New SEBI Regulations on the Execution Only Platform (EOP) for Direct Mutual Funds

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New SEBI Regulations on the Execution Only Platform (EOP) for Direct Mutual Funds

On June 13th, 2023 the SEBI issued a circular for creating a new category for intermediaries, Execution Only Platforms (EOPs). But why? The reason is to promote the penetration of Mutual Funds and ease down the process of investment that comes with adequate investor protection and grievance redressal mechanism.

Working on this framework will be a stepping stone towards strengthening the investors with the power of technology by investing directly in Mutual Fund schemes.

The development of the platform was discussed in the Mutual Fund Advisory Committee (MFAC) for creating a separate framework for Execution-Only Platforms (EOPs).  Further, the Committee stated various requirements for the proposed framework, which included the following:

• Legal Structure and Regulations of EOPs
• Framework for EOPs
• Revenue model

Who Has to Register Under EOP?

SEBI noted, that several entities including investment advisors and stock brokers are providing execution services, like selling and buying direct mutual fund schemes through digital mode. Here, it is decided to prescribe a framework for Execution Only Platforms (EOPs) for transacting in direct plans of schemes.

Any entity that wants to provide the execution-only service in direct plans of mutual funds can obtain registration under any of the two categories.

1. EOP Category 1 - As an agent of assets management companies registered with AMFI.
2. EOP Category 2 - As an agent of investors, registered as a stockbroker

Now, EOPs cannot do a ranking of schemes based on their internal report. Also, they cannot show any MF scheme advertisement on the online platform. However, SEBI has restricted these platforms to rank the MF schemes for investors.

Two Types of EOP Categories

Any entity that wants to operate an EOP must register under any of two schemes:

Category 1 EOP

1. The entity must be AMFI registered and a body corporate.
2. An entity can act as an agent of AMCs and integrate its systems with AMCs or RTAs authorized by such AMCs, to facilitate transactions in Mutual Funds.
3. The entity can act as an aggregator of the transactions in direct plans of schemes of Mutual Funds and provide services to investors or other intermediaries.

Category 2 EOP

1. The entity shall obtain registration as a Stock Broker in terms of the SEBI (Stock Brokers) Regulations, 1992 under the EOP segment of the Stock Exchanges. 
2. The entity shall be a body corporate.
3. The entity shall operate as an agent of investors and operate only through the platforms provided by the Stock Exchanges.
4. The entity shall not act as an aggregator of the transactions in direct plans of schemes of Mutual Funds and shall provide services to investors directly.

Eligibility Criteria

Any entity that wants to be registered under the EOP must ensure compliance with the following requirements, on a continued basis:

• Must appoint a compliance officer
• Appointed at least two qualified key managerial personnel with experience of at least three years each in the securities market.
• Fulfill the ‘FIT and PROPER  person’ criteria under the SEBI (Intermediaries) Regulations, 2008. 
• Must comply with the requirement of base net worth applicable for Trading Members.

Transaction and Onboarding Fees

1. An entity may levy a flat transaction fee which must be borne by AMCs, within the upper limit as specified by AMFI. On-boarding costs, if levied, shall be borne by the AMCs.
2. Similarly, an entity may levy a flat transaction fee which must be borne by the investors, within the upper limit as specified by the Stock Exchanges. Further, Onboarding fees, if levied, shall be borne by the AMCs and investors.
3. AMC shall not charge any fees/ charges paid to the EOPs, or the schemes of the Mutual Funds.

Pooling of Funds

To address the challenges and promote a secure investing environment in Mutual Funds, the SEBI has proposed that the pooling of funds discontinue from July 1st, 2023. Entities in both categories of EOPs must ensure compliance with relevant provisions including Chapter 16 of the Master Circular for Mutual Funds dated May 20th, 2023 of usage of pool accounts for transactions in units of Mutual Funds.

Rights and Obligations

• Enter into an agreement with the AMC and Stock Exchanges which should clearly define their rights and obligations relating to the EOP services.
• An objective must be to show a fair and transparent policy for providing execution services for products of AMCs.

Operational Risk Management

• Share investors' data with their other departments, divisions, group entities, or with any third party, only with the specific consent of the investors.
• Ensure compliance with cyber security and cyber resilience requirements, as specified by AMFI.
• Must ensure compliance with the cyber security and cyber resilience framework for Stock Brokers, as prescribed by SEBI from time to time.

Grievance Redressal

• For Category 1 EOPs, the grievance redressal mechanism must be as prescribed by AMFI.
• For Category 2 EOPs, the grievance redressal mechanism must be as prescribed for Stock Brokers from time to time, through SCORES, mediation, and arbitration mechanism.

Technology Related Requirements

• Maintain robust technology infrastructure to appropriately support their operations and manage the associated risks.
• Have adequate and suitable systems in place, so that investors can place orders on a real-time or near-real-time basis.
• Maintaining data privacy and preventing unauthorized sharing of data.
• Establish safeguards and procedures to deal with malfunctions or erroneous use of their systems, or other unforeseen situations.
• Make their platforms available for transactions at all times, continuously.

Compliance

• Provide an interactive tool for the investors to screen or filter various schemes
• Entities shall submit information or reports as may be specified by AMFI or SEBI or Stock Exchanges.
• The entities under both categories shall keep the AMCs and Stock Exchanges or AMFI, as the case may be, informed of events resulting in disruption of activities or market abuse without undue delay.
• Ensure periodic monitoring of the EOPs under their supervision

Maintenance of Books of Accounts, Records, Etc.

As per Regulation 17(1A) of SEBI Regulations 1992, a Stock Broker in the EOP must keep and maintain the books of accounts, records, and documents.

• The Category 2 EOP keeps and maintains records as specified in Annexure for a minimum period of 5 years.
• The Category 1 EOP, keep and maintain the books of account, records, and documents, in the form and manner specified by AMFI.

Existing Platforms

• Existing platforms that are providing services similar to Category 1 EOPs must obtain registration under one category of EOPs within 3 months from the date of this circular coming into force.
• Although registration as an EOP will not be required for platforms operated by Market Infrastructure Institutions, such as Stock Exchanges. But these platforms must ensure compliance with the relevant requirements under the framework for EOP within three months of the date this circular enters into force.

Conclusion

Lastly, the SEBI has called Stock Exchanges and AMFI to create an appropriate framework that provides an interactive framework to the investors to evaluate various schemes as per the data selected by the investor. 

Also, SEBI has asked the existing platform to get the registration under any category of EOP within three months of the circular published, which is September 1st, 2023.

Also read:  The Role of Mutual Fund Distributors in Investment Management

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