SEBI has again put its foot down on the trail commission issue. Will AMFI comply this time?

As the Association of Mutual Funds in India (AMFI) continues dilly-dallying for over six months on whether trail commission would continue to be paid to the old distributor even after a customer has walked away, the market regulator, Securities and Exchange Board of India (SEBI) has rapped AMFI on the knuckles asking it to implement a clear-cut decision taken more than two years ago.

On 30th December, SEBI slammed AMFI with a polite but firm email which says that AMFI must implement its own circular of 5 September 2007 along with the SEBI circular of 11th December. The December circular of SEBI clarified that distributors cannot insist on non-objection certificate (NOC) when a customer moves from one distributor to another. The SEBI email reads: “the non-insistence of NOC has to be implemented in conjunction with adhering to AMFI circular of September 2007 regarding payment of commissions. Please confirm that SEBI circular of December 11th and inter alia references to AMFI circular of Sep 20007 are fully complied with by all mutual funds.”

The 5 September 2007 AMFI circular had categorically said: “On receipt of letter from the investor advising AMCs about his desire to change his distributor, AMCs will act on the instruction. Once the distributor (ARN code) has been changed, the trail commission thereafter for all business done by the old distributor (under old ARN code) may be payable to new distributor (under new ARN code) on a prospective basis subject to terms and conditions, if any, entered into by AMCs with such distributor.”

This was a clear-cut decision and direction. Mysteriously, it never got implemented. Instead, AMFI put the matter to vote a few months ago—two years after having issued a clear-cut direction. In the process, 11 out of total 17 voted in favour of giving trail commission to the new distributor. However, AMFI did not implement this as well, which was first reported by Moneylife Digital (read it here).
 In a remarkable example of cussedness, AMFI then asked for votes by email, also first reported by Moneylife Digital (read it here).

 All chiefs of asset management companies got an email in the afternoon of 22nd December asking them to vote on three questions—whether the trail commission of a departing customer: a. should be paid to the old distributor; b. should be paid to the new distributor; c: should not be paid at all. Funds are supposed to vote a simple yes/no to each of these three questions.

It now appears that AMFI’s move on 22nd December came just a few hours after SEBI sent a mail to AMFI which read: “Please read the circular on the unambiguity on the payment of trail commission in case of change in distributor. However, we understand that there is lack of uniformity among AMCs in compliance with the said guidelines of AMFI. You are advised to revert to us with a confirmation on compliance with the said AMFI guidelines in the AMFI circular on September 5th 2007.”

In a remarkable example of cussedness, AMFI ignored SEBI’s clear directive and instead went in for an email vote. But eight days later, one day before the deadline of the email vote were to lapse, SEBI issued its missive to AMFI, asking it to implement the simple, logical decision taken in September 2007 that trail commssion has to go to the new distributor. The question is who benefited from the years of stalling and the cat-and-mouse game AMFI has been playing?