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Guidelines for Portfolio Managers

Finsec Law Advisors

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Recently, pursuant to a review of the regulatory framework for portfolio managers (PMs), SEBI had issued the new SEBI (Portfolio Managers) Regulations, 2020 (PMS Regulations) on January 16, 2020. Now, on February 13, SEBI has issued certain guidelines further amending the regulatory compliance framework for PMs (Guidelines). Some of these guidelines are discussed below:

Supervision of Distributors

PMs can now only utilize services of distributors with a valid AMFI Registration or those who have cleared the NISM Series-V-A exam. Further, it has been clarified that fees / commissions shall be paid by distributors on a trail-basis only, and such fees / commissions can be paid only out of the fees received by the PMs and not from their own books. PMs shall also inform prospective clients about the fees / commissions earned by distributors during the on-boarding process.

PMs must ensure that distributors abide by the Code of Conduct specified under the Guidelines, and have a mechanism for independent verification of such compliance by the distributors. Further, they shall obtain a self-certification from the distributors with regard to such compliance within fifteen days from the end of each financial year.

Fees and Charges

The PMS Regulations prohibit PMs from charging any up-front fees to the clients, either directly or indirectly. While the Guidelines specify that the brokerage paid by the PMs can be charged to clients as expense, the total operating expenses, excluding the fees charged for portfolio management services and brokerage, shall be now capped at a maximum of 0.50% of the clients’ average daily assets under management.

Further, in case of partial / full redemption of a client’s portfolio, the exit load charged by the PM can be a maximum of 3% of the redemption amount in the first year of investment, 2% in the second year and 1% in the third year. No exit load can be charged after a period of three years from the date of investment. Additionally, charges for all transactions in any financial year, including those of broking, demat, custody, etc., undertaken by a PM either through self or its associates, shall be capped at 20% by value per associate (or self) for each service; and such charges cannot be more than those paid to non-associates providing the same service.

Direct On-Boarding of Clients

Clients shall now be given the option to be on-boarded directly by the PMs, without availing the services of a distributor, and such option shall be mandatorily disclosed in the disclosure document, marketing materials, and on the website of the PM. Further, in case of such direct on-boarding, no charges except statutory charges can be levied by a PM.

Investment Approach

A uniform ‘investment approach’ shall be provided in the disclosure document, marketing materials, etc., which shall inter alia include a description of the investment objective, types of securities, portfolio allocation, benchmark, indicative tenure, risks, etc.

Performance Reporting and Other Disclosures

Compliance with provisions such as disclosure of performance of benchmark indices to clients, review of compliances by the board, etc., is now required to be reported to SEBI annually, instead of on a half-yearly basis. Further, PMs shall also submit a certificate obtained from a chartered accountant certifying the PM’s net worth to SEBI within six months from the end of each financial year. Additionally, a compliance certificate shall be furnished to SEBI within sixty days from the end of each financial year.

Further, it has been clarified that material changes in the disclosure document, which must be reported to SEBI within seven working days, would include changes in control, the principal officer, fees, charges, investment approach and any other change as may be specified by SEBI.

With regard to performance reporting, the Guidelines mandate that cash holdings and investments in liquid funds shall also be included for calculation, and performance data is to be calculated net of fees and expenses. Further, the firm-level performance is also required to be annually audited. A confirmation regarding compliance with the performance reporting requirements, as specified in the Guidelines, should be submitted to SEBI within sixty days from the end of each financial year.

Besides this, a quarterly report should be provided to the clients by the PMs, describing their portfolio management activity and the performance of the portfolio. A monthly report shall also be submitted by the PM on the SEBI Intermediaries Portal, describing their portfolio management activity, within seven working days of the end of each month.