Capital market watchdog Sebi on Tuesday introduced a regulatory framework for ‘Execution Only Platforms’ for direct plans of mutual fund schemes in a bid to protect the investors dealing in such schemes.
The execution-only platform allows transactions in direct plans of mutual funds without the help of distributors.
The new framework would be applicable from September 1, the Securities and Exchange Board of India (Sebi) said in its circular.
Over the past few years, direct plans of mutual fund schemes have gained traction among investors as such schemes are cheaper compared to the regular plans, which include a commission paid to distributors. This resulted in mushrooming of several online platforms that provide the facility of investing in direct plans.
Sebi noted that several entities including investment advisors and sock brokers are providing execution services, like the purchase and redemption of direct plans of mutual fund schemes, through the digital mode. Such platforms are often availed by investors who are not their clients. At present, there is no regulatory framework in place to facilitate the provision of such “execution only services” in direct plans of mutual fund schemes, independent of the regulatory requirements applicable to investment advisers and stock brokers.
“While the investors may find it convenient to avail the services of such online platforms, investors who are not clients of such intermediaries may not have protection for the risks associated with such transactions,” Sebi said.
Accordingly, the regulator decided to prescribe a framework for Execution Only Platforms (EOPs) for transacting in direct plans of schemes of mutual funds following the public consultation in this regard. Under the mechanism, an entity desirous of providing execution-only services in direct plans of mutual funds can obtain registration under either of the two categories — category 1 EOP as an agent of asset management companies registered with the industry body Association of Mutual Funds in India (AMFI) or category 2 EOP as an agent of investor, registered as a stock broker.
The move would make it convenient for investors to put investments through EOPs and would help in ease of doing business for the platforms by mandating only such appropriate regulatory compliances as is required for the EOP activity.
The regulator has also specified the nature of services that may be offered by the EOPs, cyber security requirements, pricing of services, grievance redressal mechanisms, technology related requirements among others.
“The responsibility of ensuring compliance with KYC requirements, with respect to transactions executed through both categories of EOPs by investors in mutual funds, shall lie with the AMCs,” Sebi said.
With regard to Category 1 EOP, Sebi said that the entity will have to enter into agreement with the AMCs whichshould clearly define their rights and obligations relating to EOP services. Further the entity will have an objective, fair and transparent policy for providing execution services for products of AMCs.