Code of conduct for PMS distributors
Commission or incentive must never be the reason a distributor recommends a PMS.
SEBI's Code of Conduct for Distributors of Portfolio Management Services is Annexure 2B of the Master Circular for Portfolio Managers. It applies to every person involved in distributing PMS, individual or firm, and lists eighteen obligations. SEBI does not police distributors directly; it makes each portfolio manager responsible for ensuring its distributors follow the code (Reg 23(11) and Master Circular 2.4).
Most of the code is common sense written down. What makes it examinable is the precise wording: commission must never be the basis of a recommendation, comparisons only with comparable products, and certification valid at all times.
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The eighteen obligations, grouped
| Theme | What the code requires |
|---|---|
| Law and conduct | Follow the PM Regulations and circulars on distribution and advertising; act with integrity, promptitude, fairness, due skill, care and diligence. |
| Suitability | Consider the investor's interest, risk profile and suitability to their financial needs; take steps to protect the client's interest. |
| Commission | Commission or incentive must never form the basis for recommending PMS; disclose distribution commission details for the various investment approaches. |
| Product knowledge | Be fully conversant with the Disclosure Document, investment approaches, fees and charges, and the client agreement. |
| Disclosure to clients | Give full and latest information on investment approaches, highlighting assumptions behind performance figures, risk assessments and projections; explain the risks and level of client control in discretionary, non-discretionary and advisory services. |
| Prohibitions | No assured returns, no misrepresentation, no rebates or gifts to attract clients, no negative statements about other PMs, no manipulative or fraudulent practices or rumours. |
| Comparisons | Compare only with similar and comparable products, with complete facts. |
| Service and privacy | Help with KYC and in-person verification; keep infrastructure to help clients receive the Disclosure Document, statements, fee statements and audit report; keep client details confidential. |
| Certification | Hold valid certification as specified by SEBI at all times. |
What the portfolio manager must do about it
Master Circular 2.4.1 puts the supervision on the PM:
- check_circleEnsure distributors carry out distribution in line with the Regulations and circulars.
- check_circlePay distributors only on a trail basis, and only out of the PM's own fees.
- check_circleTell prospective clients the commission the distributor earns for onboarding them to a specific investment approach.
- check_circleEnsure distributors follow Annexure 2B, with a mechanism to verify that independently rather than relying on the distributor's word.
- check_circleReceive a self-certification of compliance with the code from each distributor within 15 calendar days of the end of every financial year.
Three situations and how the code answers them
- 1
Two approaches suit the client equally; one pays more
Recommend on the client's interest and suitability. Disclosing the higher commission does not cure a recommendation driven by it.
- 2
A client asks what return to expect
Show past performance with its assumptions. Never assure a return, even informally on a call.
- 3
A ₹75 lakh client wants a discretionary PMS but insists on approving every trade
Explain the level of control in each service type. A client who wants trade-by-trade control is describing a non-discretionary or advisory service, not discretionary.
Free account, this exam preselected.
The annual deadline
The financial year ends on March 31, so the self-certification is due to each PM by April 15. Older material says "15 days"; the July 2025 Master Circular specifies 15 calendar days.
How XXI-A tests this
Questions quote one obligation and ask which is a breach, or give a scenario (an aggressive derivatives approach sold to a retired client who asked for capital protection) and ask what principle was broken: suitability. The common traps: thinking disclosure of commission makes a commission-led recommendation acceptable; thinking a distributor may criticise a rival PM if the statement is true (the code bars negative statements outright and allows only fair comparisons); and placing the code in the Regulations' Schedule III, which is the code for portfolio managers themselves.
FAQs
What is the code of conduct for PMS distributors?expand_more
Annexure 2B of SEBI's Master Circular for Portfolio Managers: eighteen obligations covering suitability, commission disclosure, product knowledge, fair comparison, confidentiality and continuous certification.
Who checks that a PMS distributor follows the code?expand_more
The portfolio manager. It must verify compliance independently and collect an annual self-certification from each distributor within 15 calendar days of the financial year end.
Can a PMS distributor offer a gift or rebate to win a client?expand_more
No. The code bars attracting clients through unethical means such as rebates or gifts.
Does a PMS distributor need to stay certified after registration?expand_more
Yes. The code requires valid SEBI-specified certification at all times, so a lapsed NISM XXI-A certificate breaches it.