Will MF agents, RIAs have separate self-regulators?

The Securities and Exchange Board of India (Sebi) wants to put in place a self regulation organization (SRO) for mutual fund distributors and registered investment advisers (RIAs) since they have now become a large part of the mutual fund industry. SRO is a structure used by most regulators globally to form a first line of regulation. Sebi has invited public comments on a consultation paper (read: bit.ly/2UrxVG4) for the amendment of the Sebi (Self Regulatory Organizations) Regulations 2004. We explain the key functions of the SRO.


Sebi has divided SRO’s functions into four broad categories. First, the SRO will have a development role covering training and education of its members and investor awareness. Second, it will have a regulatory role, granting membership and laying down a code of conduct for its members. Third, it will have a grievance redressal role, resolving disputes between members and investors and between members themselves.

Finally, it will have a disciplinary role, wherein it can take action against members for violation of the code of conduct or regulations. The SRO will have the power to suspend individuals and entities from their membership or remove them altogether but not to impose monetary penalties. It would have the power to resolve disputes between members and between investors and members. However, the SRO for mutual fund distributors will not have the power to handle disputes between its members and mutual funds.

Sebi’s earlier attempts to set up an SRO ran into rough weather when the Financial Planning Stanper The number of mutual fund distributors has grown roughly sixfold over the past 14 years. However, the number of registered investment advisers (RIAs) is modest but can grow faster as consumers move towards fee-only advice 2012 dards Board (FPSB) India challenged its decision to appoint the Association of Mutual Funds in India-promoted body, Institution for Mutual Fund Intermediaries (IMFI), as the SRO.

FPSB India moved the Securities Appellate Tribunal (SAT) against Sebi’s decision. From SAT, the case went all the way to the Supreme Court, which ruled that Sebi can call for applications for SRO again.

Sebi has neatly sidestepped the problem of appointing the SRO by handing over the job to a nomination committee that will be led by a retired high court or Supreme Court judge. “A nomination committee headed by a retired high court or Supreme Court judge is likely to be impartial and select an SRO on its merits,” said Dhruv Mehta, president, Foundation of Independent Financial Advisors (FIFA). 2018


A key question Sebi has asked in the SRO proposals is whether there should be one SRO or multiple SROs for the two different types of intermediaries—mutual fund distributors and RIAs.

Experts have different opinions on the issue. “There should be a single SRO since both types of intermediaries serve the same customers,” said Mehta.

Vishal Dhawan, founder and CEO, Plan Ahead Advisors Pvt. Ltd, a financial planning firm, said distributors and advisers have different regulatory needs. “There is also a need to differentiate the two in the minds of investors. Hence there should be two SROs,” he said.

However, Sebi’s consultation paper seems to have missed out the issue of self-regulation for robo advisors and fintech companies. As the current Sebi paper, these companies will come under one of the two SROs. Srikanth Meenakshi, chief operating officer, FundsIndia.com, suggested that a separate panel be formed to draw up guidelines for robo advisors and fintech companies.

Another challenge for Sebi will be to address if banks that sell funds will come under the SRO. Mis-selling by banks continues to be a big issue and the consultation paper is silent on the jurisdiction of the SRO over bank intermediaries. Suresh Sadagopan, founder, Ladder 7 Financial Advisories, said banks which are distributing mutual funds will come under the SRO like any other distributor. However, how exactly they will be regulated remains to be seen.

Retail investors are pumping over ₹8,000 crore a month into equities through the systematic investment plan route, and it is up to the regulator to ensure that the fiduciary duty is understood and accepted by the intermediary industry.