Conflict of interest management is a critical aspect of portfolio management regulation. This article explains the guidelines for portfolio managers and associated persons regarding conflict of interest.
The Regulatory Framework
Legal Basis
The SEBI (Portfolio Managers) Regulations, 2020 require that portfolio managers shall either avoid any conflict of interest in his investment or disinvestment decision, or where any conflict of interest arises, ensure fair treatment to all his customers.
Code of Conduct
The Code of Conduct for Portfolio Managers requires that:
- The portfolio manager shall either avoid any conflict of interest in his investment or disinvestment decision, or where any conflict of interest arises, ensure fair treatment to all his customers
- It shall disclose to the clients, possible source of conflict of interest, while providing unbiased services
Types of Conflicts of Interest
Financial Conflicts
Conflicts arising from financial interests include:
- Making a financial gain to the disadvantage of the client
- Conducting the same business as the client
- Having a financial or otherwise interest while making investments for one client over another
Professional Conflicts
Conflicts arising from professional relationships include:
- Family members involved in related businesses
- Associated persons with conflicting interests
- Personal trading by employees
Structural Conflicts
Conflicts arising from organizational structure include:
- Multiple business lines within the same group
- Shared resources across business lines
- Common management
Conflict Avoidance
Independent Custodians
An external entity must hold the client's assets to prevent any conflict of interest.
Segregation of Activities
Portfolio managers offering advisory services must ensure:
- Clear segregation between advisory and distribution functions
- Avoidance of any conflict of interest in investment advice and commission-based products
Separate Accounts
The client's funds and securities should be kept separate from the manager's assets.
Conflict Disclosure
Disclosure Document
Portfolio managers must disclose in the Disclosure Document:
- Details of conflicts of interest related to services offered by group companies or associates
- Complete disclosures of transactions with related parties
- Details of investment of client's funds in related parties or associates
Client Communication
Portfolio managers must disclose to clients:
- Possible sources of conflict of interest
- How conflicts are managed
- Any actual conflicts that arise
Public Appearance
Portfolio managers must disclose:
- Registration status
- Financial interest in subject companies
- Any material conflict of interest
Associated Persons
Definition
Associated persons include:
- Directors
- Partners
- Employees
- Family members
- Any person connected with the portfolio manager
Compliance Requirements
Associated persons must:
- Avoid conflicts of interest
- Disclose any potential conflicts
- Comply with the Code of Conduct
Family Members
The new rules now cover immediate family members, including spouses and dependent children, to minimise the possibility of indirect conflicts of interest.
Management of Conflicts
Policies and Procedures
Portfolio managers must have:
- Written policies for conflict identification
- Procedures for conflict management
- Mechanisms for conflict disclosure
Fair Treatment
Where any conflict of interest arises, the portfolio manager must ensure fair treatment to all its customers.
Recording
All conflicts of interest must be:
- Identified
- Documented
- Managed
- Disclosed
Expert Legal Guidance
Anuj Desai & Associates provides expert legal advisory services on conflict of interest compliance for portfolio managers. Our securities law experts help clients identify conflicts, implement management procedures, and ensure regulatory compliance. Contact us for guidance on conflict of interest and other regulatory matters.