According to the Securities & Exchange Commission, mutual fund investors will now be protected from “intermediate pooling” of money and units by mutual fund distributors, investment advisers, channel partners, platform providers, and other entities. Mutual fund distributors, investment advisers, channel partners, platform providers, and other entities will be prohibited from engaging in “intermediate pooling” (SEC). Until April 1, 2022, portfolio managers who are registered with the Securities and Exchange Board of India (Sebi) would be exempt from the new rule. It will also be necessary for asset management companies (AMCs) to put in place a system to ensure that mutual fund accounts held by investors are directly connected to mutual fund subscription and redemption operations. According to the Securities and Exchange Board of India, there will be no money pooling through an intermediary organization.
The swing pricing mechanism will be utilized exclusively for scenarios involving net outflows from high-risk open-ended debt schemes, and will not be used for any other scenarios. In practice, it will be a hybrid framework, with a partial swing during normal periods and a necessary complete swing during periods of market dislocation. Swing pricing would be applied to all unitholders in each mutual fund scheme for redemptions of more than Rs 2 lakh in each mutual fund scheme during both normal and market dislocation situations. It will be in force as of March 1, 2022, when the swing pricing system is implemented.
The markets regulator has now established recommendations for a swing pricing mechanism in order to deter large redemptions from open-ended debt mutual funds, which will be implemented in the near future. It will prevent major investors from withdrawing their money from a fund during a market downturn, as well as a drop in the fund’s net asset value (NAV). Overnight funds, gilt funds, and gilt with a 10-year maturity fund, on the other hand, are not impacted by the swing pricing mechanism and continue to operate as usual.
According to the Sebi, certain platforms pool their clients’ funds into a nodal account and then transfer those funds to asset management companies on a per transaction or lump sum basis, depending on the terms of their bilateral agreement with AMCs.
It is stated in the circular that “any intermediate pooling of funds and units by MFDMs, IAs, MFUs, channel partners, or any other service providers or platforms, by whatever name they are known as shall be suspended” in the case of money market transactions. There are many different types of mutual fund service providers, which include entities such as investors, mutual fund distributors (including brokerage firms), and mutual fund utilities, to name a few.
It is not sufficient, according to the Securities and Exchange Board of India, to issue a one-time mandate or to issue mandates/instruments in the names of mutual fund distributors, investment advisors, mutual fund units, channel partners, or other companies (including online platforms) in order to permit mutual fund transactions.
A swing pricing mechanism is a pricing mechanism that fluctuates in value.
The swing pricing for high-risk, open-ended debt schemes that hold high-risk assets will be applied in the event of market dislocation, as explained here. The swing factor is expected to be between 1 and 2 per cent. The fund houses will be required to categorize the schemes in the Potential Risk Class (PRC) matrix into the categories A-III, B-II, B-III, C-I, C-II, and C-III.
There will be a swing factor of 2 per cent for all of the schemes that are classified in the C – III category, which have the highest credit and duration risks. Therefore, in times of difficulties, investors redeeming their units will have to accept a net asset value that is 2 per cent lower than the market value of their units. Additionally, A-III will have a swing factor of one per cent, as it has the lowest credit and duration risks of all the categories.
When it comes to normal periods, the Association of Mutual Funds in India will describe the general factors that will be used to determine the thresholds that will be used to trigger the implementation of swing pricing. It will also prescribe a certain range of swing thresholds for each condition. Additionally, asset management organizations may establish their own criteria based on the nature and characteristics of the mutual fund scheme.
According to Sebi, it is still the responsibility of the AMCs to ensure that they are complying with PMLA requirements and are not accepting payments from third-party bank accounts.
When doing online transactions, two-factor authentication will be required, whilst offline purchases would require a signature. No matter whether the unitholder reports the fraud, the AMC is liable for any losses incurred by the unitholder as a result of any unauthorized transactions in the unitholder’s folio that occur as a result of fraud, negligence, or a deficiency on the part of the AMC, an employee of the AMC, or other persons or entities who provided services to the AMC on the AMC’s behalf. b.
The AMC, on the other hand, would not be accountable for any illegal activities carried out by investment advisors while providing services to unitholders.