SEBI Bans Intermediate Pooling in Mutual Fund Transactions.

The Securities Exchange Board of India, the capital market's regulator, has asked mutual fund houses to ensure that no mutual fund distributor, online platform, stock broker, or investment adviser pools money from investors in a bank account and transfers it to the fund house for the purpose of purchasing scheme units for investors. This new rule will take effect in April of next year and will not apply to SEBI-registered portfolio managers. Let us know the specifics of the aforementioned pooling ban for mutual fund trades.

The SEBI's prohibition on intermediary pooling in mutual fund transactions: SEBI imposed the restriction after discovering that some online mutual fund transaction platforms and stock brokers were aggregating money from investors for the purpose of purchasing mutual fund units in a nodal account based on an agreement with a mutual fund firm. This meant that distributors, stock brokers, or online transaction platforms held investors' money for an extended period of time, posing a counterparty risk to investors.

When an investor purchases units of a mutual fund, the SEBI has instructed fund companies to guarantee that the money is credited immediately to the mutual fund scheme's bank account. When the investor sells the units, the money is paid straight to the investor's bank account from the mutual fund scheme's bank account.

It is also used to describe mutual fund units. Whether in Demat mode or not, the units would be credited to the investor's account without an intermediary pooling by the distributor. When units are redeemed, they are sent directly from the investors' accounts to the fund house's account, with no stop-overs in the form of a pooled account of an online platform, a distributor, or a stock broker.

Ban on intermediate pooling for mutual fund transactions: SIP transactions with one-time requirements

Mutual fund distributors or entities involved in mutual fund distribution are not permitted to take contributions through mandates signed by investors in the name of such mutual fund distributors or entities involved in mutual fund distribution.

Mutual fund businesses employ e-mandates to process SIPs initiated by investors. However, these e-mandates will not be utilised again, and no new one-time mandates will be received in the distributors' name. According to the SEBI[1] circular, cheque payments from investors will only be made in the name of the various MF schemes.

Asset Management Company Guidelines

Furthermore, SEBI has requested that the Association of Mutual Funds in India develop rules for Asset Management Companies to follow in order to limit the risks of fund co-mingling at the level of payment aggregators/payment gateways participating in mutual fund transactions.

All stakeholders should be informed of the information of each stage of the relevant transaction, including transaction rejection, by the Asset Management Companies. Investors, distributors, registrars and transfer agents, and others will all be aware of the transaction's status at the same time. This information will be created and secured by the system, and the costs of developing the information-sharing platforms will not be passed on to the investors. According to the SEBI circular, the AMCs would bear the responsibility for adhering to the PMLA regulations and not enabling the use of third-party bank account payments.

The mutual fund houses will determine whether the money utilised to purchase mutual fund units is the property of the investors. You cannot use someone else's money to purchase mutual fund units for yourself.

Authentication using two factors

The SEBI requested two-factor authentication for unit redemption. An OTP will be issued to the unitholder's e-mail or cellphone number as one of the two-factors for authentication.

If the transaction is conducted offline, the signature validation method must be used to honour redemption transactions. It should ensure that redemption transactions are not undertaken without the approval of the unitholder.

If an investor suffers a loss as a result of an unauthorised transaction caused by fraud, negligence, or deficiency on the part of the mutual fund house, its staff, or even the mutual fund distributor, the mutual fund house must compensate the investor. The fund house is not liable for any illegal transactions made by the investment advisor while providing services to unitholders.

Conclusion

The Securities and Exchange Board of India announced in a statement that fund pooling by stock brokers, mutual fund distributors, and investment advisers will be prohibited from April 1st, 2019. SEBI discovered various online mutual fund transactions platforms as well as stock brokers aggregating money from investors for the purpose of purchasing mutual fund units in a nodal account based on an arrangement with the mutual fund firm.

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