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Sebi proposes self-regulator for mutual fund distributors, advisers

Sebi proposes self-regulator for mutual fund distributors, advisers

  • Sebi has issued a discussion paper proposing a self-regulator for mutual funds and has invited comments till 21 April
  • The SRO would be able to suspend, expel and impose non-monetary penalty on advisers indulging in malpractices

Mumbai: The Securities and Exchange Board of India (Sebi) on Monday issued a discussion paper proposing a self-regulator for distributors and advisors of mutual fund products.

Mumbai: The Securities and Exchange Board of India (Sebi) on Monday issued a discussion paper proposing a self-regulator for distributors and advisors of mutual fund products.

The self-regulatory organization (SRO) would have powers to expel, suspend, and impose a non-monetary penalty on distributors and advisors found indulging in malpractices such as mis-selling of mutual fund schemes or churning of portfolio, the regulator said in the discussion paper.

The self-regulatory organization (SRO) would have powers to expel, suspend, and impose a non-monetary penalty on distributors and advisors found indulging in malpractices such as mis-selling of mutual fund schemes or churning of portfolio, the regulator said in the discussion paper.

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The move comes after a long legal battle that started in 2013 when Sebi decided to appoint a company floated by industry body Association of Mutual Funds in India (Amfi) as an SRO for distributors. The decision was challenged by the Financial Planning Supervisory Board (FPSB) in the Securities Appellate Tribunal (SAT). The appeal by FPSB had alleged that the selection process contravened rules that applied to SROs.

The tribunal quashed Sebi’s decision. Sebi appealed to the Supreme Court, which upheld SAT’s order.

In 2017, the apex court directed Sebi to tweak its regulations and resume the selection process. Sebi submitted an application in November 2018 to the Supreme Court, which said that instead of inviting applications a company should be made an SRO based on its experience and capability.

The SRO would be required to lay down the code of conduct for both the distributor and advisors, resolve disputes between members and between investors and distributors. Disputes between fund houses and distributors would be governed by contractual obligations, Sebi said.

Currently, it is the fund houses that have a primary responsibility towards the code of conduct of mutual fund distributors that are empanelled with them. However, every fund house adopts a different practice of dealing with a distributor, prompting a need for consistent practice and an SRO.

So far, disciplinary action against distributors and agents has been taken by the regulator.

“The distributors of mutual fund products and investment advisors (IAs) are becoming important players in the market and growing in numbers," Sebi said in a release on Monday, adding that there are approximately 124,000 distributors of mutual fund products as on 28 February and 1,136 registered IAs as on 19 March.

“Therefore, their direct supervision by Sebi would be challenging. Hence, some form of a first-level regulator is required to have an oversight on them. In view of the above, it is proposed to have SRO(s) to regulate the distributors of mutual fund products and IAs," Sebi said.

“Further, the same may be extended to such other intermediaries /other market participants as may be notified by Sebi from time to time," it said.

Sebi has also proposed that a nomination committee comprising external experts and headed by retired a high court or a Supreme Court judge be formed to recommend which company should be made the SRO.

The SRO would be made up of 25% of nominated members, 25% shareholder directors, and 50% of public interest directors, Sebi suggested.

The market regulator has invited comments till 21 April.

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