SEBI to ban intermediate pooling for mutual funds and units; check details

SEBI declared on Monday that mutual fund distributors, investment advisers, channel partners, platforms, and other companies would be prohibited from "intermediate pooling" of funds and units to protect mutual fund investors' interests. The new rule, which will take effect on April 1, 2022, will not apply to portfolio managers who are SEBI-registered. Asset Management Companies (AMCs) will need to put the required procedures to ensure that fund and unit transactions for subscription and redemption are done directly between the investors' accounts and the mutual fund scheme accounts in question. There would be no intermediary pooling, according to SEBI. It also stated in a circular issued on Monday that AMCs will be liable to compensate unitholders for losses caused by unauthorised transactions stemming from fraud, negligence, or deficiency on the part of the AMCs.

Mutual Fund Distributors are MFDs, Investment Advisers are IAs, and Mutual Fund Utilities are MFUs. A few platforms have been detected pooling clients' cash into a nodal account and then transferring to AMCs on a per transaction or lump sum basis, based on a bilateral agreement with AMCs. "AMCs shall ensure that intermediate pooling of funds and/or units in any manner by MFDs, IAs, MFU, channel partners or any other service providers/ platforms, by whatsoever name called, are discontinued for MF transactions," the circular said. After consultations with stakeholders and suggestions from SEBI's Mutual Fund Advisory Committee, the decision was made. According to SEBI, AMCs shall ensure that financial and non-financial transactions can only be completed if both the AMC and the service provider or platform have signed a service agreement.

"MFDs, IAs, MFU, channel partners and other entities (including online platforms) facilitating MF transactions shall not accept payment through one-time mandate or issuance of mandates/instruments in their name for mutual fund transactions," SEBI said.

AMCs to guarantee full information available to involved parties at each step 

Investors' cheques shall only be written in the name of the respective MF schemes. In conjunction with SEBI, the Association of Mutual Funds of India (AMFI) will provide guidelines for AMCs on reducing the risks of fund co-mingling at the level of payment aggregators/payment gateways participating in mutual fund transactions. AMCs will guarantee that full information at each stage of the relevant transaction, including rejection, is made available to all parties participating in the transaction at the same time, according to SEBI. Payment aggregators will only have access to payment-related data that is required for reconciliation and traceability. There will be two-factor authentication for online transactions and a signature option for offline transactions for mutual fund unit redemption.

"The onus of compliance with PMLA provisions and not permitting usage of third party bank account payments continues to lie with the AMCs," SEBI said.

"AMC would be liable to compensate for losses, if any, occurred to a unitholder, where unauthorised transaction(s) occur(s) in unit holder's folio due to fraud/ negligence/deficiency on the part of the AMC, employee of AMC or persons/entities whose services have been availed by the AMC, including the platform providers, MFDs, RTAs, MFU, and channel partners, irrespective of whether or not the fraud is reported by the unitholder," the circular said.

Funds pay-in and funds pay-out to be made directly to investor account 

Unauthorised transactions by investment advisors while providing services to unitholders, on the other hand, would not be deemed an AMC obligation. AMFI will establish guidelines in cooperation with SEBI to improve controls for verifying essential investor details such as bank account numbers, email addresses, and phone numbers. In a subsequent circular, SEBI stated that stockbrokers or clearing members will no longer pool funds and/or units in any form or manner for mutual fund transactions. Stock exchanges will have to put in place the required systems for stock brokers/clearing members to ensure that funds pay-in and funds pay-out are both made directly to the investor account by the clearing organisation.

"Pay-in/pay-out of funds shall not be handled by the stockbrokers/clearing members for the redemption of units held in dematerialised mode, the practice of issuance of Delivery Instruction Slip (DIS) (physical or electronic) to the depository participant to debit the units for delivery to clearing corporation may continue," SEBI noted.

Stockbrokers prohibited from taking investor cash in pooled accounts 

Stockbrokers or clearing members that facilitate mutual fund transactions should not accept mandates for SIPs or lumpsum transactions in their names. They are also prohibited from taking or processing investor cash or units in their proprietary or pooled accounts, as well as accepting payment via one-time mandates or the issue of mandates/instruments in their name for mutual fund activities. One-time mandates in favour of SEBI-recognized clearing businesses, on the other hand, may be approved, according to SEBI. 

"Stock exchanges and AMFI shall jointly, in consultation with SEBI, issue operating guidelines to stock brokers/ clearing members and AMCs respectively, to facilitate the mutual fund transactions on stock exchange platforms," the circular said. 

With inputs from PTI

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