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Thursday, December 29, 2011

Sebi to weigh ban on payment of upfront commissions in mutual fund schemes

Sebi is expected to take a close look at a suggestion made by CEOs of leading fund houses to ban payment of upfront commission to distributors of mutual fund schemes. 
Battling redemptions, some MFs are luring distributors with high commission - a practice that breeds unfair competition and goes against the principle of the "no-entry load regime" that kicked off from April 2009.

The subject cropped up at a meeting between Sebi and heads of as many as 15 fund houses. Faced with a dismal market, MFs have also suggested that know-yourcustomer (KYC) norms be simplified and the period of exit load extended beyond a year to attract long-term investors.

"Sebi is keen to promote mutual funds as a 'savings' product as against an 'investment'. It will form a team to take up with the government to mandate retirement funds to invest in mutual funds.

This could be similar to 401K, the US retirement savings plan for employees," said a person present at the meeting. Such a move will push the growth of the mutual fund industry in a big way, said a Sebi source.

On the issue of upfront commission, an industry source said big fund houses, which introduced the practice, are now opposing it as they lose out to new funds. According to industry sources, fund houses are paying anywhere between 0.95% and 3% as upfront commission to distributors from their own pockets.

Between October and March, fund houses pay higher upfront commission to distributors to sell their tax-saver funds. During the two-hour meeting, the fund CEOs proposed that qualified foreign investors (QFIs) would be encouraged to put in money if KYC norms are streamlined. They also asked for introduction of share-class structure and valuation models of gold funds.

"Sebi wanted our views on key issues facing the industry. The regulator, it seems, is not happy about falling asset bases and investment outflows. We think Sebi will take quick decisions on KYC for QFIs, transaction charges and extension of exit load structure," said a CEO who attended the meeting.

According to sources, the regulator may take a decision not to make PAN (permanent account number) mandatory for QFIs who want to invest in Indian mutual funds. The regulator will look into rules laid down by overseas regulators for enabling individual foreign investors, particularly from countries with a strong regulatory framework, to put money in Indian MFs.

Offshore distributors, selling Indian MFs to QFI, may be entrusted with the responsibility of completing the KYC procedure. Industry representatives strongly backed the agenda on a possible extension of the exit load period from one year to two or three years.

This, they think, will arrest sudden outflows and distributor-induced fund portfolio churning. In order to make the marketing structure more flexible, the decision to charge a transaction fee should be left to the discretion of a distributor. At present, distributors recover a charge of Rs 150 from all investors, irrespective of the size of investment.

"This is not a good practice... If someone is investing Rs 1 lakh, the distributor should have the freedom not to levy a charge," said the head of another fund. The regulator may soon exempt independent financial advisors from disclosing their fees on the websites of fund houses, he felt.

Among other things, the regulator said it would also look into the valuation model of gold fund-of-funds which have gold prices as the benchmark but valued at closing net asset value (NAV). This, according to fund managers, is resulting in widen variance between performance of gold fund-of-funds and their NAVs.

The regulator, however, was also not comfortable with the idea of introducing differential share class in mutual funds. "Differential share class discriminates between investors and it cannot be implemented," the regulator told the MF executives.

source: ET
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