Is India the market to shape the future of mutual fund distribution? With most attention these days given to UCITS in Europe, the RDR in the UK and financial re-regulation in the US, India’s Security and Exchange Board a month ago quietly released a two-page circular that might change the future of mutual fund distribution.

Inconspicuously entitled “SEBI/IMD/CIR No. 8/174648/2009”, the subject matter for one and a half pages and 16 articles is the “code of conduct for intermediaries of mutual funds.”

Aside from the generic guidelines around protecting client interests, providing investment documentation and highlighting associated risks, six of the 16 guidelines focus on commissions and kickbacks, including:

-disclose ALL commissions in the form of trail or any other mode received (art. 5)
-avoid recommending inappropriate products to get higher commissions (art. 9a)
-don’t encourage churning to earn higher commissions (art. 9b)
-client suitability is paramount and extra commission should not form the basis of recommending a scheme (art. 13)
-intermediaries will not rebate commission (art. 14)
-focus on financial planning to reduced the trend of kickbacks (art. 15)

There is active discussion in the Indian mutual fund market as to how much this will impact the industry and potentially change the distribution landscape – not only in India.

In the past, “avoid colluding with clients in faulty business practices such as bouncing cheques, wrong claiming of dividend, etc” (art. 8), could be downplayed as an emerging market only phenomenon, but following the recent financial scandals in developed markets and the current fight in the US around a consumer protection agency, the clarity of language offered by some emerging markets might cross borders and impact thinking in developed markets.

Or, as David Swensen, head of the Yale endowment, points out in his “lunch with the FT” in regard to basic research for manager selection around Bernie Madoff this weekend: “If you sat down and had a conversation with him (Madoff) about his investment activities and couldn’t figure out that he was being evasive, shame on you.”