SEBI has issued a consultation paper to appoint Self Regulatory Organisation (SRO) for mutual fund distributors and registered investment advisors (RIAs).
Sharing the rationale for SRO, SEBI said that MF distributors and RIAs are becoming important players and growing in numbers. “There are approximately 1.24 lakh distributors as on February 28, 2019 and 1136 RIAs as on March 19, 2019. 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 this view, it is proposed to have SRO(s) to regulate the MF distributors and RIAs.”
Further, SEBI has acknowledged the role of mutual fund distributors and RIAs and said, “To sustain this growth and to ensure deeper penetration of mutual fund products into all areas of the country, the distributors are expected to play an important role.”
Here are the proposed key responsibilities of SRO
Developmental role: SRO will have to provide training and education to its members and create awareness among investors. Also, SRO can provide policy inputs by participating in SEBI committees
Regulatory role: SRO will be responsible to grant and renew certificate or license to its members and conduct examination for such a certificate. SRO will have to set down a code of conduct and supervise if it is adhered to.
Grievance redressal and dispute resolution role: SRO will resolve grievances against its members and settle dispute between investors and distributors.
Disciplinary role: SRO can take action against distributors in an event of violation of code of conduct and regulations. Further, being the first level regulator, SRO can suspend distributors and impose penalty (not monetary).
Proposed eligibility criteria to become SRO
- Minimum net worth of Rs.1 crore
- Adequate infrastructure
- Professional competence, financial soundness and general reputation of fairness and integrity
- Incorporation under section 8 of companies act, 2013
- Function of SRO as one of the main objectives of the company
To appoint SRO, SEBI has proposed to constitute a nomination committee comprising external experts such as retired judge to give recommendations to SEBI on suitability of an entity recognized as on SRO. The committee will look at pending cases as directed by the Supreme Court. However, SEBI will take a final call on appointment of SRO depending on capability of recommended entities.
Within SRO, the governing body should consist of members such as mutual fund distributors, RIAs, SEBI nominated Public Interest Directors (PIDs) and shareholder directors i.e. promoters or representatives of the entity. While the governing body can elect any member as a chairman by casting vote, the chairman of its governing board will be among PIDs.
On arbitration and dispute resolution, SEBI said that while SRO can provide a dispute resolution mechanism including arbitration to settle dispute between investors and distributors and disputes between its members, the SRO is not allowed to handle dispute between distributors and MFs.
Matters for consideration
- If there should a single or different SROs for MF distributors and RIAs
- If the proposed role of SRO is adequate
- Is there any need to enhance the networth of SRO
- Any other comments on the proposal
You can send your comments to SEBI by sending an email at sro@sebi.gov.in or post it physically to SEBI BKC office before April 21, 2019.
