Legal & Regulatory Environment

This unit is worth ten per cent of the paper and it is also the one with the most practical consequence: it covers the rules that decide whether you may sell mutual funds at all, and what you may say while doing it.

Who regulates mutual funds in India?

SEBI. Mutual funds are registered with and regulated by SEBI under the SEBI (Mutual Funds) Regulations, 1996. Those regulations govern who may sponsor a fund, how schemes are launched, what they may invest in, how NAV is computed, what must be disclosed and to whom.

SEBI's authority here comes from the SEBI Act, 1992, which gives it the job of protecting investors and regulating the securities market. When a later unit says a scheme must do something, the underlying reason is almost always a SEBI regulation or circular.

What does AMFI do, if it is not the regulator?

The Association of Mutual Funds in India is the industry association — its members are the asset management companies. It is not a regulator and cannot make binding law. What it does is issue best-practice guidelines that its members follow, publish industry data, and register distributors.

That last function is the one that matters to you personally. AMFI issues the AMFI Registration Number, the ARN, and without one you cannot distribute mutual funds. The order is fixed: pass NISM-Series-V-A first, then apply to AMFI for the ARN. The certification is the prerequisite, not a substitute.

• SEBI registers and regulates the funds and their schemes.
• AMFI registers the distributors and publishes the code of conduct they follow.
• NISM conducts the certification examination that the ARN requires.

What is KYC for?

Know Your Customer is an identity and address verification requirement, and it exists because of anti-money-laundering law rather than because of anything to do with investing. Its purpose is to establish that the investor is who they say they are and lives where they say they live, so that the financial system is not used to move illegitimate money.

It is done once, through a KYC Registration Agency, and the resulting record can then be used across mutual funds rather than repeated at each one. It is worth separating this cleanly from two things it is often confused with: risk profiling, which is about what an investor can tolerate, and suitability, which is about whether a particular product fits them. Those are the distributor's work. KYC is a legal check.

What the code of conduct requires

A distributor with an ARN is bound by AMFI's code of conduct, and it is enforceable — a breach can cost the registration. Its themes are consistent and they are the themes an examination question will test.

• Recommend what suits the investor, based on their circumstances, not what pays the most.
• Disclose the commission you earn when the investor asks, and disclose all material information about the scheme.
• Never guarantee or indicate a return. No scheme may promise one, so neither may you.
• Do not rebate commission to an investor to win the business.
• Keep the investor's information confidential.

The through-line is that a distributor sits between a product and someone who does not fully understand it, and the rules are written for that asymmetry. Several questions in this unit are simply that principle applied to a specific situation.

What the examination tends to ask here

Ten per cent means about ten questions, and they cluster around three things: which body does what, the sequence from certification to ARN, and what the code of conduct forbids. The commonest trap is treating AMFI as the regulator, and the second commonest is reading KYC as a suitability exercise.