Regulatory, Governance and Ethical Aspects of Portfolio Managers

1The regulatory framework

• SEBI regulates portfolio managers under the SEBI Act, 1992 and the SEBI (Portfolio Managers) Regulations, 2020, which replaced the 1993 regulations. SEBI also issues circulars, consolidated in a master circular for portfolio managers.
• A portfolio manager must hold a certificate of registration from SEBI. It stays valid until it is suspended or cancelled.
• APMI (the Association of Portfolio Managers in India) is the industry body. It registers PMS distributors (APRN), selects the benchmarks used to compare PMS performance, and publishes performance data.
• PMS distributors are not registered with SEBI directly. They register with APMI and are bound by the code of conduct, which portfolio managers must enforce.

Remember

• SEBI Act 1992 + PMS Regulations 2020.
• APMI: distributor registration, benchmarks, performance data.

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2Governance and duties of a portfolio manager

• Maintain a net worth of at least ₹5 crore.
• Appoint a qualified principal officer and a separate compliance officer.
• Keep each client's funds in a separate bank account and securities in the client's own name through a custodian (unless advisory-only).
• Do not borrow funds or securities for clients, and do not lend client securities except as the Regulations permit.
• Act in a fiduciary capacity: put the client's interest first.
• Maintain books of account and records for each client and preserve them for at least five years.
• Report material changes to SEBI within the specified time, including changes in control, the principal officer, fees and investment approaches.

Remember

• Net worth ₹5 crore; fiduciary duty; separate accounts; records kept 5 years.

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3Code of conduct for portfolio managers

The Regulations include a code of conduct. A portfolio manager must:

• act with integrity, fairness and due care, in the best interest of clients;
• give clients full and fair disclosure of fees, risks and conflicts of interest;
• not make exaggerated or misleading claims, or promise returns;
• avoid churning (excessive trading to earn more fees or benefit associates);
• treat all clients fairly, without favouring some over others in allocating trades;
• keep client information confidential;
• not take advantage of client funds for its own benefit.

Remember

• Integrity, disclosure, no misleading claims, no churning, fairness, confidentiality.

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4Code of conduct for PMS distributors

A PMS distributor must:

• check that PMS and the specific investment approach are suitable for the client;
• disclose all commissions and other benefits received from portfolio managers;
• give accurate information on risks, fees and past performance, without misrepresentation or promised returns;
• not rebate commissions or offer inducements to win clients;
• not encourage churning between products to earn more commission;
• keep client information confidential and maintain records;
• never collect client money themselves: investments are paid directly into the client's PMS bank account.

Remember

• Suitability, disclosure, no promises, no rebates, no churning.

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5Conflicts of interest and market abuse

• Related-party investments are limited (overall 30% of the client's portfolio) and need prior client consent. They must be disclosed.
• Front-running (trading ahead of client orders for one's own benefit) and insider trading are prohibited under SEBI's regulations on fraudulent and unfair trade practices and on insider trading.
• Employees' personal trading should follow internal rules and pre-clearance, so that they do not trade against or ahead of clients.
• Trades must be allocated fairly among clients. A manager must not give the best prices to favoured accounts.

Remember

• Front-running and insider trading are prohibited.
• Related-party investments: capped, consented, disclosed.

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6Inspection, penalties and complaints

• SEBI may inspect a portfolio manager's books, records and systems at any time.
• For violations, SEBI can issue warnings, impose monetary penalties under the SEBI Act, or suspend or cancel the registration.
• Complaints: a client should first complain to the portfolio manager, which must resolve it promptly. If not satisfied, the client can escalate through SCORES, SEBI's online complaints system, and then use Online Dispute Resolution (ODR).
• Portfolio managers publish data on the complaints they receive and resolve on their website, as part of SEBI's investor charter.

Remember

• SEBI: inspection, penalties, suspension or cancellation.
• Complaint route: portfolio manager → SCORES → ODR.

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7What ethics means

Ethics is the set of moral principles that guide behaviour when it affects others. The word comes from the Greek ethos: custom, habit or character. Core principles include honesty, fairness, diligence, care and respect for others.

Ethics goes beyond the law. Staying within the law avoids illegality; ethics asks what is right. It grows out of a person's values and character.

Example An adviser who neglects after-sales service that clients need, or makes excuses to avoid it, may break no law but is acting unethically.

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8Why ethical conduct matters in business

• Advice concerns clients' money and life goals, so it needs the highest ethical standards.
• Client first: put the client's interest above your own, with no conflict of interest.
• Trust is at the centre of advice. It takes years to build and moments to lose, and once lost it may be almost impossible to regain.
• Be proactive: suggest what the client needs before they have to ask.
• Give up shortcuts and quick gains to stay true to principles. A client who hands over their money matters treats you as a custodian.

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9Ethical dilemmas

An ethical dilemma is a choice between two alternatives, neither of which is clearly better. Each choice sends a signal about the adviser's standards, and repeated choices shape how clients see the adviser.

