Transactions in direct plans of schemes of Mutual Funds

Regulatory framework for Execution Only Platforms for facilitating transactions in direct plans of schemes of Mutual Funds

1. It has been observed that various SEBI registered Investment Advisors/Stock Brokers provide execution services in direct plans of Mutual Fund schemes through their technology/digital platforms. Such platforms are often availed by investors who are not their clients in terms of SEBI (Investment Advisers) Regulations, 2013 or SEBI (Stock Brokers) Regulations, 1992.
   
2. There is no specific framework presently available for technology/digital platforms (including platforms provided by Investment Advisers/Stock Brokers to non-clients) to provide execution-only services in direct plans of Mutual Fund schemes and to obtain data feeds with respect to such transactions. Thus, while the investors may find it convenient to avail the services of such online platforms, investors who are not clients of such intermediaries under the above specified Regulations may not have recourse or protection for the risks associated with respect to such transactions. Therefore, a need was felt to strike a balance between investor convenience and investor protection.
   
3. Pursuant to public consultation and discussions in the Mutual FundsAdvisory Committee, it has been decided to prescribe a framework for Execution Only Platforms for transacting in direct plans of schemes of Mutual Funds. In this regard, the SEBI (Stock Brokers) Regulations, 1992 (link) have been amended and notified on January 17, 2023.
   
4. The comprehensive framework for Execution Only Platforms (‘EOPs’) is specified at Annexure A to this circular.
   
5. The Stock Exchanges shall enact appropriate framework for EOP segment wherein the following requirements shall not be applicable for Category 2 EOP:
   
   a)trading rules applicable for equity, equity derivative and other segments
   b)Investor Protection Fund.
   c)rules applicable for clearing and settlement of trades relating to equity, equity derivative and other segments.d)pooling of client’s funds by Trading Member.
   e)membership and other related requirements as a Self-Clearing Member (SCM) or requirement of Trading Member –Clearing Member agreement.
   f)risk management framework and settlement related polices applicable for equity, equity derivative and other segments where the Clearing Corporation provides novation and guarantee for settlement of trades.
   g)issuance of contract notes and issuance of funds & securities statement.
   
6. The Stock Exchanges desirous of providing an EOP segment are directed to:
   a)make necessary arrangements to their relevant bye-laws, rules and regulations for the implementation of the directions in this circular and provide status of implementation regarding the same to SEBIon a monthly basis; and
   b)monitor the operations carried out by EOPswho have obtained membership under EOP segment.
   
7. The AMFI is directed to:
   a) make necessary amendments for the implementation of the directions in this circular and provide status of implementation regarding the same to SEBIon a monthly basis; and
   b) issue necessary guidelines for Category 1 EOP before the date of this circular coming into force.
   c)monitor the operations carried out by EOPs registered with AMFI.
   
8. This circular shall come into force with effect from September 01, 2023.
   
9. This circular is issued in exercise of the powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992 to protect the interest of investors in securities and to promote the development of, and to regulate the securities market.

Annexure

Read More on SEBI