SEBI Issues Regulations for Execution-Only Platforms for Direct Mutual Fund Schemes

SEBI Issues Regulations for Execution-Only Platforms for Direct Mutual Fund Schemes

The Securities and Exchange Board of India (SEBI) has introduced a framework for ‘Execution Only Platforms’ for direct plans of mutual fund schemes to protect investors dealing in such schemes. The platform allows transactions in direct plans of mutual funds without the assistance of distributors.

Under this mechanism, an entity desiring to provide execution-only services (EOP) in direct plans of mutual funds can obtain registration under either of the two categories.

An EOP is a digital or online platform which facilitates transactions such as subscription, redemption and switch transactions in direct plans of schemes of mutual funds.

Further, the platforms provided by SEBI-registered investment advisors and stock brokers to their advisory or broking clients would not be covered under the EOP framework.

As of present, there was no specific framework 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.

The circular shall be applicable from 1 September, 2023.

Categories of EOP

The capital markets regulator has divided EOPs into two categories.

Category 1 EOP: an agent of asset management companies (AMCs). Further, as Category 1 EOP, the entity must enter into agreements with the AMCs that clearly define their rights and obligations relating to EOP services. In addition to this, the entity must have an objective, fair and transparent policy for providing execution services for the products of AMCs.

Category 2 EOP: an agent of an investor registered as a stock broker.

As Category 2 EOP, the entity must enter into necessary arrangements with the Stock Exchanges that clearly define their rights and obligations relating to the EOP services.

The entities under both categories of EOPs are required to ensure the following:

(i) They have a comprehensive risk management framework covering all aspects of their operations and shall also ensure that risks associated with their operations are identified and managed.

(ii) Ensure access control for their clients and prevent unauthorized access to their platform.

(iii) Ensure that all transactions on their platform, without exception, are dealt with in a fair, non-discriminatory and orderly manner.

(iv) Formulate data governance, protection and dissemination policy which is fair and non-discriminatory.

(v) Ensure data integrity and privacy.

(vi) Maintain all data relating to their activities in an easily retrievable media. Also, maintain confidentiality and security of all data relating to their activities and strictly control access to such data.

The entities under both categories of EOPs may share investors’ data with their other departments/divisions, their group entities and/or with any third party only with the specific consent of the investors.

Furthermore, for Category 1 EOPs, the grievance redressal mechanism shall be prescribed by the Association of Mutual Funds in India (AMFI) and for Category 2 EOPs, the grievance redressal mechanism shall be as prescribed for Stock Brokers from time to time i.e., through SCORES, mediation, and arbitration mechanism.