November 22, 2019

AMFI Due Diligence Process for MFDs – A Complete Guide

Sujata Kabraji

Independant Financial Advisor

AMFI Due Diligence for MFDs – A Complete Guide

Most of us baulk at the thought of facing auditors and due diligence. However, It can be immensely helpful in improving your practice!

The dictionary meaning of due diligence is simple – “reasonable steps taken by a person to avoid committing a tort or offence”In order to do this, one should be aware of what constitutes a tort or an offence.

So before filling up the AMFI due diligence questionnaire, take a breath and read the code of conduct. (Download Here – AMFI Code of Conduct)

The updated due diligence questionnaire is 12 pages, divided into 6 sections. It is available in Word format (Download Here – AMFI Due Diligence Questionnaire) so the easiest way is to start filling one section at a time. Several appendixes are required, so it makes sense to create a folder on your computer and dump the information into the folder and edit later. Some of the appendixes required are scans of your KYD, your ARN, etc. Each scan/PDF can be named by the Section so it’s easy for the auditor to find.

These are the 6 sections:

Section 1: Information about the Distributor

Section 2: Mutual Fund Business Activities

Section 3: Operations & Customer Service Related Processes

Section 4: Compliance and Risk Management

Section 5: Human Resources Management

Section 6: Legal (including that of associates & subsidiaries)

Section 1 is fairly straightforward-it’s information about you. Keep soft copies and printouts of the supporting documents as the auditor will verify these on their visit to your office.

Section 2 is a combination of data and processes. Data which you need to extract from your software – AUM – Debt and Equity & Liquid, number of active SIP’s. (Some software providers are able to help you with this.)The process is a little more tricky – are you execution-only or advisory. Whatever you choose, you need to provide proof. Stuff like customer logs, emails, investment transactions. Print several of these so that the auditor gets a good set of samples. Please be transparent. Auditors are smart and it’s easy enough to figure out if you haven’t been straightforward.

Section 3 is primarily about the process – tracking of transactions, sharing of information with clients, being up-to-date with regulations. Again here, proof of each point will be helpful to the auditor to back whatever you claim. A case in point – The complaint register, if you maintain it electronically will need the “proof” of each complaint and how it was resolved within a time frame. Do attach the email exchanges and/or paperwork of at least 2-3 sample cases.

Section 4 –This focuses on protecting the investor via various controls and checks. Making sure that your NISM certifications are valid, risk profiling and sales are separate, KYC’s are in place and that there is no conflict of interest.

Section 5 & 6 are easy enough to complete. They relate to how you evaluate your employees, the sort of training you provide, keeping your team updated with regulations and mis-selling and complaints. If you have faced any regulatory action, do mention that.

Once the auditor has been to your office and clarified their queries, they will send you a copy of their report. Please do check the report carefully. Make corrections, and after the auditor incorporates these, four copies of the report along with the appendixes should be printed. Your initials will be required on each page of the report and the appendixes and your full on the last page of the report. Once acknowledged by the auditor, keep a scanned copy for future reference.

Top 5 Tips for MFDs / IFAs

• Don’t wait till you hit Rs 100 crores, or have 20 offices or do Rs 50 lacs with one AMC to wake up to the fact that due diligence is going to stare you in the face. Put requisite processes and practices in place as early as you can.
• Go through the AMFI Code of Conduct before you start filling up the questionnaire.
• Read the entire questionnaire once and note inter-related questions so that you can answer with consistency.
• Try and complete each section before you move to the next. Create an electronic folder with six sections and save the proof under that section. Once you complete the questionnaire, print it with the appendixes and put everything in a file. Mark each section and appendix clearly so the auditor can verify quickly and smoothly.
• Treat the exercise as a learning tool. If there is stuff that you don’t do, start! The due diligence is a useful tool to improve your practice.