.
The Sebi discussion paper was met with resistance from many industry participants who argued that it amounted to putting curbs on free speech. The mutual fund industry, through its lobby group Amfi, last month requested Sebi to reconsider the proposals as providing incidental advice is a by-product and important aspect of mutual fund distribution.
“The incidental advice should not be confused with advising on products and distributors providing any sort of financial planning to investors. But Sebi is yet to consider these arguments,” said one of the persons cited above.
Sebi, however, is unwilling to make a concession.
“Advising on the right mutual fund product is the job of a trained investment adviser, who does so against a fee from investors. Distributors are incentivized by the asset management companies or AMCs, which can lead to conflict of interest,” said the Sebi official.
An email sent to Sebi on Monday was not answered till the time of going to press.
According to Sandeep Parekh, founder, Finsec Law Advisors, Sebi’s continued stance is a self-goal and has a higher probability of hurting investors.
“Such a regulatory fatwa will force distributors not to register as advisers, but rather to stop their advisory role. People assume this will hurt distributors,” said Parekh. “Modifying the exemption currently being used by distributors would force nearly half-a-lakh active distributors away from providing advice. This would be a dangerous move for investors and would free advisers from the currently mandated suitability check requirements.”
As per current regulatory requirements under the investment adviser regulations, distributors of mutual funds are exempt from registering as an investment adviser if they provide incidental advice.
A Sebi circular of 2011 mandates that mutual fund distributors do a basic fact check of the financial situation, investment experience and investment objectives of an investor before recommending a product. However, Sebi is now considering allowing a third category of investment advisers called mutual fund investment advisers, with less stringent regulatory requirements.
“These advisers would be allowed to advise on only mutual funds,” said the Sebi official. “Another concession from the discussion paper is on increasing the transitory period.”
As per the discussion paper, any mutual fund distributor who seeks to migrate to an advisory model will be allowed three years as a transition period.
Vaneesa Agrawal, partner, Suvan Law Advisors, believes that the regulator’s concerns are valid, but the solution is enforcement. “Requiring distributors to register as investment advisers may not be a feasible solution. A viable solution for Sebi could be to crack down on those distributors that offer more than ‘incidental’ advice. We haven’t seen many orders coming from Sebi on this,” added Agrawal.