SEBI plans stricter separation on mutual funds, investment products
Photo Credit: Reuters

The Securities and Exchange Board of India (SEBI) on Thursday proposed to more clearly segregate entities advising on investment products from those selling them in an effort to prevent conflicts of interest.

Under current rules, companies are allowed both to advise and sell mutual funds or other investment products only through "separately identifiable departments or divisions", which must maintain an "arms-length relationship" between the two functions.

Fees charged for each service must also be clearly separated.

But the SEBI on Thursday sought to make that separation more clear, proposing that companies would no longer be able to offer both advisory and distribution services unless they were split into separate subsidiaries, proposing that the division be completed within six months.

The SEBI also said those providing investment advice must have proper permission from regulators of the products about which they give advice.

The SEBI oversees equities, corporate bonds, and mutual funds, while the central bank oversees trading of currencies and government bonds.

"To prevent the conflict of interest that exists between advising of investment products and selling of investment products by the same entity/person, there should be clear segregation between these two activities," the SEBI said in a draft proposal.

The regulator also said mutual fund distributors - third-party companies hired by asset managers to sell investment products to retail investors - would not be able to offer investment advice beyond explaining the characteristics and "suitability" of schemes.

Over the past several years, the SEBI has sought to tighten supervision of the mutual fund industry after the sector suffered from frequent accusations that distributors and asset managers were colluding to sell specific schemes, regardless of whether they actually suited retail investors' needs.

The SEBI said market participants needed to submit their responses to the proposals by July 14.

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