Code of Conduct for Mutual Fund Distributors

Who a distributor is

A mutual fund distributor sells schemes to investors. The distributor is paid commission by the fund house out of the scheme's expenses, not a fee billed to the investor, and must hold an AMFI Registration Number (ARN). An employee who deals with investors holds an Employee Unique Identification Number (EUIN).

AMFI's code of conduct sets out how a distributor must behave. For an investor, it is a description of what to expect from the person selling a scheme.

What the code expects

A distributor should seek information about the investor's financial position, experience and objectives before a scheme is sold, and is expected to be conversant with the scheme's documents so as to explain its key features and risks. KYC must be in place before an investor can transact.

A distributor must disclose all commissions received or receivable, including trail commission. The commission actually paid also appears, in rupees, in the investor's half-yearly consolidated account statement.

What the code bars

A distributor may not promise or guarantee returns in any form or offer an indicative yield. Past performance, a written note or a waiver signed by the investor does not make a guarantee permissible. False, misleading or exaggerated statements about a scheme are barred too.

Rebating is barred: commission may not be passed back to the investor, directly or through cashback, gifts or discounts. So is churning: encouraging an investor to transact or switch more often than needed so that the distributor earns more commission.

Distributors and platforms may not pool investors' money or units in their own accounts. Breaches of the code can lead to suspension or cancellation of the ARN.

Distributor, not adviser

A distributor may not use a title such as adviser, advisor, wealth adviser or financial planner unless registered with SEBI as an investment adviser, which is a separate registration with its own rules. The description a distributor uses is 'AMFI-registered Mutual Fund Distributor', with name and ARN.

The two are paid differently. A registered investment adviser is paid a fee by the client and cannot earn distribution commission on the same client's investments.

Rules at a glance

Key points

• A distributor sells schemes, is paid commission by the fund house out of the scheme's expenses and must hold an ARN.
• The code expects a distributor to seek information to understand the investor's needs and to disclose all commissions, including trail.
• No promise or guarantee of returns in any form, and no indicative yield.
• Rebating commission and encouraging churning are barred.
• A title such as 'adviser' may be used only by a person registered with SEBI as an investment adviser.
• Investors' money and units may not be pooled in a distributor's or platform's own account; breaches can cost the ARN.

Common misunderstandings

• A distributor is not an investment adviser: that title needs a separate SEBI registration.
• Commission passed back to the investor is not a harmless discount: it is rebating, which the code bars.
• A long-running SIP, a yearly review of holdings or a move to a direct plan is not churning: churning is switching encouraged in order to earn more commission.
• A waiver signed by the investor does not permit a guarantee: no promise of returns is allowed in any form.

Questions people ask