Nomination in Mutual Funds

A client, who is setting up a mutual fund distribution business, called seeking clarity on the SEBI circular making changes to the nomination process. The change proposed to make the process of opting out of the nomination process a conscious decision. An investor would need to make a declaration that “he/she understands that by not opting to nominate any person for the investments, he / she understands the issues involved in non-appointment of nominee(s) and further are aware that in case of death of all the account holder(s), the legal heirs would need to submit all the requisite documents issued by Court or other such competent authority, based on the value of investments.”

So far so good from an investor’s point of view especially in light of the large amount of investments across financial products lying unclaimed. The circular however also raises some questions. Over the last few years, there has been a marked increase in the movement towards digital with newer fintech companies being launched and existing incumbents increasing their focus on digital strategy. In light of these changes in preference, the circular creates ambiguity, viz.

(i) Whether a distributor can conduct the two-factor authentication for nomination on a platform that is operated by him (given that the requirements in the circular on nominations — two factor authentication using sms facility or a declaration for opting out are met on such platforms)?

(ii) Whether the distributor uses an industry platform like BSE Star MF or NSE MF, whether the two factor authentication is required to be carried out again by such industry platforms? If the response to (i) is negative, then can it be carried out by such industry platforms?

(iii) The circular mentions the OTP (in case of electronic validation) is required to be sent to the mobile number registered with the AMC. When the two factor authentication is done by the distributor or the industry platforms using the mobile number provided by the customer to the distributor, will the authentication be considered valid even if the mobile number is different as is registered with the AMC?

(iv) All Mutual Fund customers are required to complete their KYC through a KYC agency appointed. This process requires them to mention their mobile numbers on the KYC form however there is no requirement that the same number be used when investing in any Mutual Fund Scheme. The resultant effect of this is multiple numbers being registered with different AMCs. In such a scenario, which number would be considered valid for the two factor authentication?

(v) For cases where a new folio is being created using the distributor or industry platform, will the mobile number given by such investors meet the compliance requirement of two factor authentication?

The client mentioned instead of resolving the queries that he had, we added a few more questions and he ended up with more open questions than what he originally had. We suggested some probable solutions to address the questions, some that were in his control and others that would require regulatory intervention and change —

(i) Allow distributors to conduct the two factor authentication so long as they meet the requirements mentioned in the circular.

(ii) In case the above (i) is allowed, the need for the authentication to be carried out by industry platforms is eliminated.

(iii) The number available with the distributor and used for validation should be considered as valid compliance even though it may be different from the one registered with the AMC. An alternative solution is to popularize the service made available by RTAs of triggering OTPs using APIs created for this purpose.

(iv) The address available with the KYC is used to update the address of the customer by all AMCs. This, however, is not extended to mobile numbers and email addresses and the simplest way to ensure that the same information is available with all AMC is to extend the updation to include mobile numbers and email addresses. In a way, this would become similar to the Depository environment where companies download the required information from the Depository as and when they need it. The demat account holder, to keep his latest contact details updated, just submits a request to his DP.

(v) Lastly, where a new folio is being created, the number used for authentication by the distributor should be considered valid.

The client finally looked relieved!

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Adian Services LLP

A niche service provider in the investment management eco system providing services in the areas of operations, technology implementation, legal and compliance.