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A Mutual Fund Distributor (MFD) is an intermediary authorized to sell, distribute and advise on mutual fund products. They act as a link between the investors and asset management companies. To become an MFD in India, it is necessary to pass the NISM Series V-A: Mutual Fund Distributors Certification Examination conducted by the National Institute of Securities Markets. After passing the examination, the individual must register with the Association of Mutual Funds in India (AMFI) and obtain the AMFI Registration Number (ARN).
Once registered, the individual can provide services as an MFD. While providing services, the MFDs are required to strictly adhere to the AMFI Code of Conduct. In this blog post, we shall explain this Code of Conduct to our readers.
The AMFI Code of Conduct is a vital framework for all the AMFI-registered MFDs in India. This code mandates that they uphold the highest fiduciary standards in all their interactions with investors, asset management companies and other distributors. The MFDs must embrace the core values of transparency, competency, fairness and integrity not only to enhance the trustworthiness of their profession but also to inspire confidence in their clients as well as their partners.
The code is applicable to individuals and entities registered with the AMFI as MFDs. It is binding for all directors, partners, members, sub-distributors, employees and representatives of MFDs. The designation of MFDs also includes the sales personnel who are actively engaged in the marketing, sale and distribution of MF products.
According to AMFI Code of Conduct, the MFDs have the following fiduciary duties :-
The mutual fund distributors must regard the investor’s interest as the most important. They must exercise due diligence, take proper care and exercise independent judgement that is in the investor’s best interest.
The MFDs should strive to avoid conflicts of interest as much as possible. In case a conflict cannot be avoided, the MFD must ensure that appropriate disclosures are made to investors, and that investors are treated in a fair manner. Additionally, when selling Mutual Fund products from their own group, affiliate or associates, MFDs must make the necessary disclosures regarding any conflicts of interest that arise from distributing such MF schemes.
One of the most important fiduciary duties of an MFD is to ensure that financial incentives do not form the basis for recommendation of any particular scheme/transaction to any investor. They should promote a culture of ethics as well as integrity within their organization and discourage unfair practices, conflicts of interest, aggressive sales tactics and any inappropriate conduct aimed at meeting sales targets that disregard their fiduciary duty of care, diligence and loyalty.
MFDs are barred from rebating/passing back commissions to investors. They should also refrain from enticing investors through inducements like rebates, gifts, gift vouchers and so on.
They must not collude/undertake the following improper practices:-
Encouraging excessive transactions and churning of investments to earn higher commissions.
Splitting applications to secure increased transaction fees/commissions.
Participating in payment defaults like bouncing checks or diverting funds.
Making false claims or engaging in improper dividend or redemption payouts.
Conducting unethical practices like churning investments, selling unsuitable products to clients or promoting MF schemes via false/misleading statements. This includes concealing/omitting important facts about the schemes and not disclosing the risks associated with them.
Now, let’s understand the compliance related obligations of the MFDs in India :-
The MFDs must ensure that they adhere to SEBI (Mutual Funds) Regulations, 1996, as well as the guidelines/circulars issued by SEBI and AMFI for distributors, selling, distribution and advertising practices including the preparation of sales promotional literature and content, and code of conduct. The performance disclosures must be in alignment with the requirements laid down by SEBI.
The MFDs in the country are also required to comply with other SEBI Regulations that may apply to their marketing, selling and distribution activities like obligation to separate distribution and advisory services as mandated by SEBI (Investment Advisers) Regulations, 2013.
They shall ensure compliance with AMFI-prescribed Know Your Distributor (KYD) norms. They must diligently attest/certify investor documents and perform In-Person Verification of investors for the KYC process while following the guidelines set by AMFI and the KYC Registration Agency (KRA).
The distributors of mutual funds must strive to be fully knowledgeable about the key provisions of the Scheme Information Document (SID), Statement of Additional Information (SAI) and Key Information Memorandum (KIM) as well as the operational requirements of various schemes. They should be able explain the key features of the schemes, including the fundamental attributes and the associated risks, to the investors.
To evaluate the suitability of MF schemes being marketed, the MFDs should gather information from their clients regarding their financial status, experience in making investments and their investment goals.
Furthermore, MFDs must ensure that their representatives possess the relevant education and experience so they can properly perform their respective services.
The MFDs as well as their representatives must maintain confidentiality of all details pertaining to AMCs as well as investors. They must also comply with the AMFI-prescribed Data Sharing Principles and the laws relating to Personal Data Protection.
They must stick to the data privacy-related contractual agreements signed by them with the AMC to make sure the data is always protected, used only for the intended purpose and purged once it’s no longer required to be stored for rendering services for which it was collected or stored safely.
The mutual fund distributors must make sure they and their sub-distributors remain compliant with regulations set forth by SEBI, guidelines and code of conduct notified by AMFI at all times. They must also ensure their sub-distributors possess a valid ARN. To put it in a simple manner, the principal MFD should not engage or continue to engage a subdistributor whose ARN has been rendered invalid.
Below, we have explained the infrastructure, record keeping and other related obligations for the MFDs :-
Physical infrastructure :- The MFDs are required to maintain necessary infrastructure to assist the AMCs in maintaining high service standards for investors and make sure that key operations like forwarding/submitting forms and cheques, etc., to the AMCs and RTAs are supported adequately.
