A portfolio manager should not be a party to: (1) creation of false market in securities; (2) price rigging or manipulation of securities; (3) passing of price sensitive information to brokers, members of the stock exchanges and any other intermediaries in the capital market or take any other action which is prejudicial to the interest of the investors. No portfolio manager or any of its directors, partners or managers should either on their respective accounts or through their associates or family members/relatives, enter into any transaction in securities of companies on the basis of published price sensitive information obtained by them during the course of any professional assignment.
Contract with Clients: Every portfolio manager is required, before taking up an assignment of management of portfolio on behalf of a client, to enter into an agreement with such client clearly defining the inter se relationship and setting out their mutual rights, liabilities and obligations relating to the management of the portfolio of the client. The contract should, inter alia, contain:
i) The investment objectives and the services to be provided
ii) Areas of investment and restrictions, if any, imposed by the client with regard to investment in a particular company or industry;
iii) Attendant risks involved in the management of the portfolio;
iv) Period of the contract and provision of early termination, if any
v) Amount to be invested;
vi) Procedure of settling client’s account including form of repayment on maturity or early termination of contract;
vii) Fee payable to the portfolio manager;
viii) Custody of securities.
The funds of all clients must be placed by the portfolio manager in a separate account to be maintained by him in a scheduled commercial bank. He can charge an agreed fee from the client for rendering portfolio management services without guaranteeing or assuring, either directly or indirectly, any return and such fee should be independent of the returns to the client and should not be on a return sharing basis.
General Responsibilities: The discretionary portfolio manager should individually and independently manage the funds of each client in accordance with the needs of the client in a manner which does not par take character of a mutual fund, whereas the non-discretionary portfolio manager should manage the funds in accordance with the directions of clients. He should act in a fiduciary capacity with regard to the client’s funds and transact in securities within the limitation placed by the client himself with regard to dealing in securities under the provisions of the Reserve Bank of India Act, 1934. He should not derive any direct or indirect benefit out of the client’s funds or securities. He cannot pledge or give on loan securities held on behalf of the clients to a third person without obtaining a written permission from his client. He should ensure proper and timely handling of complaints from his clients and take appropriate action immediately.
Investment of Clients’ Moneys: The portfolio manager should not accept money or securities from his client for a period of less than one year. Any renewal of portfolio fund on maturity of the initial period is deemed as a fresh placement for a minimum period of one year. The portfolio funds can be withdrawn or taken back by the portfolio client at his risk before the maturity date of the contract under the following circumstances:
i) Voluntary or compulsory termination of portfolio management services by the portfolio manager;
ii) Suspension or termination of registration pf portfolio manager by SEBI;
iii) Bankruptcy or liquidation in case the portfolio manager is a body corporate;
iv) Permanent disability, lunacy or insolvency in case the portfolio manager is an individual.
The portfolio manager can invest funds of his clients in money market instruments or as specified in the contract but not in bills discounting, badla financing or for the purpose of lending or placement with corporate bodies.