Regulatory, Governance and Ethical Aspects of Portfolio Managers
15 questions. Each answer is explained.
Question 1 of 10Practice · Series XXI-A — Portfolio Management Services (PMS) Distributors
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Learn these topics
More units in NISM Series XXI-A
- Investments11
- Introduction to Securities Markets7
- Investing in Stocks15
- Investing in Fixed Income Securities8
- Derivatives7
- Collective Investment Vehicles8
- Role of Portfolio Managers15
- Operational Aspects of Portfolio Managers20
- Portfolio Management Process22
- Performance Measurement and Evaluation of Portfolio Managers15
- Taxation7
Exam format
| Questions | 100 · 1 mark each |
|---|---|
| Duration | 120 min · 2 hours |
| Pass mark | 60% · 60 of 100 marks |
| Negative marking | 10% · 0.1 marks off per wrong answer |
| Certificate validity | 3 years · from the date of the examination |
| Marks for this unit | Not published by NISM |
NISM Series XXI-A Portfolio Management Services (PMS) Distributors
Exam rules read on NISM's site on 3 October 2026. Check the current rules on NISM's site (opens in a new tab)
What these answers assume, and when it was last checked
Each question uses the rules listed below. We last checked them on 5 September 2026. A Budget or SEBI circular can change a rate, lot size or expiry day. If a rule changes before your exam, treat the linked questions as out of date and check NISM's current workbook.
- NSE uses Tuesday expiry and BSE uses Thursday expiry. This applies from 1 September 2025.
- The January 2026 index lot sizes are NIFTY 65, BANKNIFTY 30, FINNIFTY 60, MIDCPNIFTY 120 and NIFTYNXT50 25.
- The October 2024 SEBI framework sets a minimum index contract value of Rs 15–20 lakh. Each exchange may list one weekly benchmark index.
- Option buyers pay the premium upfront from 1 February 2025. A short index option has an extra 2% Extreme Loss Margin on expiry day from 20 November 2024.
- Equity short-term capital gains are taxed at 20%. Long-term gains are taxed at 12.5% above Rs 1.25 lakh. Both rates apply from 23 July 2024.
- F&O income is non-speculative business income in ITR-3. NSE equity derivatives trade from 9:15 a.m. to 3:40 p.m.
- The final ten-minute session began on 3 August 2026. It aligns with the cash market Closing Auction Session.
- Most Securities Transaction Tax questions test the base and who pays. On an option sale, it is the premium and the seller pays. On a futures sale, it is the traded value and the seller pays.
- On exercise, Securities Transaction Tax uses intrinsic value: settlement price minus strike price. The buyer pays it.
- Two questions test the current rate. From 1 April 2026, option sales carry 0.15% on the premium and futures sales carry 0.05% on traded price. The earlier rates were 0.10% and 0.02% from 1 October 2024.
- This section uses the T+1 rolling settlement cycle. Obligations are fixed on T+1. A short delivery goes to buy-in auction on T+1 and settles on T+2.
- The trade-for-trade surveillance segment uses direct close-out. Funds pay in by 10:30 a.m. and pay out on or after 1:30 p.m. on settlement day.
- Securities pay in to the settlement pool by 10:30 a.m. They pay out directly to the client’s demat account by 3:30 p.m.
- The 3:30 p.m. deadline replaced 1:30 p.m. under SEBI’s 10 October 2024 circular. Direct client credit was required by SEBI’s 5 June 2024 circular.
- The optional T+0 cycle trades until 1:30 p.m. Obligations are fixed by 2:30 p.m. on the trade day. An early pay-in shortage is closed out directly.
- Cash-market Value at Risk margin is six times exponentially weighted moving-average volatility. It has a 9% floor for Group I, a 21.5% floor for Group II, and a fixed 50% or 75% level for Group III.
- Extreme Loss Margin is 3.5% for a share and 2% for a broad-market-index exchange traded fund. Mark-to-market margin is collected before the next day’s trading. The trade-for-trade segment has 100% upfront margin.
- Close-out uses the higher of the highest price from trade day to auction day and 20% above the auction day’s official close.
- A funds shortage costs 0.07% a day. The trading facility is withdrawn at a shortage of Rs 5 lakh or more.
- SCORES allows 21 calendar days, then two 15-day review levels. Online Dispute Resolution moves from conciliation to arbitration after the market participant and SCORES steps.
- At NSE, the Investor Protection Fund limit is Rs 35 lakh per investor for each defaulting or expelled member. This applies to claims arising after 13 August 2024.
