Updated: Jul 26
Do’s for Mutual Fund Distributors
Don’ts Mutual Fund Distributors
AMFI’s Code of Conduct for Mutual Fund Distributors
Frequently Asked Questions (FAQs)
A Mutual Fund Distributor's life revolves around guiding investors through the complex world of mutual funds, helping them make sound financial decisions that align with their goals. Each day presents a unique set of challenges and opportunities - you must stay updated on the latest market trends, help clients with their mutual fund investment goals, and follow the rules to ensure fairness & transparency.
As a distributor, you understand the weight of the responsibilities and challenges of this role. However, in a fast-moving and rapidly updating industry, how can you ensure that your actions comply with legal guidelines and protect the interests of people who rely on your expertise?
This is where guidelines for do's and don'ts in the best mutual fund distribution business come into the picture. AMFI has laid down the Code of Conduct for mutual fund distributors in pursuance of the SEBI Circular and other regulatory and compliance requirements to monitor and ensure transparency in the MFD Profession.
In this article, we will discuss a few guidelines on do's & don'ts to help you navigate the challenges in your mutual fund distribution business smoothly and establish client trustworthiness. These guidelines are inspired by the Code of Conduct given by AMFI, along with other rules & regulations as prescribed by SEBI & AMFI from time to time. Let's get going.
DO’s FOR MUTUAL FUND DISTRIBUTORS
Maintain Integrity, Transparency & Fairness
The fundamental responsibility of Best Mutual Fund Distributors is to maintain integrity, transparency and fairness in their mutual fund distribution business in India. Establishing and maintaining strong investor trust as you deal with their money is essential. Transparency must be ensured with respect to transactions, diversification of investment & portfolio analysis. It is vital to exercise principles of equity and fairness and not give biased recommendations.
Act in the Best Interest of Investors
As an MFD, you are entrusted with the responsibility of making wise investment decisions on behalf of your investors. Hence, it is critical to think from their shoes before deciding. By thinking from an investor perspective, you can protect their interests and make the most beneficial investments to help them achieve their financial goals.
Communicate with Investors About Their Financial Status, Financial Needs and Investment Goals
You now know the importance of thinking from an investor perspective. But how to do that?
As an MFD, you deal with diverse investors having unique financial situations. There is no one size fits all investment approach that can be applied. Hence, it is vital to communicate frequently with your clients to understand their financial situation and investment goals thoroughly. Taking time to talk to each client and understanding their needs & goals ultimately helps in making informed & favorable decisions.
Have Thorough Knowledge of Key Provisions of SID, SAI & KIM
As an MFD, one essential regulatory requirement is to go through the points and thoroughly understand the provisions as laid down in the 3 crucial documents of any mutual fund scheme: Scheme Information Document (SID), Statement of Additional Information (SAI) & Key Information Memorandum (KIM). Investors must be made aware of the disclosures made in these documents before investing in any mutual fund scheme. Therefore, understanding these documents ensures that you are in a comfortable position to explain the key features of the schemes and any risks associated therein.
Always Have a Valid ARN & Renew Them on Time
Every online mutual fund distributor will know the significance of ARN. Without ARN, you cannot be a lawful distributor of mutual funds. Also, this ARN is valid for only three years and must be renewed periodically. Hence, you must appear for the NISM certificate examinations, complete your Continuing Professional Education (CPE) and meet any other requirement to renew and maintain your ARN validity at all times.
Be Confidential with Stakeholder Data
Another essential requirement to be satisfied by mutual fund distributors is to maintain the confidentiality of stakeholder information. It means that, as MFDs, you are restricted from sharing the personal data of clients and AMCs with third parties or outsiders at any cost.
Maintain Adequate Infrastructure to Support Operations
To facilitate ease of operations in the mutual fund distribution business, MFDs must establish an adequate infrastructure that will help execute their transactions effectively.
For example, maintaining a physical address to handle manual collection, processing & submission of offline forms; partnering with tech-friendly platforms to digitize operations and maintaining confidentiality through data protection & cyber security measures. You must also adopt internal control procedures to maintain consistency and correctness in operations.
Maintain Relevant Records and Information
As an MFD, you must exercise diligence in maintaining records of investor information and transactions, whether in physical or electronic form, to comply with applicable SEBI regulations. Some information records are KYC of clients, their transaction history, consent/dissent for investing in particular schemes, etc.
Comply with Regulatory & Legal Requirements set out by SEBI & AMFI
MFDs shall compulsorily adhere to the regulations prescribed by SEBI in the “Securities and Exchange Board of India (Mutual Funds) Regulations, 1996 (Mutual Fund Regulations)” and other guidelines and circulars as issued by SEBI & AMFI from time to time. These regulations pertain to the operational activities, including selling, distribution, marketing and code of conduct. MFDs must also comply with performance disclosure requirements, including Know Your Distributor (KYD), In Person verification (IPV) & KYC Registration Agency (KRA).
Exercise Fiduciary Responsibility & Due Diligence
Safeguarding investor interest is your foremost responsibility as an MFD. Hence, it is critical to exercise diligence and professional judgment while guiding investors. Try to avoid any conflict of interest and ensure you provide unbiased recommendations.
