SEBI issues regulations for execution-only platforms for direct mutual fund schemes

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Further, the platforms provided by SEBI-registered investment advisors and stock brokers to their advisory or broking clients would not be covered under the EOP framework.

Categories of EOP

The capital markets regulator has divided EOPs into two categories. The Category 1 EOPs would need to be registered with AMFI, the mutual fund industry body.

Under this category, the EOPs would act as an agent of asset management companies (AMCs) and integrate their systems with AMCs and/or Registrar and Transfer Agents (RTAs) authorized by AMCs to facilitate transactions in mutual funds.

These entities may act as an aggregator of the transactions in direct plans of schemes of mutual funds and provide services to investors or other intermediaries.

The Category 2 EOPs would need to be registered as a stock broker with SEBI and can operate as an agent of investors and operate only through the platforms provided by the stock exchanges.

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These entities cannot act as an aggregator of the transactions in direct plans of schemes of mutual funds and can provide services to investors directly.

Any entity looking to operate as an EOP can obtain registration under one of the two categories.

On-boarding rules

The Category 2 EOPs, which need to be registered as stock brokers, need to comply with the Know Your Client (KYC) requirements at the time of onboarding investors on its platform and take necessary steps including verifying the identity of its investors by requiring them to submit necessary documents.

Further, these EOPs would need to enter into necessary arrangements with the stock exchanges which should clearly define their rights and obligations relating to the EOP services.

For Category 1 EOPs, the requirements with respect to the onboarding of investors would be as specified by AMFI.

"The responsibility of ensuring compliance with KYC requirements, with respect to transactions executed through both categories of EOPs by investors in mutual funds, shall lie with the AMCs," SEBI said in the circular.

As Category 1 EOP, the entity would need to enter into agreements with the AMCs, which should clearly define their rights and obligations relating to EOP services. Further, the entity shall have an objective, fair and transparent policy for providing execution services for products of AMCs.

Transactions and boarding fees

As per SEBI, the EOPs registered with AMFI can levy a flat transaction fee (not ad-valorem, which means based on the quantum of trade), which would be borne by AMCs, within the upper limit as specified by AMFI.

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Also, onboarding fees, if levied, would need to be borne by the AMCs.

On the other hand, the Category 2 EOPs can levy a flat transaction fee (not ad-valorem), which would be borne by investors within the upper limit as specified by stock exchanges.

Further, on-boarding fees, if levied by this category of EOPs would be borne by the AMCs and/or investors.

Additionally, AMCs cannot charge any fees/charges paid to the EOPs, to the schemes of the mutual funds.

Apart from this, EOPs under both categories would need to have a comprehensive risk management framework in place.

They have also been instructed to prevent unauthorised access to their platforms and ensure data integrity and privacy.

The entities would also be required to maintain an arm’s length relationship, if performing multiple activities within the same entity, so as to avoid conflict of interest.

"Maintain investor-level segregation between EOP services and distribution services for Mutual Fund products, at the entity’s group level. Thus, an investor at the EOP’s group level may either avail EOP services for transacting in direct plans or distribution services for regular plans of Mutual Funds," SEBI said.

The EOPs also cannot display any advertisement regarding any mutual fund scheme on their platforms. Further, they cannot display any proxy/surrogate/common brand-related advertisements.

The entities would also be required to display in a user-friendly manner, the factual information pertaining to mutual funds as available in public domain including past performance of schemes and ensure compliance with the minimum disclosure requirements.

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Also, they would need to provide an interactive tool for the investors to screen or filter various schemes based on the criteria selected by the investor including past performance, assets under management, etc. and ensure that there is no auto display of recommendation or ranking of any of the schemes.

The discontinuation of usage of pool accounts for transactions in units of mutual funds would also be applicable to EOPs

SEBI has asked existing platforms to get suitable registration under one of the categories of EOPs within three months from the date of the circular coming into force, which is September 1, 2023.