Enforcement actions for non-compliance with registration requirements of portfolio managers

Portfolio Managers

A corporate entity known as a portfolio manager complies with a contract or agreement with the client and provides advice, makes decisions, or takes action on the client’s behalf regarding the management and administration of the customer’s funds and securities. A portfolio manager is simply a professional who makes investment decisions and executes investment activities on behalf of an individual or organisation. The portfolio manager must be able to serve their client’s needs by making investments that will yield the highest return. He has a fiduciary duty and is bound by the terms of the contract that the portfolio manager and his customer have agreed to.

Compliance Regarding portfolio manager Registration with SEBI

The following is a list of the post-registration requirements that the registered portfolio managers must meet.

  • Any time the portfolio manager’s status or organisational structure changes, the Board must be notified, and prior approval must be obtained.
  • The portfolio manager is obligated to take appropriate action to redress such a grievance, which must be resolved within one month in the event that there is any compliance from an investor.
  • A portfolio manager must keep track of various grievances, their nature, and other details and relay this information to the Board.
  • The portfolio manager must constantly have a net worth of at least five crore rupees. 
  • The minimum amount that the portfolio manager can accept from a customer is fifty lakh rupees, or securities with a minimum value of fifty lakh rupees. 
  • The manager is required to follow all guidelines mentioned in the Act.

What guidelines apply to portfolio managers?

The contract between the portfolio manager and the investor governs how a portfolio manager provides services. According to the SEBI Portfolio Managers Regulations, the agreement must include the bare minimum of information. However, the portfolio manager may include extra conditions in the contract with the customer. As a result, an investor is encouraged to carefully study the agreement before signing it. 

Enforcement Action for Non-compliance with Registration Requirements

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Portfolio managers may face severe action if they do not follow the regulatory requirements. The following are some potential actions the portfolio managers could face for non-compliance:

Liability for action in case of default or non-compliance

A portfolio manager who violates any of the Act’s, its rules, or the regulations made under it will be held liable for one or more of the actions listed there, including the action under Chapter V of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008[1].

Cancellation, Suspension, and Other Actions Related to Registration

The Board may, without prejudice to any action under the securities laws or instructions, directions, or circulars issued, can take any of the following actions against any individual who has been granted a registration certificate under the regulations or act:

(a) fails to comply with any requirements subject to which a registration certificate has been granted to him; 

(b) violates any of the provisions of the securities laws or directions, instructions, or circulars issued thereunder.

Appointment of the designated authority

The Board may initiate legal action against any person who has been issued a certificate of registration under the Act and the regulations for non-compliance with the registration requirement.

The Executive Officer shall then designate an officer not below the rank of Division Chief as the designated authority, provided, however, that the Executive Director may, in his discretion, designate a bench of three officers, each of whom shall not be below the rank of Division Chief: Furthermore, such a bench shall be chaired by the senior member, and a majority of that bench shall make any decisions or recommendations.

No officer who has investigated or inspected the claimed violation is eligible to be nominated as a designated authority.

Holding of enquiry

  • The designated authority must give notice to a subject of an inquiry, asking them to provide justification for why the action is being considered.
  • The notice shall be required to produce a written reply to the notice received, along with documentary evidence, if they have in support of such written reply, within a period to be indicated in the notice, not exceeding twenty-one days from the date of service.
  • Copies of the documents the Board relied upon and excerpts from the pertinent reports that reflect the conclusions reached after an inquiry, investigation, or inspection, if applicable, shall be attached.
  • The designated authority may issue a notice fixing a date for document inspection if the person requests an inspection of such documents within the timeframe and the designated authority is of the opinion that the request may be granted.
  • The designated authority must offer the notice a chance for a personal hearing. It must either cause the notice to be issued or issue it with the scheduled hearing date.
  • The designated authority may end the proceedings after recording its reasons and using the evidence that is in the record if the notice does not respond to the notice issued or does not show up on the scheduled hearing date and the designated authority is satisfied that the notice has received the sufficient opportunity to respond.
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Recommendation of action

The designated authority may, in a report, recommend the following actions after taking into account the information and facts:

  • Dismissing the case without taking any adverse action.
  • Cancelling the registration certificate.
  • Suspending the certificate of registration for a predetermined amount of time.
  • Prohibiting the notice from accepting any new assignments or contracts or launching any new schemes for the predetermined amount of time.
  • Prohibiting an officer of the notice from working for or being affiliated with any registered intermediary or other parties.
  • Issuing a regulatory censure to the notice; 
  • Prohibiting a branch or office of the notice from carrying out operations for a time period that may be specified.

The designated authority should submit the report within 120 days after the personal hearing date or the date of receipt of the reply to the notice, whichever comes first.

Order of the Competent Authority

  • The competent authority shall forward a copy of the designated authority’s report and call upon the noticee to submit its argument in writing why the measures as recommended by the designated authority or any other action as contemplated by these regulations, should not be taken, as soon as it receives the report containing the measures recommended by the designated authority.
  • The notice shall provide a written submission and any documentary proof, if any, in support of the written submission within the time frame specified in the notice but not more than twenty-one days after the date of service thereof.
  • The competent authority may grant a chance for a personal hearing when the designated authority has suggested cancelling the certificate of registration or when the competent authority believes that the circumstances are appropriate for the certificate of registration to be cancelled.
  • The competent authority will pass an order within 120 days from the date of receipt of submissions of the report or the date of the personal hearing, whichever is later, after considering the facts and circumstances of the case, written submission, and the material on record, if any.
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As discussed above, portfolio managers have to face severe actions if they violate the regulatory requirements. In the event of a default of compliance with the regulatory requirement, the regulatory body, the SEBI, has the jurisdiction to take a number of steps.

Portfolio managers must take non-compliance seriously and take proactive measures to correct any errors or violations. The potential effects of non-compliance can be lessened with quick corrective action, collaboration with SEBI, and application of corrective measures. In order to successfully go through the regulatory procedure, it is advised for portfolio managers to consult legal counsel or a professional advisor in the event of non-compliance.

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