Transparency in fee disclosure is a cornerstone of investor protection in portfolio management services. This article explains SEBI's standard format for fee disclosure and the compliance requirements for portfolio managers.
The Regulatory Mandate
Legal Basis
Regulation 22(4) of the SEBI (Portfolio Managers) Regulations, 2020 requires portfolio managers to disclose the quantum and manner of payment of fees payable by the client for each activity for which service is rendered.
Purpose
The fee disclosure framework aims to:
- Ensure transparency in fee structures
- Enable informed decision-making by clients
- Prevent hidden charges
- Standardize fee disclosure across the industry
Standard Format for Fee Disclosure
Annexure on Fees and Charges
The client agreement shall contain a separate annexure which shall list all fees and charges payable to the portfolio manager.
Contents of the Annexure
The annexure must include:
- All fees and charges payable
- The manner of calculation
- When fees are charged
- How fees are deducted
Fee Illustration
The annexure shall contain details of levy of all applicable charges on a sample portfolio over a period of one year. The fees and charges shall be shown for 3 scenarios:
- Portfolio value increases by 20%
- Portfolio value decreases by 20%
- Portfolio value remains unchanged
Additional Fee Illustrations
Whenever performance fees is charged to the client, the annexure for fees and charges shall also contain the following additional fee illustrations:
- One year and multi-year fee illustrations
- Different scenarios (increase, decrease, unchanged)
- High watermark principle incorporated
Disclosure Document Requirements
Static Section
The Disclosure Document must include under the static section:
- Nature of expenses
- Taxation
- Accounting policies
Dynamic Section
The Disclosure Document must include under the dynamic section:
- Client representation
- Financial performance
- Performance of Portfolio Manager
- Audit Observations
Fee Calculation Tool
Mandatory Requirement
Portfolio manager shall provide a fee calculation tool to all clients that highlights various fee options with multi-year fee calculations.
Features
The tool must:
- Incorporate the high-watermark principle wherever applicable
- Provide multi-year fee calculations
- Highlight various fee options
Access
The link to access the said tool shall be provided in advance to all new clients on-boarded on or after October 1, 2024.
Client Acknowledgment
Physical Mode
In case the client is on-boarded through physical mode, the client must:
- Separately sign the annexure on fees and charges
- Add a handwritten note that they have understood the fees/charge structure
Digital Mode
In case the client is on-boarded through digital mode, the client must:
- Separately sign the annexure on fees and charges
- Add a note that they have understood the fees/charge structure (typed or written electronically)
Update Requirements
Material Changes
Material changes in fees must be:
- Disclosed to clients
- Updated in the Disclosure Document
- Filed with SEBI
Timeline
The updated Disclosure Document shall be simultaneously communicated to the clients, updated on the website of portfolio manager and filed with SEBI within 7 working days from the date of change.
Expert Legal Guidance
Anuj Desai & Associates provides expert legal advisory services on PMS fee disclosure compliance. Our securities law experts help portfolio managers draft compliant fee disclosure annexures, implement fee calculation tools, and ensure regulatory compliance. Contact us for guidance on fee disclosure and other regulatory matters.