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Sebi begins process for sales guidelines

Sebi begins process for sales guidelines
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First Published: Mon, May 31 2010. 10 04 PM IST
Updated: Mon, May 31 2010. 10 04 PM IST
Mumbai: Banks and other entities that sell mutual funds may soon have to follow Securities and Exchange Board of India’s (Sebi) guidelines, marking the second stage of its effort to institute reforms in how these products are sold.
On Monday, a meeting of the advisory committee of mutual funds took the first steps towards this by taking a decision to put in place a system of distributor regulation. Titled “Right Selling vs Mis-selling: building institutional processes”, the note to the committee is a virtual road map to put in place sales guidelines for all sellers of mutual funds, including banks, national distribution houses and independent financial advisers (IFAs). Banks account for one-third of the total mutual fund sales, large national distributors for another one-third and IFAs for the rest.
Retail financial products such as mutual funds do not have effective regulations in place that apply to those selling these products. The manufacturers (the mutual funds) are regulated entities, but those selling it are not. With no policing, sharp sales practices have defined sales of funds by some institutions.
The current Sebi proposal seeks to put in place a system of product suitability which would mean that a set of products will be described as having attributes that fit a certain type of investor. Selling something inappropriate to that person would be a violation of the rules. For instance, a retired person whose objective in investing in a fund is regular income will not be sold a mid-cap fund that is a high-risk product aimed at returning that extra bit to a well diversified portfolio.
The note also looks at a system of written documentation and call recording to generate a trail to the final outcome that an investor experiences after the investment decision. The committee, that has representatives from the industry, the industry association and investor groups, and is chaired by former UTI chairman S.A. Dave, was unanimous in its decision to implement the proposal.
Sebi will work with the industry body, the Association of Mutual Funds of India, and the National Institute of Securities Market to flesh out this proposal into an effective road map.
Other issues discussed at the meeting included restricting the use of derivatives to portfolio hedging and a more robust and standardized performance disclosure template.
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First Published: Mon, May 31 2010. 10 04 PM IST