Examples

• Revenue vs need: a client doesn't need a particular service. Doing it anyway earns money; telling the client it isn't needed is the ethical choice.
• Pure ethical dilemma: both options break an ethical principle. For example, signing up so many clients that you can't serve them properly, or growing so slowly that the business can't survive.
• Personal vs professional values: an adviser believes in term insurance (low premium, pays only on death) but works for a firm that pushes higher-commission ULIPs and whole-life policies.
• Distributors may push a consistently underperforming fund for its commission. Relationship managers may push ULIPs or equity funds on elderly clients. Evaluate the product and avoid it if it is unsuitable.

How to resolve dilemmas

• Analyse more deeply: often the right course becomes clear.
• Apply a principle: do the most good for everyone involved, or do the least harm.
• Reframe the problem: fresh thinking can reveal new solutions.

Social media spreads opinions of every kind, and clients will ask about them. Advisers must be able to justify their advice, which makes ethical behaviour essential.

Remember

• In a pure ethical dilemma, both options breach an ethical principle.
• Resolution tools: deeper analysis, most good or least harm, reframing.

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10Fiduciary responsibility

Investment advisers are fiduciaries. They must act in the client's best interest and rise above conflicts. The standard is utmost good faith (uberrimae fidei): never profit at the client's expense or take unfair advantage of the client's trust.

What fiduciary duty requires

• Full disclosure: nothing material is omitted, not just nothing false. Disclosure is essential where there is a conflict of interest, and also where there is a perceived conflict.
• Suitable advice fitted to each client's specific situation.
• A reasonable, objective basis for every recommendation, not factors that benefit the adviser.
• Proper execution of the work, free of conflicts.

Exam trap The fiduciary principle is uberrimae fidei, utmost good faith.

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11How investor grievances work

Grievances can concern:

• the accuracy or completeness of information or advice;
• fees, charges or penalties;
• service requests that were delayed or ignored.

The first step is always the product or service provider. If that does not resolve the complaint, the investor goes to the regulator for that sector.

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12Features of a robust grievance system

• Source: the complaint must relate to matters covered by the relevant laws: the SEBI Act, SCRA, Depositories Act, their rules and regulations, and the relevant parts of the Companies Act, 2013.
• Date and time of receipt: complaints must be made within the time limits in the law, so the system isn't clogged with stale cases.
• Nature of complaint: it must be a genuine complaint, so frivolous ones are filtered out.
• Internal or external: complaints go first to the entity's internal system, then escalate outside.
• Status: the investor can track progress through the action taken report (ATR) or a resolution notice.
• Time to resolve (ageing report): complaints must close within set timelines, so confidence in the system holds.
• Escalation: an independent party reviews complaints that weren't resolved satisfactorily.

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13Capital market redress: SCORES and ODR

Escalation path

1. Complain directly to the market participant.
2. If that fails, escalate through SCORES under its guidelines.
3. If the investor is still not satisfied, use Online Dispute Resolution (ODR).

ODR can also be started directly once the participant has failed to resolve the complaint, or at any stage of escalation. The market participant can also start ODR, after giving the client due notice. ODR must be started within the law of limitation, counted from the later of the date the issue arose, the last transaction, or the disputed transaction.

SCORES is SEBI's online complaints system. It covers listed companies (issues in the primary and secondary markets), mutual funds, PMS, VC funds, brokers, merchant bankers, depositories and DPs, RTAs, distributors and advisers.

Not handled on SCORES

• complaints that are incomplete or not specific;
• allegations without supporting documents;
• suggestions or requests for guidance or explanation;
• non-trading or illiquidity of shares;
• dissatisfaction with a share's trading price;
• non-listing of shares from a private offer;
• disputes under private agreements.

Not dealt with by SEBI at all

• complaints against unlisted, delisted, wound-up, liquidated or sick companies;
• sub-judice matters;
• matters under other regulators.

How it works: SEBI confirms the complaint is within its remit and forwards it to the entity. The entity must file an ATR within the stipulated time, and the investor tracks status online.

These alternative dispute mechanisms are quick and inexpensive. The investor can still go to court, within the law of limitation.

SCORES was upgraded in 2024 with tighter resolution timelines. Check SEBI's current SCORES process.

Remember

• Order of escalation: entity → SCORES → ODR. ODR can also be used directly.
• SCORES won't take share-price complaints, private-agreement disputes, or complaints about unlisted companies.

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14Securities Appellate Tribunal

How it works (Section 15U, SEBI Act)

• SAT is not bound by the Code of Civil Procedure. It follows natural justice and regulates its own procedure.
• It has civil-court powers to:
  • summon witnesses and examine them on oath;
  • order discovery and production of documents;
  • receive evidence on affidavit;
  • issue commissions to examine witnesses or documents;
  • review its own decisions;
  • dismiss applications for default or decide ex parte, and set such orders aside.
• Its proceedings are judicial proceedings under the IPC.

Appeals (Section 15T)

• Anyone aggrieved by an order of SEBI, a SEBI adjudicating officer, IRDAI or PFRDA can appeal to SAT.
• Deadline: within 45 days of receiving a copy of the order, in the prescribed form with the fee.
• Further appeal: to the Supreme Court within 60 days of SAT's decision being communicated.

Exam trap SAT also hears appeals against IRDAI and PFRDA orders, not only SEBI's.

Remember

• Appeal to SAT within 45 days; to the Supreme Court within 60 days.

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