Sebi's ‘regulatory shift’ in action? Industry body to craft standards for portfolio managers’ firm-level audit

In what appears to be the first attempt at the Securities and Exchange Board of India's (Sebi's) new regulatory architecture, a circular addressed to portfolio managers stated that the terms of reference (ToR) for a mandatory audit will be determined in consultation with Sebi.

In a press conference conducted on July 24, Sebi Chairperson Madhabi Puri Buch stated that the regulator's circulars specify 'what' is to be done but not 'how' it is to be done. Now, the regulator will test a method of requesting the industry to determine the "how" standards, or the standards for the implementation of the regulations.

APMI (Association of Portfolio Managers in India), in consultation with SEBI, shall specify standardised Terms of Reference ('ToR') for the aforementioned audit of firm-level performance data of portfolio managers, it was stated in a circular dated August 2.

In addition, the standard outlined by APMI will become applicable on October 1, 2023, and all Portfolio Managers will be required to adhere to it for the purpose of annual auditing of firm-level performance data.

Buch stated, with regard to the regulatory shift, that Sebi receives a great deal of valuable feedback from its advisory committees when attempting to strike a balance between the need to ensure business efficiency and market integrity. Then, these inputs are disseminated for public comment, and following their receipt, a new regulation is formulated or an existing regulation is revised.

However, when implementing them, market participants ponder how it is to be done and if what they are doing is sufficient or will be deemed a violation.

Such added that, upon further consideration, Sebi determined that industry bodies are best suited to determine industry standards (for implementing regulations).

The current circular on the audit's Scope of Work added that it should include "the requirement for Portfolio Managers to evaluate clients' portfolios across all services for the audit of firm-level performance data. The performance of advisory clients may only be excluded if it is not reported or published in any marketing materials or on any website.

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