- A Basic Services Demat Account has no annual maintenance charge up to Rs 4 lakh of holdings. It costs up to Rs 100 above that, until the Rs 10 lakh eligibility ceiling. These slabs apply from 1 September 2024.
- The rupee pairs are USD-INR, EUR-INR, GBP-INR and JPY-INR. The cross-currency pairs are EUR-USD, GBP-USD and USD-JPY.
- Each contract covers 1,000 units of the foreign currency, except JPY-INR. JPY-INR covers 100,000 yen and is quoted in rupees per 100 yen.
- The tick is 0.25 paise, or Rs 0.0025. It equals Rs 2.50 a contract.
- Rupee pairs trade from 9:00 a.m. to 5:00 p.m. A monthly contract stops trading at 12:30 p.m. two working days before the expiry month’s last business day.
- Final settlement is in cash at the FBIL reference rate on expiry day. FBIL, Financial Benchmarks India, has published this rate in place of the Reserve Bank since 2018. Premium-style European options are quoted in rupees. The buyer pays the premium in cash on T+1.
- Daily settlement is on T+1 and final settlement is on T+2.
- NSE Clearing circular 026/2020 sets SPAN margin plus Extreme Loss Margin. The futures margin is 0.50% for USD-INR, 0.15% for EUR-INR, 0.25% for GBP-INR and 0.35% for JPY-INR. A short option has 0.75%. These figures apply from 1 June 2020.
- A USD-INR client may hold 6% of total open interest or USD 20 million, whichever is higher. A trading member may hold 15% or USD 100 million.
- A resident user has one USD 100 million equivalent limit across all rupee pairs and exchanges. No document is needed below that limit, but a valid underlying contracted exposure must still exist. This clarification applies from 3 May 2024.
- The currency segment has no Securities Transaction Tax.
The exam figures (questions, time, pass mark, negative marking and certificate validity) come from NISM's own pages, read on 3 October 2026. Timed practice uses the same figures. Study with the official workbook as well.
The written-out answers on this page are hidden while your timed set runs.
All 15 questions on Regulatory, Governance and Ethical Aspects of Portfolio Managers, with answers
Q1A salesperson supplies a portfolio manager’s trading name and registration number. What is the most appropriate first verification step?
Option A. Match the legal entity and registration details against SEBI’s official register — Correct answer
Option B. Rely only on a high-return screenshot that shows the portfolio manager’s name
Why it is wrong: A picture of returns does not prove who the firm is. It does not prove registration either.
Option C. Treat the registration number as a guarantee that future returns will be good
Why it is wrong: Registration does not promise that investments will make money.
Option D. Assume the registration carries over to any business with a similar trading name
Why it is wrong: A similar name does not prove that the same legal entity holds the registration.
Answer: A. A registration check tells you who the firm is. It also shows its standing with the regulator. It is not a sign of good performance. Use the official register. Compare the legal name, the registration details and any contact details it lists. If something does not match, sort it out directly through verified channels. Registration does not remove risk. So keep doing due diligence (careful checks). Look at the investment and at how the firm runs. Remember: Verify both the number and the entity to which it belongs.
Hint, shown before you answer in practice mode: Common mistake: Checking a number without confirming that the salesperson represents the same entity.
XXI-A-136easyapplication
Q2Under SEBI’s 16 July 2025 PMS master circular, what should a person understand after passing the required NISM distributor examination?
Option A. Certification and the applicable APMI distributor registration are separate checks — Correct answer
Option B. Passing the examination removes the need for any distributor registration at all
Why it is wrong: The circular in the question has its own distributor rules. They cover registration and supervision. Passing the exam does not remove them.
Option C. Holding any mutual fund distributor code automatically replaces every PMS requirement
Why it is wrong: Different kinds of distribution can have different rules. So a mutual fund code does not by itself meet every PMS requirement.
Option D. Passing the exam automatically creates a portfolio-manager registration with SEBI
Why it is wrong: The distributor exam tests what you know. It is not registration as a portfolio manager.
Answer: A. In regulated distribution, three steps do different jobs. One is the skill certificate. Another is registration as a distributor. A third is being appointed or empanelled, which means a portfolio manager takes you on. Passing the exam gives you only the required certificate. So check the registration rules on their own. Also check the rules for being taken on by a portfolio manager. Both sets of rules come from the framework that applies. Do not treat all three steps as one certificate. Remember: One credential should not be treated as automatic completion of every regulatory role.
Hint, shown before you answer in practice mode: Common mistake: Confusing distributor certification with authorisation to act as a portfolio manager.
