SEBI’s latest proposal for biometrics based know your distributor (KYD) norms for independent financial advisors is being reworked.c

The Association of Mutual Funds in India (AMFI) is taking another look at its know your distributor (KYD) guidelines that were expected to be implemented by 1 August, 2010. We learn that a circular listing the new rules had even been issued and quickly withdrawn in the past few days.

Although KYD rules are largely supported by the industry, two issues are rankling many insiders- firstly, who would set it up and secondly the onus for verification on fund houses. Sources say that AMFI is reviewing its stand on the issue. When asked, AMFI's chief executive officer, HN Sinor said, "We are working on it".

A top official from a fund house told us that the Securities and Exchange Board of India (SEBI) wanted the National Securities Depository Ltd (NSDL) to create a subsidiary to implement the 'background checker' model with biometrics-based identification (as was done for the database of IT company employees) for mutual fund distributors. There was also a condition that funds would be responsible for physical verification of addresses and other details.

According to sources, some senior AMFI office bearers pointed out that CDSL Ventures, a subsidiary of Central Depository Services of India Ltd (CDSL) had already worked with the mutual fund industry on an investor database. Further, Karvy and Computer Age Management Services (CAMS), with over 350 offices together across the country, have also been handling registration and transfer issues and had also created excellent software for online and offline tracking of portfolios. AMFI sources say, it makes much more sense to build on existing relationships rather than go to NSDL for a new database.

The market regulator essentially wanted the new guidelines for two reasons-to ensure that details about fund distributors are known to the industry and also to ensure that persons appearing for mutual fund certification examinations are genuine.

Fund houses were given six months to verify their existing distributors' lists. After implementation of the KYD norms, there will be an 'in-person' verification of each distributor at the time of empanelment. "This process was not followed so far, but the guidelines will make it mandatory for every asset management company (AMC) to follow it," added the official. The need for verification is evident and distributors too support the idea.

Rajesh Krishnamurthy, managing director of iFAST Financial India Pvt Ltd, has this to say, "KYD is a welcome move. This will bring in complete authenticity of the person(s) dealing with the end client. With a few recent instances of mutual fund agent related fraud coming up in the media, there is also a need to demonstrate pro-consumer and pro-industry measures-for the consumer, for his protection, and for the industry-to avoid being broadbased as fraudsters. KYD will be a step in the right direction".

 "As a private limited company, we are already confirming with similar requirements for directors - for example: A Director Identification Number (DIN). Plus, we go one step forward and file various papers with the ministry of corporate affairs by affixing the director's digital signature. To make it successful, there is a need to have points of presence for KYD in all locations where we have AMFI/NISM (National Institute of Securities Markets) registered distributors without which the biometric requirement will become a bigger challenge in itself," he said.

Moneylife, too, had exposed the case of a fraudulent, Jabalpur-based mutual fund distributor on 7 July 2010 (http://www.moneylife.in/article/81/6918.html ). However, many distributors find the requirement for biometric-based verification rather excessive and invasive of their privacy. The other irritant is the flood of new rules and operating guidelines that the regulator seems to issue almost everyday; source say that they spend most of their time on figuring out the compliance and implementation of each new change directed by SEBI. Meanwhile, assets under management (AUM) have been dwindling at an alarming rate and continue unabated every month since August 2009, when upfront commissions were abolished.

 "I don't know why they come up with new rules every week. It is going to be difficult for all distributors to follow the all the rules. They (regulators) want people who have large AUM to be in the industry since complying with all their guidelines and rules have costs involved," said a Mumbai-based financial planner.

"People who wish to do business in a straightforward way will not hesitate to give KYC details. The biometric issue needs to be reconsidered," said Ramesh Bhatt, an advisor. A Mumbai-based planner says, "Investor education is still lacking. I don't know how biometric will curb the intention of mis-selling. I am not averse to KYD but they should come up with simple and practical solutions." — Ravi Samalad