The Association of Mutual Funds in India (AMFI) issued a circular dated April 21, 2023, which has slightly revised the existing best-practice guidelines for the Transfer of AUM from one MF Distributor (ARN-holder) to another based on the recommendations of AMFI’s Standing Committee on Certified Distributors (ARN Committee) and approval of the Board of AMFI.

AMFI clarified with the revision of guidelines that if an investor transfers his/her assets to the new ARN holder at a time when her MFD initiates the transfer of AUM due to any reason, the new MFD will be entitled to get trail commission. However, until now, if any investor did change their MFDs, the new distributors were not entitled to receive trail commission.

Nevertheless, now as per the amendment, the above provision of new MFD receiving the Trail Commission on transfer of AUM is applicable only in case of transfer of AUM initiated by the transferor MFD. AMFI states, “In the event, if the unitholder has an objection to shifting their investments under the ARN of the proposed transferee distributor on account of changes shift to a different distributor of their choice, then in such cases the new distributor opted by the unitholder shall be eligible to receive trail commission on the mutual fund investments of the clients transferred under their ARN, on a prospective basis on the valid transferred assets, basis the lower of the commission rate (as applicable on the date of transfer) of the transferor and the transferee distributor. For avoidance of doubt, it is hereby clarified that the above provision is applicable only in case of transfer of AUM initiated by the transferor MFD.”

However, you must bear in mind that if investors change the ARN code, which means if they shift from the existing ARN to another broker on their own, then there will be no trail commission on such transactions. However, if a client changes ARN due to the voluntary exit of the existing distributor, the new distributor is entitled to get a trial commission.

Here’s detailed information regarding the revised guidelines by AMFI on AUM transfer:

1. If distributor (ARN code) change is initiated by the investor

• As per SEBI’s circular no. SEBI/IMD/CIR No.13/187052/2009 dated December 11, 2009, Mutual Funds/AMCs need to ensure compliance with instructions of an investor who desires to change their distributor or switch to direct plan, without compelling that investor to obtain an NOC from the existing distributor.
• Such a change of distributor code/ARN leads to the investor’s unit holdings being delinked from the earlier distributor/ARN and tagged/linked to the new distributor/ARN. Remember, if the investor changes the ARN code, i.e. from your ARN to another broker on their own, there will be no trail commission on such a transaction, and the trail commission in respect of transferred assets should not be paid to the new distributor (ARN holder).

2. If distributor (ARN Code) change is initiated by the existing distributor

Change in Distributor (ARN code) upon request of an existing distributor may be effected only in the following circumstances:

• Change in the name/ egal status of the distributor (such as an individual MF distributor converting his MF distribution business to a partnership firm, a partnership firm converting itself into a Limited Liability Partnership (LLP), a private limited company converting itself into a public limited company or vice versa.
• In case of mergers/acquisitions/consolidation of business/transfer of business/demergers/ dissolution of business/change in partnership firms or LLP/new code acquired by the distributors (ARN Holders).
• Transfer of AUM from national distributor to sub-distributor is allowed only if the sub-distributor transfers his entire assets with national distributors. Both national and sub-distributor will have to certify to the AMC that the entire AUM is transferred.

How will the execution of AUM transfer take place:

