Due Diligence of qualifying Mutual Funds Distributors

What is Distributors’ Due Diligence?

Due diligence, in the context of MFDs, refers to appraisal of various activities and processes undertaken by the MFDs while conducting the mutual fund distribution business and servicing their mutual fund clients, with a view to evaluate that the MFDs are exercising reasonable care and control that a prudent business set-up or person is normally expected to have in place, considering the fiduciary nature of mutual fund investments.

SEBI Regulations w.r.t. Distributors’ Due Diligence

As per extant SEBI Regulations, the AMCs are required to regulate their empanelled distributors by putting in place a due diligence process to satisfy the ‘fit and proper’ criteria that incorporate, inter-alia, the following factors:

1. Business model, experience and proficiency in the business.
2. Record of regulatory / statutory levies, fines and penalties, legal suits, customer compensations made; causes for these and resultant corrective actions taken.
3. Review of associates and subsidiaries on above factors.
4. Organizational controls to ensure that the following processes are delinked from sales and relationship management processes and personnel:
1. Customer risk / investment objective evaluation.
2. MF scheme evaluation and defining its suitability and appropriateness to various customer risk categories.

Further, the AMCs are required to undertake the due diligence process of the MFDs satisfying one or more of the following four criteria at the time of their empanelment and during the review period:

1. AUM raised over Rs.100 Crore across industry in the non-institutional category but including high net worth individuals (HNIs)
2. Commission received of over Rs.1 Crore p.a. across industry
3. Commission received of over Rs. 50 Lakh from a single Mutual Fund
4. Multiple point presence (more than 20 locations)

Objective of the due diligence exercise

The objective of the due diligence exercise is to review the efficacy and the effectiveness of the internal controls of the shortlisted distributors and their compliance with extant regulations and applicable AMFI guidelines, to enable the AMCs to satisfy themselves that the concerned distributors meet the ‘fit and proper’ criteria as required as per SEBI regulations.

How is the Due Diligence process conducted?

While the AMCs are required to undertake the due diligence process of their MFDs, for convenience and to avoid duplication, a common / unified due diligence of the qualifying MFDs is organised by AMFI on behalf of the participating AMCs utilising the services of qualifies audit firms. The due diligence reports submitted by the audit firms engaged for the purpose are shared with the respective AMCs for taking necessary action on the observations therein as deemed appropriate.

For more information and FAQs on MFD due diligence process click here.