DONT’s FOR MUTUAL FUND DISTRIBUTORS
Engaging in Malpractices
In safeguarding investor interest and maintaining integrity and transparency, MFDs must take care not to engage in the following malpractices:
Manipulating investment portfolios to earn higher commissions.
Splitting of applications to show a higher number of transactions and, in turn, receive higher transaction charges.
Participating in a diversion of funds or payment defaults and making false dividend claims.
Making false or misleading statements and giving biased recommendations, or selling unsuitable products.
Disclosing or Sharing Confidential Data
Another fundamental responsibility of MFDs is not to disclose confidential information of investors or AMCs at any cost. As an MFD, you must ensure that neither you nor your representatives share or publish such information in any forum without prior consent of the concerned party. MFDs are also restricted from sharing confidential information with partners of group entities for cross-marketing purposes.
Do not indulge in mis-selling products and mutual funds to earn an extra commission. Proper care must be taken while explaining the features of products, and no misleading statements must be made, including concealing or omitting important information or making false claims.
Indulging in Aggressive Sales Tactics or Other Activities to Achieve Sales Targets
When marketing, selling, or distributing any Mutual Fund scheme, MFDs should not engage in fraudulent or unfair trade practices. Ensure that financial incentives don't influence your advice on schemes or transactions to investors. Encourage an ethical and honest culture within your organization, discouraging unfair practices, conflicts, and aggressive sales tactics to meet sales targets, as it goes against your duty of care to investors. Also, avoid giving rebates or gifts to attract investors.
Engaging in any Professional Misconduct
MFDs and their representatives must act with integrity and professionalism and avoid making false or defamatory statements about AMCs, AMFI, Mutual Fund schemes, or other MFDs. They should provide fair and balanced perspectives, refrain from spreading untrue statements or rumors that could harm the industry's reputation, and ensure all communications are factual and unbiased to avoid misleading the public.
AMFI’s CODE OF CONDUCT FOR MUTUAL FUND DISTRIBUTORS
The Association of Mutual Funds of India (AMFI) introduced the Code of Conduct for Mutual Fund Distributors, a mandatory guideline on regulatory requirements to be followed by mutual fund distributors.
The Code was previously revised by AMFI in the year 2013. Following many developments and significant changes in the mutual funds industry, AMFI felt the need to revise the Code of Conduct again to align with the new changes in the industry. AMFI issued the revised Code of Conduct on April 07th, 2022.
The SEBI has mandated that no mutual fund company shall deal with those intermediaries or MFDs who have defaulted in or violated the provisions of the Code of Conduct. Hence, this Code of Conduct is of utmost importance to MFDs for conducting a transparent & trustworthy mutual fund distribution business.
In conclusion, the Code of Conduct for Mutual Fund Distributors fosters a fair and transparent environment for investors. Continuously educating yourself, adhering to the code's guidelines, and maintaining a robust ethical compass will help you navigate the challenges and complexities of the industry while acting in the best interests of your clients. Prioritizing investor protection also promotes transparency, and fair practices, enabling you to contribute to the growth and stability of your business as well as the mutual fund industry as a whole.
FREQUENTLY ASKED QUESTIONS (FAQs)
What are the key dos for mutual fund distributors?
Some key do's for mutual fund distributors include providing accurate and unbiased information to clients, ensuring proper disclosure of risks of mutual funds, including fees and charges, recommending mutual funds to investors based on their financial profile, and maintaining transparency and fairness in conducting business. In conclusion, MFDs shall follow the Code of Conduct, SEBI Regulations on mutual funds and other regulatory requirements.
What are some don'ts for mutual fund distributors?What are some don'ts for mutual fund distributors?
Some don'ts for mutual fund distributors include avoiding conflicts of interest, refraining from making false or misleading statements, and not engaging in any fraudulent activities. MFDs shall not give recommendations of schemes that help them earn additional commissions. Similarly, they shall not disclose any information about investors or other stakeholders other than for compliance purposes.
Are there any restrictions on accepting commissions or incentives as a mutual fund distributor?
Yes, the guidelines often impose restrictions on accepting commissions or incentives to ensure that distributors act in clients' best interests rather than being influenced by personal financial gain.
What should mutual fund distributors disclose to their clients?
Mutual fund distributors should disclose all relevant information to their clients, including the risks associated with investment products, fees and charges, and potential conflicts of interest. MFDs must be genuine and not provide biased recommendations to their clients.
Are there any restrictions on marketing and advertising for mutual fund distributors?
Yes, mutual fund distributors must adhere to specific rules regarding marketing and advertising to ensure that the information provided is accurate, clear, and not misleading to investors.
Are there any continuing education requirements for mutual fund distributors?
Yes, in many cases, mutual fund distributors are required to participate in regular training and education programs to stay updated with industry trends, regulatory changes, and best practices. MFDs must also renew their ARN once in 3 years by appearing for the relevant NISM certifications. Without a valid ARN, you cannot carry an MFD business.