Amfi Guidelines On Trail Commission For Mutual Fund Distributors

The Association of Mutual Funds in India (AMFI) has recently made revisions to its guidelines concerning the payment of trial commissions to mutual fund distributors. These changes come in response to requests from distributors and aim to adapt to the evolving landscape of the mutual fund industry.

Background

Previously, if an investor requested a change of distributor or ARN (Association of Mutual Funds in India Registration Number) code, no trail commission was paid to the new distributor for the transferred assets. This rule was put in place over a decade ago to address certain market practices prevailing at the time.

Revised Guidelines

After careful consideration and review by AMFI’s ARN Committee, the following revisions have been recommended and approved by the AMFI Board:

Trail Commission Payment

If a change of distributor/ARN code is initiated by the investor, the AMCs (Asset Management Companies) may consider paying trail commission to the new distributor after a cooling-off period of six months from the date of the change in the Unitholder database.

If the distributor code is changed back to the original ARN code within the cooling-off period of six months, the cooling-off period will restart from the date of the change.

Example as per the circular said, “If the distributor code is changed from Distributor A to Distributor B on 25 March 2024, the Distributor B will be paid trial commission after the expiry of cooling off 6 months i.e. 24-Sep-2024. However, if the distributor code is changed back to distributor A on 25-Aug-2024 (i.e. within a cooling off period of 6 months), the 6-month cooling off period will start afresh from 25-Aug-2024 i.e. up to 24 February 2025 before commission payment is started to distributor A.”

Commission Rate

The payment of commission to the new distributor will be based on the lower commission rates of both the transferor and transferee distributor as applicable on the date of the change of distributor code.

No other payments, including incentives or commissions, will be made on account of the change of distributor code on a prospective basis.

Implications

These revisions aim to address the concerns raised by mutual fund distributors regarding the existing guidelines. By allowing trail commission payments to the new distributor after a cooling-off period and specifying the commission rates, AMFI seeks to ensure fair compensation for distributors while preventing any misuse of the system.

Uniform Implementation

AMFI has urged all its members to uniformly implement these revised guidelines across all AMCs. Distributors are advised to inform their respective AMC Boards and Trustees about these changes at their next board meetings.

Real-world examples include distributors switching careers, investors moving to different cities, or the investor-distributor relationship dissolving. In these situations, the investor still wants the new distributor or a single organisation to handle the portfolio. Thus far, providing for such a request has not been compensated. This circular has resolved this issue.

By providing clarity on commission payments and introducing a cooling-off period, these revisions aim to promote transparency and integrity within the mutual fund distribution ecosystem.

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Disclaimer: This blog has been written exclusively for educational purposes. The securities mentioned are only examples and not recommendations. The information is based on various secondary sources on the internet and is subject to change. Please consult with a financial expert before making investment decisions.