Sebi Update: Trail Model For Distribution Commission; AIFs To Provide ‘Direct Plan’ Option; Check Details Here

Markets regulator Securities and Exchange Board of India has asked alternative investment funds (AIFs) to provide an option of ‘direct plan’ for investors and introduced a trail model for distribution commission. The measures are part of the Sebi’s initiatives to bring transparency in expenses and curb mis-selling.

In addition, the regulator came out with guidelines with respect to excluding an investor from an investment of AIF.

This came after the regulator observed inconsistency and lack of adequate disclosure in Private Placement Memorandum (PPM) with respect to certain industry practices.

The new rules are aimed at providing flexibility to investors for investing in AIFs, bringing transparency in expenses and curbing mis-selling, Sebi said in two separate circulars.

The framework pertaining to direct plan will come into force from May 1, while those related to excluding an investor from an AIF investment will become effective immediately.

AIFs will have to ensure that investors who approach the AIF through a registered intermediary, which is separately charging the investor any fee such as advisory fee or portfolio management fee, are on-boarded through direct plan only.

Introducing a trail model for distribution commission, Sebi said that category III AIFs would charge distribution fee from investors only on an equal trail basis. It means no upfront distribution fee would be charged by such AIFs directly or indirectly from their investors.

Further, any distribution charge paid would be only from the management fee received by the managers of such category III AIFs.

For other two categories, AIFs may pay up to one-third of the total distribution fee to the distributors on upfront basis, and the remaining distribution fee would be paid to the distributors on equal trail basis over the tenure of the fund.

Also, Sebi asked AIFs to disclose distribution fees to the investors at the time of on-boarding.

The capital markets regulator has already barred upfront commissions for portfolio management services and mutual funds.

Upfront commission is a one-time payment made by a fund to a distributor on selling a scheme to an investor. Trail commission, on the other hand, is a recurring fee paid to a distributor until the investment is withdrawn.

With regard to excusing or excluding an investor, Sebi said that an AIF may excuse its investor from participating in a particular investment in certain circumstances.

Those circumstances include if an investor, based on the opinion of a legal professional, confirms that its participation in the investment opportunity would be in violation of rule; or if the investor, as part of an agreement signed with the AIF, had disclosed to the manager that its participation in such investment opportunity would be in contravention to the internal policy of the investor.

Further, the manager will have to ensure that terms of such agreement with the investor include reporting of any change in the disclosed internal policy, to the AIF, within 15 days of such change.

Moreover, an AIF may exclude an investor from participating in a particular investment opportunity, if the manager of the AIF is satisfied that the participation of such investor in the investment opportunity would lead to the scheme of the AIF being in violation of rule or would result in material adverse effect on the scheme of the AIF.

If the investor of an AIF is also an AIF or any other investment vehicle, such investor may be partially excluded from participation in an investment opportunity, to the extent of the contribution of the investment vehicle’s underlying investors who are to be excused from such investment opportunity.

The manager will have to record the rationale for such exclusions along with the supporting documents.

In February 2020, the regulator introduced a template for PPM for AIFs, in order to ascertain that a certain minimum level of information in a simple and comparable format is disclosed to investors.

The PPM template provides for disclosure with respect to direct plan for investors, and constituents of fees that may be charged by the AIF, including distribution fee.

(With PTI inputs)

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