Mis-selling of MFs is now a fraudulent practice; get prepared to deal with it

To avoid unlimited personal liability, adopt either the LLP or the Private Limited Company framework.

Almost half a year has gone by since SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) (Amendment) Regulations, 2012 has been notified in the Gazette of India. On December 12 last year, this particular notification was published under the hand of U.K. Sinha, Chairman, SEBI. You may read the same here

Why is this important to you?  

As regulations evolve, you have to review the way in which you engage with your clients. Most of you reading this column would be working in your individual capacity as a mutual fund distributor. Some of you may be working as a partnership and a smaller set would be operating as limited liability partnership or as a private limited company. How your business is structured has a great bearing on how you would be impacted by this regulation.

Recently when I was in Pune, I wanted to gauge the awareness of this important change that has a far reaching implication if you are caught on the wrong side of things! I must say, majority of the people in the room (all ARN holders) were aware that SEBI has notified mis-selling in mutual funds as a fraudulent practice. However, contrary to what most advisors preach – taking of appropriate insurance covers to take care of present or future liabilities, they had themselves not covered their liability from a business perspective.

Going back to some of the basic commerce lessons we have learnt; let us understand what do different forms of organizations mean to our business in the context of the above.

Disclaimer: The table above provides an overview of the various types of entities that you, as an intermediary, may want to consider and some of the characteristics of each of them. The above information is merely indicative of the compliance and management requirements of each entity. We suggest that you make your choice of business entity after due consultation with your legal / tax / compliance consultant since these professionals are better-placed to help you make the right choice of business entity as well as highlight any underlying risks.

With unlimited personal liability standing on the doorway, I would certainly not want to be in this business by adopting the first two forms of organization (Sole Proprietorship / Partnership). If you are serious about your business, you have to take the following steps to say the least:

1.     Adopt either the LLP or the Private Limited Company framework

2.     Get yourself a professional indemnity insurance policy

3.     Start documenting client engagement – risk profilers, investment advice, review notes and the such

4.     Ensure that you have all evidences to show that suitability was evaluated before recommending the products

To take this one step further, put a date to each activity. And stick to your timelines. If you are your own boss, and nobody is watching over your plans, you are better off committing these timelines to your best friend / associate so that peer pressure will work towards fulfillment of your plans.

If you think you need further guidance on this subject, you should feel free to write to us on compliance.in@ifastfinancial.com and we will make all efforts to provide you with the appropriate response.

Rajesh Krishnamoorthy is the Managing Director of iFAST Financial India.

The views expressed in this article are solely of the author and do not necessarily reflect the views of Cafemutual.