Sebi Discusses Framework For Execution Only Platforms for Direct Plans of Mutual Fund Schemes

The Securities and Exchange Board of India (Sebi) held its Board meeting in Mumbai on December 20, 2021.

The Board took several important decisions, including among others, on introducing a framework to facilitate an ‘execution only platform’ for direct plans of mutual fund schemes, and strengthening focus and governance mechanisms in stock exchanges, clearing corporations and depositories.

Sebi announced in a press statement that a number of entities including investment advisors, and stock brokers are offering execution services in direct plans of mutual fund schemes through the digital mode.

At present, there is no regulatory framework in place to facilitate the provision of such “execution only services” in direct plans of MF schemes, independent of the regulatory requirements applicable to investment advisors and stock brokers.

Given this, the Board has decided to introduce a regulatory framework for “Execution Only Platforms” (EOP) for direct plans of Mutual Fund schemes, with a view to achieve the following objectives, it said in the press statement.

These include: convenience to investors in making investments through EOPs; appropriate investor protection mechanisms; and ease of doing business for the EOPs, by mandating only such appropriate regulatory compliances as is required for the EOP activity.

“Under the approved framework, EOPs may be granted registration under either of the two categories – Category 1 EOP as an agent of asset management companies (AMCs), registered with the Association of Mutual Funds of India (Amfi) or Category 2 EOP as an agent of investor, registered as a stock broker. The detailed framework and the modalities of implementation of the same, nature of services that may be offered by the EOPs, cyber security requirements, pricing of services, grievance redressal mechanisms, etc. shall be notified through circulars,” the statement added.

The Board also approved the various amendments to the regulations for these market infrastructure institutions (MIIs).

Some of the key decisions in this regard were to categories the functions of MIIs into three vertical, namely: critical operations, regulatory, compliance and risk management, including the role of MIIs as first level regulators of intermediaries and listed entities, as well as investor grievance redressal, and other functions, including business development.

One of the important decision related to the process of appointment of key management personnel heading the critical operations and regulatory, compliance and risk management.

Sebi announced in a press statement that the process of appointment of public interest directors (PIDs) was to be rationalised by mapping certain skill-sets/expertise to PIDs.

“The MIIs will be required to mandatorily appoint PIDs with background and expertise in the areas of technology, law and regulatory, finance and accounts and capital markets. In line with the extant requirement, the PIDs will continue to meet every six months, and in addition to submission of a report to the Board of the MII, they will be required to submit a report to Sebi after the meeting,” Sebi announced in the press release.

In addition, the internal evaluation of functioning of MIIs and their statutory committees will be done every year. Also, an external evaluation will be done by an independent entity once in three years.

The press statement also listed details as of the accountability of KMPs.

According to the statement, the definition of KMPs would be changed to cover employees based on importance of activities carried out by them and their relative hierarchy within the MII.

Further, the MII will clearly delineate and segregate the roles and responsibilities of such identified KMPs within each function, especially their responsibilities towards regulatory, compliance and risk management functions in order to improve overall accountability, the statement added.

“The appointment and removal of KMPs will be done by Nomination and Remuneration Committee (NRC). The MIIs will appoint a separate chief risk officer, who would be in-charge of handling risks associated with the MII. The performance of KMPs will be evaluated in every six months. In addition to existing reporting requirements, the chief regulatory officer or compliance officer will be required to submit a quarterly report to Sebi on non-compliances. No employee of the MII will be permitted to simultaneously be an employee of a subsidiary of the MII,” the statement said.

Lastly, ‘A sharper Code of Conduct’ will be applicable to the MII, the governing board, directors, KMPs and committee members, and the Board Members and KMPs will be held accountable if they are aware of wrongdoing(s) and do not appropriately report the same.

MIIs will also be required to frame an internal policy for sharing and monitoring data, which will entail means and manner of data sharing, types of data that can be shared, escalation matrix for data sharing, etc. These regulatory changes are expected to bring in greater transparency and accountability in the functioning of MIIs, the statement announced.

In addition, the MIIs will also set up an investment committee as a new statutory committee, which will be responsible for evaluating investments including capital expenditure, investments into other companies and CSR activities.

Lastly, the agenda items and minutes of the governing board of the MII pertaining to regulatory , compliance and risk management aspects is to be disclosed on the website of MII, the statement further said.