XXI-A-137mediumregulatory
Q3Which distributor-payment arrangement matches the ordinary requirements in SEBI’s 16 July 2025 PMS master circular?
Option A. Trail compensation paid only from the portfolio-management fees received by the manager — Correct answer
Option B. An unrestricted deduction from client principal described as a gift to the distributor
Why it is wrong: Relabelling a payment does not comply with the specified source and form.
Option C. A fresh upfront commission taken directly from each client’s initial investment
Why it is wrong: That conflicts with the specified ordinary trail-only arrangement.
Option D. A payment funded by keeping unreported client dividends
Why it is wrong: Client income cannot be diverted as an undisclosed compensation source.
Answer: A. Compensation compliance concerns how a payment is structured and where its funding comes from, as well as whether it is disclosed. Under the named dated framework, distributor compensation is on a trail basis and funded from the fees received by the manager. A different label or client-funded diversion does not meet those conditions. This question does not state an industry commission rate. Remember: Check the source and timing model of distributor remuneration, not just its amount.
Hint, shown before you answer in practice mode: Common mistake: Assuming that disclosure alone makes any payment structure permissible.
XXI-A-138mediumregulatory
Q4Under the distributor provisions in SEBI’s 16 July 2025 PMS master circular, a prospect is considering a specific investment approach. How should material distributor compensation be handled?
Option A. Disclose it only if the approach subsequently underperforms
Why it is wrong: Performance does not determine whether a material incentive should be disclosed.
Option B. Replace the amount or structure with a claim that there is no conflict to consider
Why it is wrong: An unsupported claim does not provide the material compensation information.
Option C. Disclose the relevant compensation details rather than wait for the prospect to find out — Correct answer
Option D. Keep it hidden whenever the client pays the manager rather than paying the distributor directly
Why it is wrong: Indirect funding does not make the incentive irrelevant to the client.
Answer: C. Compensation disclosure makes a distribution incentive visible so the client can understand it alongside the proposed service. Identify the approach being considered and the compensation connected with distributing it. Communicate the material information required by the named framework. Disclosure supports transparency but does not excuse an unsuitable recommendation. Remember: A distribution incentive should be transparent even when the payment is indirect.
Hint, shown before you answer in practice mode: Common mistake: Treating a manager-funded commission as information the client need not know.
XXI-A-139easyregulatory
Q5A distributor prefers an approach solely because it pays a higher trail commission, despite a documented liquidity mismatch for the client. What is the central conduct concern?
Option A. The approach becomes suitable if it has a strong recent return.
Why it is wrong: Recent performance does not resolve the liquidity mismatch.
Option B. The recommendation is driven by the incentive instead of the client’s needs. — Correct answer
Option C. The client’s liquidity requirement matters only after a loss occurs.
Why it is wrong: It is relevant before recommendation and commitment.
Option D. The concern disappears if the distributor discloses the higher payment.
Why it is wrong: Disclosure does not by itself make an unsuitable choice appropriate.
Answer: B. Conflicts must be managed in the substance of a recommendation, not only described in a disclosure. The scenario states both an incentive-driven motive and a client constraint that the approach does not fit. A suitable process evaluates the client’s needs first. Commission transparency is important, but it does not cure the underlying mismatch. Remember: Disclosing a conflict does not authorise acting against the client’s documented needs.
Hint, shown before you answer in practice mode: Common mistake: Treating disclosure as a substitute for suitability.
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Q6A distributor repeatedly recommends moving a client among similar PMS approaches mainly to increase remuneration. Goals, constraints and investment rationale have not changed. What is the main concern?
Option A. Unnecessary switching creates costs and conflicts without a demonstrated client benefit — Correct answer
Option B. Every switch is appropriate whenever a new account can be opened
Why it is wrong: Administrative ability does not establish an investment reason.
Option C. A switch cannot affect a client because the approaches are similar
Why it is wrong: Costs, taxes, execution and timing can change even between similar approaches.
Option D. The practice becomes appropriate if the distributor avoids documenting the motive
Why it is wrong: Omitting a record does not remove the conflict or its consequences.
Answer: A. A recommendation to switch should have a supportable client-focused rationale that takes implementation consequences into account. Compare the expected client benefit with costs, tax effects, liquidity and changes in exposure. The scenario supplies no investment-related reason and identifies remuneration as the motive, making the conflict central to the review. Remember: Require a client-benefit rationale for switching, not merely an opportunity to transact.