• Request for change in distributor/ARN code may only be initiated by a distributor whose ARN is valid, who is ‘KYD’ Compliant and who has furnished all the requisite self-certifications due as on the date of request.
• Also, you need to transfer your entire assets to the new distributor. Once you transfer your assets, you will have to surrender your ARN to AMFI for cancellation. You will have to submit your original ARN within 15 days of such a transfer, along with a handwritten letter. A copy of such a letter has to be sent to respective fund houses.
• However, the transferor distributor need not surrender their ARN in case they become a sub-distributor of the transferee distributor in order to service clients. Also, you cannot do fresh business independently under your ARN after transferring assets.
• Any Transferor Distributor who has surrendered his valid ARN in order to obtain a fresh ARN/EUIN shall be considered eligible to transfer his assets to the fresh ARN, even if on the date of application for transfer of AUM, the Transferor ARN is ‘surrendered/not valid’. Do note that the application for transfer of AUM should be made within a period of six months from the date of cancellation of ARN.
• The transferor distributor must inform their mutual fund clients with a suitable letter/email about the impending change of the distributor/ARN code, the reason for the same, along with the details of the new distributor who will be servicing them after the transfer of assets. In addition, mention that if the clients have any objection to the change in distributor code, they must write to the respective AMCs directly. In case of no objections, AMCs will have to effect changes to ARN within 15 days.
• The request letter for the transfer of assets submitted to the AMCs by the transferor distributor shall include the reason for the transfer, duly supported by documentary evidence and client intimation letters/emails, along with a list of all clients.
• Commissions to the Transferee Distributor shall be paid only on the valid assets, i.e., where commissions would have been rightfully and legitimately payable to the Transferor Distributor. AMCs would pay commissions to new distributors only after the cancellation of old ARN except when old ARN holders opt to become sub-distributor.
• The trail commission rate for the new distributor will be in line with the trail commission rate of the old distributor. For the transfer between the national distributor and sub-distributor, trail commission rate would be a lower of commission on old ARN and new ARN.

3. Change in Distributor/ARN code due to voluntary exit by an MF distributor

A distributor may decide to voluntarily discontinue his/her distribution business; in this case, the following procedure may be adopted:

• Distributors will have to inform their clients in writing through email/letter that they should get a new distributor of their choice. Investors should write to respective mutual funds about the new MF distributor. A copy of such a communication has to be submitted to respective AMCs.
• If a distributor’s ARN has expired and they fail to renew the ARN within 3 months, the AMCs may write to clients to choose another distributor for servicing and inform the AMC to change the ARN code in the client’s’ folios or switch to Direct Plan. If the MFD fails to renew the ARN within 6 months after the expiry of the validity, the ARN stands cancelled, and no fresh business should be accepted.
• Once the distributor/ARN code has been changed in the AMC records, the trail commission thereafter for all business done by the earlier distributor shall be payable to the new distributor prospectively.
• The transfer of assets should not be used by the distributor as a measure to circumvent any legal/regulatory obligation and/or AMFI guidelines. A distributor who has stopped his mutual fund distribution business must surrender his ARN to AMFI for cancellation, with a copy of the letter submitted to the AMCs as soon as his details are removed from the investors’ folios in the AMCs’ records.

4. If the transfer of AUM takes place due to death of a mutual fund distributor

In order to transfer the AUM of a deceased distributor to the ARN of the nominee or legal heir, the ARN of the deceased distributor should have the following:

• A valid ARN on the date of demise and his trail commission not under suspension.
• The Nominee/legal heir should have a valid ARN as on the date of the request for transfer of AUM and should be KYD compliant. Also, the ARN should not have been suspended by AMFI for any reason whatsoever.

Only those assets which were procured by the deceased distributor prior to their demise and during the validity of their ARN can be transferred to the ARN of the nominee/legal heir. The nominee/legal heir of the deceased distributor needs to submit an application for cancellation of ARN of the deceased distributor to CAMS – AMFI Unit within six months from the date of demise, along with a copy of death certificate of the deceased distributor duly attested by a notary or by a gazetted officer and the ARN card of the deceased distributor.

The new distributors will have to individually approach all empanelled AMCs and make an application for the transfer of assets to their ARN. Also, inform all clients of changes in ARN through letter or email. The AMCs shall process the request for the change in the distributor/ARN code/ transfer of assets to the ARN of the nominee/legal heir after a cooling-off period of 15 days from the date of receipt of distributor’s request, subject to no objection from clients.

Apart from this, all other norms related to the Transfer of AUM from one Mutual Fund Distributor to another remained unchanged.