AMFI revises code of conduct for mutual fund distributor

AMFI has revised the code of conduct for mutual fund distributors to demonstrate the core values of transparency, competency, fairness and integrity among other things.

AMFI has divided the code into six parts. Let’s take a look at the new code of conduct for MFDs:

Fiduciary duty

• MFDs should keep interest of their clients before anything else and always act in their best interests
• MFDs should avoid conflict of interest. When it cannot be avoided, they should intimate clients about such conflicts through disclosures
• MFDs should not recommend schemes based on financial incentive
• MFDs should promote a culture of ethics and integrity within their organization and discourage unfair practices, aggressive sales targets and inappropriate business conduct
• MFDs cannot give rebate or pass-back of commission to investor
• MFDs cannot attract clients through gifts, gift vouchers etc.
• MFDs cannot do churning to earn commission, splitting application to earn transaction charges, participating in diverting funds, concealing material facts and making false claims

Compliance obligation

• MFDs should adhere to SEBI MF regulations, comply with KYD norms all the times
• MFDs should do in person verification (IPV) of investors to comply with KYC norms
• MFDs should tell their clients about risk associated with recommended schemes
• MFDs should understand financial status, investment experience, investment objective of clients before recommending any scheme
• Business representative of MFDs should have to comply with AMFI norms
• MFDs should maintain confidentiality of clients data and enter into contractual agreement with AMCs for data protection
• MFDs having sub broking model will have to work with sub distributors having valid ARN

Infrastructure requirement

• Physical: MFDs must maintain necessary infrastructure to support AMCs in maintaining high standards
• Digital: MFDs should facilitate IT related infrastructure and maintain cyber security to maintain confidentiality of data
• Internal control: MFDs should put in place internal checks and balances to prevent mis-selling and misconduct
• Insurance: MFDs are encouraged to take up appropriate insurance coverage (professional indemnity) for their activities
• Record keeping: MFDs will have to maintain record physically or digitally including KYC records

Client related obligations

• MFDs should urge investors to go through SAI, SID or KIM before making investment
• MFDs should disclose all material facts including commission received or receivable  in lieu of recommended schemes. They should also tell clients about commission structure of competitive schemes across fund houses
• MFDs should disclose list of mutual funds they can offer and give them an option to consider alternate products, which are not offered by them
• MFDs facilitating digital transaction should tell their clients that they are investing in regular plans which involve payment of commission to MFDs. Such MFDs should also disclose their commission structure across fund houses through hyperlink
• MFDs should not indicate returns from any scheme
• MFDs offering other financial products should ensure that they do not mis-sell mutual funds by comparing with other products in terms of return expectation
• MFDs should explain to clients that MF investments are not guaranteed or assured return products and tell them that principal amount may be exposed to risk of loss
• MFDs should resolve investor grievances and complaints and provide assistance to deal with AMCs with respect to their grievances and complaints
• MFDs can only use promotion material provided by AMCs
• If they wish to promote any scheme on their own, they can do so by taking prior permission of AMCs

Other obligation

• MFDs should train their employees to comply with all the norms
• MFDs should use social media responsibly with respect to content standards and authenticity
• MFDs should co-operate with AMCs, AMFI, SEBI and other authorities in relation to their services
• MFDs should intimate AMCs and AMFI about any change in their status, constitution, address, contact details
• MFDs should immediately inform AMC or AMFI in writing about any act amounting to moral or financial irregularities by them or their employees
• MFDs should always use a tagline – AMFI registered Mutual Fund Distribution in all communication

Obligation towards MF industry

• MFDs should not make any false or defamatory statement about AMC, AMFI, other MFDs and MF schemes
• MFDs should maintain professional decorum and should not participate in transmitting untrue statement or rumours