Hint, shown before you answer in practice mode: Common mistake: Assuming that similar investments make repeated switching harmless.
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Q7A distributor is asked to send one client’s detailed holdings to another prospect as proof of success. The client has not authorised this disclosure. What is the appropriate response?
Option A. Do not disclose identifiable client information without an appropriate authority or lawful basis — Correct answer
Option B. Send the statement because a profitable account is not confidential
Why it is wrong: Confidentiality does not depend on whether the account made money.
Option C. Send it after deleting only the cover page while retaining the client’s account identifiers
Why it is wrong: The remaining details can still identify the client and reveal protected information.
Option D. Send it if the prospect promises to invest a large amount
Why it is wrong: Commercial value does not create authority to disclose another client’s information.
Answer: A. Information obtained through a client relationship should be used and shared only within appropriate permissions and obligations. Determine whether the data identifies the client and whether there is authority to share it. Without an appropriate basis, do not disclose the statement. Use suitably authorised and compliant material instead, rather than assuming a marketing purpose overrides confidentiality. Remember: A successful investment account still contains confidential client information.
Hint, shown before you answer in practice mode: Common mistake: Believing that removing a name alone always makes detailed account data anonymous.
XXI-A-142easyapplication
Q8A person involved with PMS receives confidential, material earnings information before public release. No legitimate-purpose or other exception is established. What is the appropriate response to a proposed personal trade based on it?
Option A. Trade only a small quantity because materiality depends solely on trade size
Why it is wrong: The question identifies the information as material. A small order is not a blanket permission.
Option B. Do not act on or improperly pass on the information, and escalate through compliance — Correct answer
Option C. Forward it to selected clients before the public announcement
Why it is wrong: Selective tipping can extend the misuse rather than resolve it.
Option D. Trade through a relative so that the recipient’s own name is absent
Why it is wrong: Using another account does not remove the information-misuse concern.
Answer: B. Controls over unpublished price-sensitive information address trading and improper communication, not merely whose account is used. The information is confidential and material, and it has not been publicly released. Do not use the proposed trade or selective disclosure to exploit it. Follow the applicable compliance process to determine restrictions and handling obligations. Remember: Changing the account or order size does not cure misuse of unpublished material information.
Hint, shown before you answer in practice mode: Common mistake: Assuming that indirect trading is acceptable when direct trading is not.
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Q9A dealer learns of a large confidential client purchase order and buys the same security personally beforehand, intending to sell after the client’s order affects the price. What practice is most directly illustrated?
Option A. Public-information value investing
Why it is wrong: The advantage comes from confidential order information rather than an independently researched public investment thesis.
Option B. Ordinary portfolio rebalancing for the client
Why it is wrong: The stated trade is personal and anticipates a client order rather than adjusting the client’s policy weights.
Option C. Front running — Correct answer
Option D. Hedging the client’s existing exposure
Why it is wrong: The dealer is seeking personal profit from the order’s impact, not an offsetting client hedge.
Answer: C. Front running involves exploiting advance knowledge of another order for a trading advantage. Identify the confidential client information and the dealer’s personal trade before the client order. The stated intention is to benefit from the later order’s price effect. That is different from authorised client implementation or a trade based solely on public analysis. Remember: Confidential order information must not become a personal trading opportunity.
Hint, shown before you answer in practice mode: Common mistake: Mistaking access to an order for permission to profit from it.
XXI-A-144mediumapplication
Q10Two connected accounts arrange offsetting trades with no genuine change in economic ownership, solely to create the appearance of active demand. What is the principal concern?
Option A. A legitimate dividend-reinvestment plan
Why it is wrong: The question does not describe putting paid-out income back into an investment.
Option B. Normal diversification across unrelated risks
Why it is wrong: Connected trades that cancel each other out do not spread money across different risks.
Option C. A reduction in all investors’ execution costs
Why it is wrong: Fake trading does not show a genuine cost benefit. It may also mislead other people in the market.
Option D. Artificial volume and misleading market activity — Correct answer
Answer: D. To judge market integrity, look at the economic purpose and effect of the trading. Do not just check that the trades appear on an exchange. Here, the two accounts are connected. The real owners keep the same exposure as before. The stated aim is to fake demand. These facts point to a market manipulation concern. A trading system can record a trade. That alone does not make its purpose legitimate. Remember: Visible volume is not necessarily genuine independent investment demand.
Hint, shown before you answer in practice mode: Common mistake: Treating exchange execution as proof that a trading pattern is proper.
