NISM Series XXI-A · Unit 12 of 12 · about 10% of the paper
Regulatory, governance and ethical aspects of portfolio managers: NISM Series XXI-A notes and practice questions
SEBI's Portfolio Managers Regulations, the conduct of managers and the distributor's duties.
What to know in Unit 12
- Registration and net worth.
- Code of conduct.
- Distributor obligations.
- Grievance redressal.
Key terms, examples and exam traps
SEBI Portfolio Managers Regulations
These regulations govern registration, conduct, fees, disclosures and client protection for portfolio managers.
Example. A manager's activities are bound by SEBI's rules.
Exam trap. This statement is false: Portfolio managers are free from regulation.
Net worth requirement
A portfolio manager must maintain minimum net worth of ₹5 crore.
Example. A firm falls short on capital and cannot be registered.
Exam trap. This statement is false: A manager needs only ₹10 lakh of net worth.
Fiduciary duty
The manager must act in the client's best interest, with care, diligence and loyalty, and place client interest before its own.
Example. A manager avoids a trade that benefits it at the client's expense.
Exam trap. This statement is false: The manager may favour its own interest.
Prohibition on assured returns
Portfolio managers and distributors cannot assure or guarantee returns on a PMS.
Example. A distributor says 'The PMS will give you 20% every year.'
Exam trap. This statement is false: Distributors may guarantee returns.
Conflict of interest
Managers must disclose and manage conflicts, avoid front running and not misuse client information.
Example. A manager trades ahead of a client's large order.
Exam trap. This statement is false: Front running is acceptable if profit is shared.
Distributor registration
Distributors of PMS must hold the NISM XXI-A certificate and an AMFI ARN, and follow code of conduct.
Example. A distributor completes certification before selling PMS.
Exam trap. This statement is false: Any person can distribute PMS without certification.
Suitability by distributor
The distributor must assess the client's suitability, explain risks and fees and give the disclosure document before onboarding.
Example. A distributor checks a client's risk profile and net worth before recommending PMS.
Exam trap. This statement is false: Suitability is the manager's duty alone.
Commission disclosure
Distributors must disclose commission earned from the portfolio manager to the client.
Example. A distributor tells the client how she is paid.
Exam trap. This statement is false: Commissions are hidden from clients.
Grievance redressal
Clients can complain to the manager, then to SEBI's complaint system, and use online dispute resolution.
Example. An unhappy client files a complaint on the regulator's portal.
Exam trap. This statement is false: Clients have no recourse against portfolio managers.
Penalties
SEBI can penalise, suspend or cancel registration of managers or distributors who violate the regulations.
Example. A manager is penalised for mis-selling.
Exam trap. This statement is false: SEBI cannot act against portfolio managers.
Insider trading
Portfolio managers must not trade on unpublished price-sensitive information, and violations are prosecuted.
Example. A manager buys shares based on confidential merger news.
Exam trap. This statement is false: Insider trading is allowed in managed accounts.
Related-party dealing
Managers must disclose investments in related-party securities and avoid favouring group entities.
Example. A manager discloses its group company's shares in a client's portfolio.
Exam trap. This statement is false: Related-party holdings need not be disclosed.
Code of conduct for distributors
Distributors must act honestly, avoid mis-selling, keep confidentiality and give true information about products.
Example. A distributor refuses to oversell the product's features.
Exam trap. This statement is false: The code allows exaggerated claims.
6 practice questions
Read each question and choose your answer before opening the free mock, which shows the correct answer and the reason.
Q1. Which term is described here? Portfolio managers must not trade on unpublished price-sensitive information, and violations are prosecuted.
- Review and monitoring
- Alpha
- Insider trading
- Prohibition on assured returns
Q2. Which statement best describes “Suitability by distributor”?
- Brokerage and other expenses on transactions, such as custodian and audit fees, are charged to the client as disclosed.
- The bottom-up approach starts with analysing individual companies, regardless of macro or sector views.
- A portfolio manager is a SEBI-registered body corporate that manages or administers a client's securities or funds under a contract.
- The distributor must assess the client's suitability, explain risks and fees and give the disclosure document before onboarding.
Q3. Which statement best describes “Grievance redressal”?
- Exit load is a charge on withdrawal in the early years: at most 3% in the first year, 2% in the second and 1% in the third, with none thereafter.
- Securities in a PMS are held in a separate demat account in the client's name, giving ownership and transparency.
- Clients can complain to the manager, then to SEBI's complaint system, and use online dispute resolution.
- Capital losses can be set off against capital gains and carried forward as per the tax law.
Q4. Which term is described here? The manager must act in the client's best interest, with care, diligence and loyalty, and place client interest before its own.
- Transparency
- Fiduciary duty
- Custodian
- Exit load
Q5. Which statement best describes “Commission disclosure”?
- Managers provide a statement of realised gains and losses, which helps the client file her tax return.
- Holding cash gives liquidity and flexibility but can drag returns in rising markets.
- Distributors must disclose commission earned from the portfolio manager to the client.
- NAV is the per-unit value of a scheme, equal to net assets divided by units outstanding.
Q6. Which term is described here? A portfolio manager must maintain minimum net worth of ₹5 crore.
- Rebalancing
- Net worth requirement
- Custodian
- Minimum investment
Frequently asked questions
How much of NISM Series XXI-A comes from Unit 12?
Unit 12 (Regulatory, governance and ethical aspects of portfolio managers) usually carries about 10% of the questions. The whole exam has 100 questions and the pass mark is 60%.
What should I study in NISM Series XXI-A Unit 12?
Registration and net worth. Code of conduct. Distributor obligations. Grievance redressal.
Are these NISM Series XXI-A practice questions free?
Yes. Take the full free mocks to see the correct answer and the reason for every question.
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