New norms for PMS fees

SEBI vide its circular dated October 5, 2010 has streamlined the fees and charges levied by portfolio mangers. This move by SEBI is pursuant to the consultative paper issued by SEBI on the regulation of fees and charges levied by the portfolio managers in July 2010. Through this circular, SEBI has effected the proposed changes in the consultative paper. A brief background and the highlights of the circular are posted below:

Background

Usually in Portfolio Management Services ("PMS") the portfolio manager, pursuant to a contract with the client, advises or directs or undertakes on behalf of the client the management/ administration of a portfolio of securities or the funds of the client. There are two kinds of PMS, namely (i) discretionary PMS and (ii) non-discretionary PMS. A discretionary portfolio manager individually and independently manages the funds of each client in accordance with the needs of the client. A non-discretionary portfolio manager manages the funds in accordance with the directions of the client.

The relationship between the portfolio manager and client including their mutual rights, liabilities and obligations are specified in the agreement between the portfolio manager and the client. Recently SEBI had received complaints from clients relating to fees and charges levied by portfolio managers and upon scrutiny SEBI noticed that the clauses relating to fees and charges in the portfolio manager-client agreement do not always clearly reflect the fees and charges payable by the client. Thus in order to bring about greater uniformity, clarity and transparency with regard to fees and charges, SEBI has come out this circular.

Highlights of the circular

1. Fees charged by portfolio managers to be based on high water mark principle: High water mark is the highest value that the portfolio account has reached. The portfolio manager should charge performance based fee only on increase in portfolio value in excess of the previously achieved high water mark. High water mark principle would be applicable only for discretionary and non-discretionary services and not for advisory services. In case of interim contributions/ withdrawals by clients, performance fees would be charged after appropriately adjusting the high water mark on proportionate basis.

2. Maximum liability of a client towards the portfolio manager limited to his investment with the portfolio manager.

3. Agreement with the client to contain an annexure containing all fees and charges payable to the portfolio manager: This annexure should contain details of levy of all applicable charges on a sample portfolio of Rs.10 lacs over a period of one year. The fees and charges shall be shown for 3 scenarios viz. when the portfolio value increases by 20%, decreases by 20% or remains unchanged.

4. Disputes between the portfolio manager and the client in relation to the fees and charges to be settled through arbitration under the Arbitration and Conciliation Act, 1996.

A copy of the circular is available here.