[Analysis] SEBI Consultation on Portfolio Management Services – Enhancing Transparency | Compliance | Client Understanding

Table of Contents

1. Introduction
2. Ensuring Client Understanding: Portfolio Managers’ responsibility in clarifying fee structure during onboarding process
3. Portfolio Manager’s Obligation: Providing clients with a standard ‘Most Important Terms and Conditions’ document
4. Mandatory registration of PMS distributors with the Association of Portfolio Managers in India (APMI)

1. Introduction

SEBI has released a Consultation Paper dated February 15, 2024, on the ease of doing business initiatives for Portfolio Managers. The Consultation paper solicits public feedback on proposed measures to streamline processes and reduce compliance costs. SEBI has addressed key aspects such as client understanding, documentation simplification, and distributor registration. The proposals align with SEBI’s response to the Finance Minister’s call for a consultative approach to ease compliance burdens in the financial sector, in line with the budget announcements for FY 2023-24. These recommendations, if implemented, would bring significant changes to the landscape of Portfolio Management Services. The various proposals highlighted by the working group are discussed hereunder:

2. Ensuring Client Understanding: Portfolio Managers’ responsibility in clarifying fee structure during onboarding process

Existing norms

As per the Master Circular on Portfolio Managers dated March 20, 2023, new clients must be required to sign the annexure on fees and charges separately and add in their handwriting that they have understood the fee structure.

Observations by the working group

The EODB working group has highlighted that in the digital onboarding process, there are certain operational challenges in complying with the requirement of a handwritten note on the annexure of fees in the agreements, including the non-availability of a stylus at the investors’ location. This requirement creates a hindrance towards complete the digital onboarding of the clients

Proposed norms

The working group has proposed the following –

• Portfolio managers must ensure that clients understand the fee structure and that the words (“I/We have understood the fees/charge structure”) are handwritten for clients on-boarded via physical mode and hand-typed (using a keyboard) by the first holder for clients on-boarded via digital mode. Other holders should click on “Yes/No” to indicate their understanding of the fee structure.
• Portfolio Managers must have an online fee calculator tool that highlights all fee options with multi-year fee calculations with a high watermark concept. An email with the link for the same must be sent to all new clients during onboarding.
• The agreement between the client and the Portfolio Manager must contain fee illustrations. For fixed fees, all three scenarios i.e. positive, negative and zero returns must be provided.
• The fee debit note must include an annexure detailing the fee calculation. If the fee calculation is incorrect or if the client raises a query on the fees charged, then the portfolio managers must resolve the matter within 30 days.
• There should be no additional costs for the investor other than the charges specified in the annexure of fees in the agreement.

Comments

The proposed measures would significantly impact both portfolio managers and their clients. Firstly, by requiring clients to confirm their understanding of the fee structure, whether via handwritten or digital acknowledgement, the proposal aims to strengthen transparency in financial transactions. Secondly, the implementation of an online fee calculator tool would facilitate improved communication between portfolio managers and clients.

Thirdly, the requirement for portfolio managers to resolve fee calculation discrepancies or client queries within 30 days demonstrates a commitment to timely dispute resolution. This approach not only enhances trust but also strengthens the client-manager relationship. Lastly, stipulating that there should be no additional costs beyond those specified in the annexure of fees would provide clients with cost certainty.

Overall, these proposals signify an effort to improve transparency, communication and accountability within the realm of portfolio management.

3. Portfolio Manager’s Obligation: Providing clients with a standard ‘Most Important Terms and Conditions’ document

Existing norms

As per Regulation 22(1) and 22(3) of SEBI (Portfolio Managers) Regulations, 2020, two documents are prescribed for formalizing the PMS-client relationship. The PMS-client agreement includes provisions related to mutual rights, liabilities and obligations, fees payable, risks involved, investment objective, investment restrictions, tenure and termination of the agreement.

Another document i.e. the Disclosure document, provides disclosures related to portfolio risks specific to investment approach, related party transactions, conflicts of interests, performance of portfolio manager, and audited financial statements.

Observations by the working group

It has been observed that these documents are voluminous, potentially causing investors to lose focus on critical aspects of their relationship with portfolio managers.

Proposed norms

To highlight the critical aspects of the PMS-client relationship and ensure ease of understanding for clients, the working group has proposed that Portfolio Managers may be required to provide their clients with a standard “Most Important Terms and Conditions (MITC)” document, which must be acknowledged by the client.

Further, the form, nature of communication, documentation and detailed standards for the implementation of MITC may be prescribed by the Association of Portfolio Managers in India (APMI), in consultation with the SEBI.

Comments

The proposed requirement for portfolio managers to provide their clients with a standard MITC document is expected to have several positive effects. Firstly, it will make it easier for clients to better understand the key terms, risks and obligations associated with their investments, thereby promoting transparency and informed decision-making.

Secondly, by mandating client acknowledgement of the MITC document, the proposal strengthens accountability on the part of portfolio managers, ensuring that clients are fully aware of the terms and conditions governing their investment arrangements. Overall, the proposal stands to benefit both clients and portfolio managers by promoting clarity, accountability and trust within the portfolio management landscape.

4. Mandatory registration of PMS distributors with the Association of Portfolio Managers in India (APMI)

The Association of Portfolio Managers in India (APMI)¹ was established as a trade body for Portfolio Managers and was incorporated on December 31, 2021, as a Section 25 company. APMI serves as a representative for the portfolio management industry to provide a unified interface to regulators, intermediaries, investors, etc.

Observations by the working group

The working group stated that there are several regulatory benefits of mandating the APMI Registration Number (APRN)² as the industry standard for distributing PMS products.

Proposed norms

The proposed norms mandate the registration of PMS distributors with the Association of Portfolio Managers in India. The key benefits for distributors include registration with an industry body, access to industry data, easy & faster access to portfolio managers, faster grievance redressal etc while the key benefits for portfolio managers include common compliances, common due diligence reports, common KYD requirements etc.

Comments

These measures not only promote regulatory compliance but also contribute to operational efficiency and risk management. Overall, the proposal aims to enhance transparency, accountability and professionalism within the portfolio management industry, ultimately benefitting both distributors and portfolio managers while bolstering investor confidence and protection.

1. Master Circular no. SEBI/HO/IMD/IMD-POD-1/P/CIR/2023/38; Dated 20-03-2023
2. APMI introduced a distributor registration portal through which individuals can obtain APRN to sell PMS. The registration was voluntary for existing PMS distributors.