Digital Infrastructure :- In the light of increased initiatives towards digitization of mode of performance of services, including new client onboarding, transaction processing and ongoing servicing for investors, the MFDs should implement sufficient information technology related infrastructure, including cyber security measures to preserve the confidentiality of electronic data during collection, transmission and storage as well as to reduce risks associated with carrying out mutual fund transactions via digital platforms.
Internal control, financial and operational resources :- The MF distributors must have in place internal control procedures and financial and operational systems and processes that can effectively detect and prevent mis-selling as well as mitigate financial losses due to fraud, professional misconduct, theft or force majeure events. MFDs are urged to obtain appropriate insurance coverage for their activities.
Record keeping :- In accordance with applicable laws as well as SEBI regulations, MFDs must keep sufficient records about their clients whether in physical or digital form as applicable. These records should include KYC records, correspondence with investors regarding the suitability of a particular scheme/transaction and investors’ consent or dissent.
Here are some of the client related obligations for the MFDs, according to AMFI’s code of conduct :-
The MFDs shall provide investors with complete and updated information, as provided by the AMCs. They must not deliberately withhold or omit any material fact/information given to them by AMCs from any investor. If a particular scheme or transaction isn’t suitable and the MFD is aware of it, they must convey the same to the investor.
Risk factors of each scheme of MF must be highlighted by the MFDs to their investors. The MFDs must not make any misrepresentation or exaggerated statements or hide associated risk factors of a scheme. They shall advise and urge their investors to go through the SAI/SID/KIM before making an investment decision.
The MFDs must disclose all material information to the investors. This includes any commissions, whether in the form of trail commissions or other types, that they receive or expect to receive for recommending different competing mutual fund schemes.
MFDs must provide their clients with a list of the mutual funds they are affiliated with. They should inform clients that the information offered is limited to the mutual fund products that the MFDs are distributing or promoting. Additionally, MFDs should advise clients to consider other alternate products that may not be offered by them before the clients make any investment decisions.
To know more about the client obligations, you can refer to the official PDF of AMFI Code of Conduct.
Some other obligations that the MFDs must fulfill are as follows :-
Individual mutual fund distributors must obtain certification from NISM and register themselves with AMFI and obtain ARN and Employee Unique Number (EUIN) from the AMFI.
The NISM certification and AMFI registration need to be renewed in a timely manner.
Non-individual MFDs must register themselves with AMFI and obtain the ARN. They must ensure their sales personnel or representatives engaged in marketing, sale and distribution of MF products possess a valid NISM certificate as well as AMFI registration/EUIN.
MFDs must ensure that their representatives receive training on appropriate conduct for their sales, marketing and distribution activities. This training should focus on :-
An awareness and understanding of their fiduciary obligations towards investors.
Implementing adequate procedures to prevent and detect any fraud or errors in the performance of their functions.
The responsible use of social media platforms with regard to content standards, authenticity, approval of information, frequency of use and other ethical practices.
The MFDs shall cooperate with and assist AMCs, AMFI, SEBI and other competent authorities as well as due diligence agencies appointed by AMFI/AMCs in relation to their services provided to the AMCs. This assistance includes supplying copies of relevant investor documents in their possession as required by the AMCs from time to time or as requested by SEBI, AMFI or any competent authority during an investigation or other proceeding.
MFDs are required to notify the AMC and AMFI in writing without delay if any of their representatives engage in acts of moral turpitude, exhibit financial irregularities, are arrested by the police or have their employment terminated due to any of these bad acts.
Apart from the above-mentioned obligations, there exist other obligations as well. They’re explained in the code in a detailed manner.
The MFDs must fulfill the following obligations to maintain the mutual fund industry’s integrity :-
According to the AMFI Code of Conduct, MFDs must not engage in fraudulent / unfair trade practices while marketing, selling or distributing any MF scheme. They, along with their representatives, are expected to uphold high standards of integrity and conduct their dealings in a way that maintains the professional image of the industry.
Furthermore, MFDs should avoid making false or defamatory statements about any AMC, the AMFI, Mutual Fund schemes or other MFDs in any setting. This includes private or public forums like chat groups, social media, print or electronic press and conferences.
MFDs are required to maintain a professional demeanor, provide a fair and balanced perspective and refrain from spreading untrue statements or false rumors that could harm the reputation of any AMC, Mutual Fund scheme or the industry as a whole. All written or oral communications must be based on facts and presented in an unbiased manner to avoid misleading the public.
The AMFI Code of Conduct is an extremely important framework for the MFDs in India. It must be adhered to by them at all times. Need assistance in securing MFD License? Connect with our consultants at Registrationwala to apply for this license. We’ll help you file an application for registration with AMFI while ensuring accuracy and enable you to obtain the license in a smooth and hassle free manner.
Hey there, I'm Dushyant Sharma. With the extensive knowledge I've gained in past 8 years, I have been creating content on various subjects such as banking, insurance, telecom, and all the important registration and licensing processes for various companies. I'm here to help everyone with my expertise in these areas through my articles.
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