SEBI Circular on Portfolio Managers

Nikhil Mogha

06 Oct, 2022

The Portfolio Managers (PM) are responsible for safeguarding the funds and securities of their clients. They are required to segregate each client’s funds and maintain separate portfolios of Securities. While segregating, the PMs are required to keep their funds separate from their clients. Further, SEBI, under Regulation 24(15)^[1] of PMS regulations, mandates that the portfolio managers are not required to hold any portfolio account either in its name or the name of its clients. The managers are further required to manage their clients’ funds in a separate bank account. To maintain transparency in handling client’s funds held by the portfolio managers, the SEBI issued a “Circular on Portfolio Managers” on 30^th September 2022.

Preparation of Policy

The SEBI, with this circular, has made it mandatory for the portfolio manager to prepare a Written Down and Specific Policy. Moreover, the policy made shall be approved by the board of the Portfolio Manager.

Written Down Policy

The circular made it mandatory for the PMs to prepare a written policy regarding the management of client’s funds and securities, including order placement, execution of the order, trade allocation and other matters. Further, the SEBI provided that the policy shall state the following:

1. Roles and Responsibilities of each team engaged in the management of funds
2.  Dealing with funds
3. Compliance process
4. Risk Management Process
5. Back-officer
6. Any other matters

Specific Policy

The circular has made it mandatory that the portfolio managers shall also prepare a specific policy that will include:

1. Situations that will specifically determine the orders which shall be placed for each client or pooled from the trading account of the portfolio manager
2. Situations will determine permissible deviations from the allotment of securities at the time of placement of order.
3. Situations wherein the PM are required to place certain margins or collateral for certain transactions. It shall also state how such collaterals or margins shall be separated from other clients so that the interest of the clients is not hampered.
4. Deviation shall be allowed in case of contingencies. Further, the deviation shall be allowed only with the prior written approval from the portfolio manager’s Principal Officer and Compliance officer.

Certain Compliance by the Portfolio Managers

The circular has made it mandatory that portfolio managers keep in check that all their clients shall be treated just and fairly. Further, the portfolio manager must comply with the following:

1. Constitution of Dealing Team

The circular has made it mandatory that PMs constitute a Dealing Team (DT), who shall be responsible for order placement and execution activities. The dealing team will constitute a Principal Officer or the person appointed in Regulation 7(2) (e) of the PMS Regulations. Further, the dealing team shall comply with the following:

1. Conversation between DT and client shall be through dedicated recorded telephone lines or an authorized e-mail id.
2. Mobile phones and other communication devices are not allowed in the dealing room.
3. Internet facilities on computers of the dealing team shall be restricted only to trade execution activities.
4. Access to the entry room of the dealing team shall be restricted to only authorized employees.
5. No sharing of information except for trade execution.

2. Automated System

The circular has made it mandatory that the PMs holding assets under Rs 1000 crore shall set up an automated system that will ensure minimal manual intervention. The automated system will ensure proper management of effective funds and securities. The automated system shall also capture details with respect to:

1. Pre-order placement allocation of trade to clients  along with an instance of deviation
2. Final allocation of trade to clients along with instances of variation.

Audit of Management Activities

The circular has made it mandatory for the portfolio managers to keep an audit of all the activities and their timestamps in relation to the management of funds and securities, including:

1. Order Placement
2. Trade Execution
3. Allocation

Timelines of Activities

The portfolio manager and APMI (Association of Portfolio Managers in India) shall ensure that all the provisions of the circular have been complied with and that required processes and systems are available. APMI is required to furnish a report on a bi-monthly basis to the SEBI that contains the progress in implementing the provisions of the circular. Further, the PMs and APMI shall adhere to the given timelines:

Conclusion

The SEBI has made every effort to safeguard the interests of the investors, and this current circular is issued to keep strong scrutiny over the activities of the portfolio managers. The portfolio managers are required to manage the fund of each client individually and maintain the bank account separated from other clients. The portfolio managers are now required to appoint a dealing team that shall be responsible for the management of funds and securities of the client. Further, the appointed team shall adhere to the preventive measures enunciated in the circular.

Read our Article: Meaning and Role of a Portfolio Manager