SEBI Informal Guidelines SEBUHO/IMD0MD-PoD-1/0W/N2023/509911, Dated 10.02.2023
Background
SEBI vide. its Circular No. dated October 5th, 2010, specified that new clients who intend to register as Portfolio Manager must sign a separate document about fees and charges and write by hand that they understand the fees and charges structure.
It was observed that in case of electronic writing, not all investors are well equipped with relevant software/ hardware to support electronic writing through stylus pen or using their fingers on the relevant portion of Annexure.
In order to avoid such delays or any hassles and delays associated with documentations, Motilal Oswal Asset Management Co. (MOAMC) proposed certain processes for ensuring compliance with requirement of the circular.
Motilal Oswal AMC’s proposal
It was proposed that as a part of its electronic onboarding, for the purposes of declaration by clients regarding them understanding the fees/charge structure, instead of writing electronically using methods as mentioned, the clients would accept the pre-typed declarations by clicking on appropriate checkboxes.
Query raised by Motilal Oswal
MOAMC has requested SEBI to issue an interpretative letter under the SEBI (Informal Guidance) Scheme, 2003 on whether the said proposal would meet the compliance requirements with regard to signing the annexure on fees and charges.
Regulatory provisions governing signing of annexures
Regulation 22 of the SEBI (Portfolio Managers) Regulations, 2020 requires a portfolio manager to enter into an agreement in writing with the client that clearly sets out their mutual rights, liabilities and obligations.
Schedule IV of the SEBI (Portfolio Managers) Regulations, 2020 details the contents of agreements between the Portfolio Managers and its clients. Such agreement requires that the quantum and manner of payment of fees and charges for each activity for which services are rendered by the manager is to be mentioned.
In this regard, SEBI noticed that the clauses relating to fees and charges in the portfolio manager-client agreement didn’t always clearly reflect the fees and charges payable by the client.
Thus, in order to bring about greater uniformity, clarity and transparency with regard to fees and charges, SEBI through its circular dated October 5th, 2010, specified in clause 4 (j) of the circular that:
New clients shall be required to separately sign the annexure on fees and charges and add in their own handwriting that they have understood the fees/charges structure.
Developments in clause 4(j)
The abovementioned clause has been further clarified through an interpretative letter dated May 20, 2021, wherein it has inter alia been mentioned that:
… as noted from the heading of the Clause 4(j) of the Circular, the intent of the provision is to disclose the fees and charges to the client and to ensure that the client has understood and acknowledged the fees and charge’s structure.
… for compliance with clause 4(j) of the Circular, the clients may sign the annexure referred to in the Circular, using electronic signature as per the IT Act and write electronically that they have understood the fees/ charge structure, using their fingers or a stylus pen, accessed by them on touch sensitive screen of their personal computing device.
SEBI’s reply to the MOAMC’s proposal
In reply to the query raised by MOAMC, the SEBI, through its informal guideline stated that such electronic onboarding process, which completely avoids the requirement of clients writing the required text regarding them understanding the fees/charge structure, would not be in compliance with clause 4 (j) of the Circular.
Thus, the SEBI clarified that electronic on boarding process couldn’t eliminate the need for clients to write about understanding the fees and charges.
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