AMFI has said that the new distributor will receive trail commission if assets are transferred to another ARN.
Transferring assets from one ARN to another has been a vexed issue for distributors. In a genuine case of ARN code change, (not initiated to poach the business of another ARN holder), the new distributor was not entitled to receive trail commission. This was proving to be a loss of business for the acquirer of assets.
A section of the industry officials felt that the new distributor should be entitled to receive trail commission since investors will be serviced by the new distributor.
When online platforms such as FundsIndia and iFAST required IFAs to transfer their assets under their own ARN they were not entitled to receive trail commission. Apparently, these platforms have had discussions with AMFI to reconsider the ARN code change rules. After years of negotiations AMFI finally decided to change the rule.
In January 2014, AMFI has come out with fresh set of best practice guidelines which allows the new distributor to get trail commission in case of change of ARN code.
This has come as a major relief to IFAs as well as online platforms. For instance, if an IFA wanted to join a platform like FundsIndia or iFAST then he/she had to forgo the trail commission since it triggered ARN code change (which would mean neither the new nor the old distributor would get trail commission). Now, if an IFA transfers his/her assets to an online platform ,the platform is entitled to receive trail commission. The platform then shares a portion of this commission with the IFA.
“We have transferred about Rs. 140 crore AUM on our platform. We thank AMFI for this decision. A lot of advisors wanted to join our platform but were afraid of losing out their commission. With the new rule they are able to get their commission through us. We provide end-to-end support to IFAs in transferring their assets to our platform,” said Chandrasekar of FundsIndia.
It takes about three to four weeks to transfer assets to an online platform. Distributors who wish to join online platforms to become sub-brokers do not need to surrender their ARN codes. They can transfer full or partial assets to online platforms. The platforms would get trail commission on the transferred assets.
Earlier rule
As per earlier AMFI rule, trail commission was payable to the new distributor. At some point, this led to distributors poaching assets of other distributors by initiating ARN code changes. “There has been tremendous increase in the trend of receiving requests for change of distributor and the data at R&TAs has revealed that the same has reached to an alarming situation,” stated an earlier AMFI circular.
AMFI had observed that few HNIs were changing ARN code to get passbacks from distributors. To deter this practice, AMFI came out with a rule which required the old distributor to issue NOC for transferring assets to another distributor. This to some extent prevented broker code change requests.
To prevent such practice, AMFI changed the rule and said that neither the old nor the new distributor would get trail commission if there was a change in ARN code. The amount of commission saved was to be kept in a separate account and utilized for the purpose of education of investor.
Change in distributor code due to voluntary cessation of business of existing distributor
Post the entry load ban, there was an increasing trend of distributors leaving the business. However, they did not transfer their assets to another distributor. Thus, investors were left handicapped. To help investors get service from the new distributor, AMFI has now allowed the new distributor to receive trail commission in such cases.
A distributor who wishes to leave his/her business has to write to investors about the cessation business. Distributors need to advise investors to communicate to various AMCs for inclusion of a new distributor’s code, if any, of their choice in place of the existing distributor’s code.
AMCs will confirm to the investor, the recording of the new distributor’s code in the records. Once the distributor code has been changed, the trail commission thereafter for all business done by the old distributor will be payable to the new distributor.
Distributors then must surrender their ARN to AMFI.
However, if the distributor code change is initiated by investor neither the new or old distributor is entitled to receive trail commission.
ARN Code (Distributor) change initiated by the existing distributor:
Change in distributor code on request of distributor may be effected only in the following circumstances:
- Change in the name/legal status
of the distributor such as an individual converting to a partnership firm,
a partnership firm converting itself into LLP, a private limited company
converting itself into a public limited company or vice versa;
- Merger / acquisition / consolidation
/ transfer of business / new code acquired within the same group in case
of non-individual distributors;
- Transfer of AUM / consolidation initiative within the same family / relatives in case of individual distributors;
- Transfer of business by
individual distributors; and
- Transfer of assets to the on-line platform of new distributor.
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