15th Dec 2011

WF : There is a lot of confusion among large distributors about the impending due diligence process. Is this going to be a discussion on policies and procedures that the distributor has adopted or will you be required to do random sampling of transactions to satisfy yourself about actual execution of laid down policies? In other words, are you responsible to verify whether a policy framework has been put in place or are you responsible for satisfying yourself about execution of the policy framework?

Yezdi : The emphasis will be on both the aspects of distributor due diligence i.e. whether proper policies and procedures are in place and also on compliance with the policy framework, procedures adopted. The due diligence framework will specifically cover the points covered in Para B of SEBI circular Cir/IMD/DF/13/2011 dated August 22, 2011. Attention will be paid to areas such as product evaluation, customer risk evaluation, whether transactions are advisory and/or execution only, conflict of interest, documentation, disclosure of commissions, etc.

The objective of the exercise is to derive reasonable comfort level that the distributor is in compliance with SEBI requirements and investors are treated fairly. It may be noted that the AMC is not conducting an audit but a due diligence exercise.

WF : With each AMC now having to independently do its own due diligence, how will you actually go about covering these 550 large distributors? Will you appoint an auditor or do you have to have your own staff conducting this exercise?

Yezdi : The proposed plan is to carry out the exercise using in-house expertise and not to outsource the activity. An internal committee comprising senior officials from Compliance, Client Services and Sales has already been formed to look into all aspects of distributor due diligence.

The AMC has already sent a Due Diligence Information Sheet to all eligible distributors to fill in the details and respond at the earliest. The AMC will carry out the due diligence process in stages. An advance intimation will be given to the distributors prior to carrying out the due diligence exercise.

WF : Will distributors get some form of a check list of what is expected from them during this due diligence process ?

Yezdi : Yes. Having a checklist in place will help both the parties i.e. AMC and the distributor. It will be sent in advance so that the distributor is prepared and the exercise can be carried out effectively and in a timely manner.

WF : What happens in case you are not satisfied with the outcome of a particular due diligence? Will you give time for remediation? Will the empannelment be suspended? Will commissions be withheld?

Yezdi : It is expected that in some cases the due diligence exercise may show dissatisfactory results. SEBI has spelt out its requirements only recently. Distributors need time to put in place their processes to meet SEBI requirements and additional AMC requirements, if any. On completion of due diligence exercise, the AMC will communicate to the distributor the shortcomings and scope for improvement. Adequate time will be given to rectify the observations.

There will be a follow up from the AMC at periodic intervals. Suspension of commission, etc will depend on the seriousness of the shortcomings / breaches. The AMC's endeavour is to encourage the distributor to comply with the requirements and not to wield the stick.

In case of first time empanelment, the AMC will refrain from empanelling the distributor who does not fulfill the due diligence norms.

WF : Are you looking at reviewing your overall distributor empannelment and annual review process to bring in some of the features mandated for the large distributors, into your internal processes for other distributors as well?

Yezdi : We will not be adopting 'Óne-size fit all' approach. We will have to clearly distinguish between the requirements of large, medium and small sized distributors. However, there will be certain minimum common standards which will be applicable to all distributors.

WF : With the recent SEBI effort for uniform KYC, what will be the impact on the existing KYC process for mutual funds? Are there any process changes that distributors should be aware of?

Yezdi : SEBI has made life simple for mutual fund investors. Now there is no need to do multiple KYC with different securities market intermediaries. In case an investor has done KYC while depository account the same KYC will be valid for investing in mutual funds.

However, it will take some time to implement and operationalise the common KYC process. As soon as it operationalised, we will inform the distributors.

WF : When distributors put out their views on any funds through their own research reports, do they need to take a compliance sign off from respective fund houses whose funds may be covered in their proprietary reports? When should distributors approach AMCs for sign offs and approvals on marketing / research material and when are they free to distribute material without this process?

Yezdi : Distributors are not really required to take any kind of pre-clearance from AMCs for their views on funds published in their research reports. It is in their domain. However, distributors are expected to give unbiased views based on proper research and rating of funds.

With regard to marketing / advertising material, the distributor should comply with the advertisement norms specified by SEBI. The marketing / advertisement material should not be misleading to investors. It should give true and fair picture with proper risk factors and disclaimers. They should refer the material to their internal compliance for vetting such documents.

It may be noted that in light of SEBI directive, AMCs are required to ensure that any, sales, promotional or any other literature, prepared by distributors about the fund house products, adhere and comply with SEBI guidelines. In this connection, distributors should file with the AMCs copies of marketing / advertising material for oversight purposes.

Disclaimer: The views expressed are as of this date and for information purposes only and should not be construed as advice to any party. The information contained in this questionnaire is not a complete disclosure of every material fact regarding HDFC Asset Management Company Limited (HDFC AMC) / HDFC Mutual Fund. Neither HDFC AMC / HDFC Mutual Fund, nor any person connected with it, accepts any liability arising from the use of this information or in respect of anything done in reliance of the contents of this information. The recipient of this information should rely on their investigations and take their own professional advice.