SEBI circular to Portfolio Managers for facilitating ease in digital on-boarding process for clients and enhancing transparency through disclosures

SEBI has issued a circular to Portfolio Managers for facilitating ease in digital on-boarding process for clients and enhancing transparency through disclosures. The key highlight of this initiative is the simplification of the digital onboarding process for clients. Regulation 22(1) of the SEBI (Portfolio Managers) Regulations, 2020 mandates portfolio managers to enter into a written agreement with clients, outlining their mutual rights, liabilities, and obligations. However, Clause 4.3.3 of the Master Circular previously required clients to separately sign an annexure on fees and charges, with a handwritten note confirming their understanding. Now, with the amendment, clients can provide this acknowledgment either handwritten for physical onboarding or electronically for digital onboarding, ensuring flexibility and convenience.

Effective from October 1, 2024, portfolio managers will also provide a fee calculation tool to clients, presenting various fee options with multi-year fee calculations. This tool, incorporating the high watermark principle where applicable, aims to enhance transparency regarding fee structures, empowering clients to make informed decisions.

Furthermore, additional fee disclosures will be integrated into the PMS-client agreement for new clients onboarded after October 1, 2024. These disclosures will include fee illustrations covering different scenarios, such as changes in the portfolio value, aligned with the high watermark principle. Similarly, periodic reports provided to clients will now include an annexure detailing the fee calculation, ensuring comprehensive transparency.

To further facilitate understanding, portfolio managers will introduce a “Most Important Terms and Conditions (MITC)” document for clients, outlining critical aspects of the manager-client relationship. While new clients will receive this document upon onboarding from October 1, 2024, existing clients will be informed via email or other suitable communication channels by January 1, 2025.

SEBI’s directive also emphasizes that portfolio managers must not levy any additional fees beyond those specified in the PMS-client agreement annexure, ensuring fairness and clarity in fee structures.

This circular, effective from October 1, 2024, underscores SEBI’s commitment to promoting efficiency and transparency in the portfolio management industry. By leveraging digital advancements and enhancing disclosure mechanisms, these amendments aim to foster trust and confidence among investors while streamlining processes for portfolio managers.