has issued guidelines for portfolio management services
(PMS) providers, stating how investors should be charged. It has also added performance reporting standards to be adhered to.
The regulator said operating expenses (excluding brokerage), over and above the fees charged to clients, shall not exceed 0.5 per cent per annum of the client’s average daily assets under management. Further, it capped the exit load that a PMS provider can charge when clients redeem their investments.
During the first year, a maximum of 3 per cent of the redeemed investment may be charged towards exit load.
In the second year, exit load is capped at 2 per cent and at 1 per cent for the third year.
laid down the guidelines in addition to the PMS regulations formalised last month, in which the minimum investment amount in PMS was increased to Rs 5 million from Rs 2.5 million.
Further, PMS providers will have to give the option to on-board clients directly without an intermediary engaged in distribution services. The option should be prominently displayed.
It also laid down performance standards. This entails reporting performance net of all fees and expenses (including taxes). The move is aimed at given investors an indication of how fees and other expenses could impact client returns.
When computing performance, the provider shall account for investments in liquid fund and cash holdings. Any change in investment approach that could affect performance shall be clearly disclosed in marketing material.
In addition, performances reported on websites and marketing paraphernalia should be the same as those reported to Sebi.
Finally, the investment approach should include various details such as investment objective, appropriate benchmark to compare the performance with, description of investments (equity, debt, unlisted or listed securities), associated risks, and other salient features. The guidelines will come into effect from May 1, 2020.
Sebi cracks the whip on errant brokers
To curb the growing menace of misuse of client securities by brokers, Sebi has developed an in-house online system that could put an end to the practice. Under the new system, Sebi collects details of clients’ securities and updates the same with trades conducted in their accounts. Later, the holding balance of the client matched with the demat account balance. Any mismatch between the two creates alerts that are sent to the bourses.
Sebi has already detected three instances of mismatch and directed the stock exchanges to reconcile the same with the concerned brokers.
“This system is likely to timely detect the misuse of clients’ securities collected by brokers as collateral or received in pay-out of securities,” Sebi said in a release. The new system deployed by Sebi follows growing instance of misuse of client securities by brokers. In recent times, clients of brokers such as Karvy and BMA Wealth have cried foul over misuse of their securities.
Most brokers explored the loophole in norms that allowed acceptance of client securities as collateral, by way of pledge. This was done by way of transfer of securities in the name of brokers. However, once a broker moved the client securities, the truthful owner of the security couldn’t track the use of those securities, often leaving them in the dark.
In the past, it was a common practise by brokers to pledge one client securities to meet their own settlement obligation or that of other clients. Some brokers even used it to raise funds for their own use.
To put an end to this practise, Sebi has been taking several policy measures. Some of these include an early-warning detection system to detect diversion, restriction on brokers on pledging clients’ securities and mapping of unique-client code with demat accounts.
With inputs from Samie Modak