XXI-A-145mediumapplication
Q11A firm’s stated AML procedure requires staff to escalate suspicious activity to the designated officer and keep any reporting confidential. A client asks a staff member whether a suspicious-transaction report is being filed. What should the staff member do?
Option A. Confirm the filing details to the client so that the client feels reassured
Why it is wrong: That conflicts with the stated confidentiality requirement.
Option B. Warn the client to change the transaction so that it will not be detected
Why it is wrong: That undermines the stated control and could facilitate evasion.
Option C. Delete the concern from the records if the transaction earns the firm a high commission
Why it is wrong: Commercial benefit does not override the required escalation process.
Option D. Follow the firm’s escalation and confidentiality process without tipping off the client — Correct answer
Answer: D. AML escalation and confidentiality should be handled through the designated process rather than through informal client discussions. The procedure assigns assessment and reporting responsibilities to the designated officer. Preserve records and follow that route. Do not reveal or help circumvent confidential reporting, and do not independently decide the underlying legal outcome. Remember: Escalate a concern through authorised channels while preserving reporting confidentiality.
Hint, shown before you answer in practice mode: Common mistake: Confusing courteous client communication with permission to disclose confidential reporting.
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Q12A client falls into a higher-risk category under a firm’s documented AML policy. The policy requires enhanced review and designated approval, not automatic rejection. What should the onboarding team do?
Option A. Skip the extra checks, because a wealthy client is presumed to be low risk anyway
Why it is wrong: Wealth does not remove the policy’s identified risk or review requirement.
Option B. Reject every higher-risk client outright, without considering the policy’s review process
Why it is wrong: That substitutes an automatic rule for the process expressly given in the question.
Option C. Complete the enhanced checks and get the required decision through the designated process — Correct answer
Option D. Approve the account automatically once the client has provided one identity document
Why it is wrong: A single document does not necessarily complete enhanced due diligence.
Answer: C. Risk-based due diligence adjusts the depth of review to identified risks while applying the organisation’s required decision process. Identify which additional checks and approvals the policy requires for the category. Complete and document them before the relevant onboarding decision. Higher risk is a reason for the stated assessment, not a conclusion that identity alone or automatic rejection suffices. Remember: Apply the actual enhanced-review process rather than assuming a universal accept-or-reject rule.
Hint, shown before you answer in practice mode: Common mistake: Treating a risk label as a substitute for evidence and documented review.
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Q13Under the client-consent arrangement in SEBI’s 16 July 2025 PMS master circular, a client expressly declines investments in the manager’s associates or related parties. What should the manager do?
Option A. Assume every related-party security is permitted because the manager is registered
Why it is wrong: Registration does not override the client-consent requirement.
Option B. Respect the dissent when constructing the client’s portfolio — Correct answer
Option C. Treat silence in a later marketing email as cancellation of the written dissent
Why it is wrong: An unrelated lack of response does not establish an informed change to the instruction.
Option D. Invest first and seek consent only after the holding gains value
Why it is wrong: Later performance does not replace the client’s decision or provide prior authority.
Answer: B. A related-party consent process addresses conflicts through informed client choices and applicable limits. The client’s recorded instruction is dissent, not consent within a selected limit. Keep those exposures outside the portfolio under the named framework unless a valid change is made through the appropriate process. Investment merit alone does not replace authorisation. Remember: Read the client’s actual consent or dissent, not merely the existence of a disclosure form.
Hint, shown before you answer in practice mode: Common mistake: Treating disclosure of a conflict as equivalent to the client consenting to it.
XXI-A-148mediumregulatory
Q14SEBI’s 24 September 2026 Board release says a proposal to introduce new Portfolio Managers Regulations was approved. Before presenting a proposed permission as operational, what should a distributor verify?
Option A. Only whether a news headline calls the reform approved
Why it is wrong: A headline cannot replace the legal rules on scope and start date.
Option B. The notified legal text, effective date and any implementing conditions — Correct answer
Option C. That every existing rule ceased to apply on the press-release date
Why it is wrong: You need the actual notification and transition rules to reach that view. You cannot just assume it.
Option D. Only whether the proposed permission would benefit the prospect
Why it is wrong: Being useful for business does not prove that the permission is in force.
Answer: B. Keep three pieces of evidence apart. The first is the regulator’s announcement. The second is the notified legal text. The third is the date the rule actually starts to work. Read what the announcement really says. It says a proposal to bring in a framework was approved. Before you apply a permission to a client transaction, check the notification that governs it. Check when it comes into force and what conditions apply. Also check the transition rules, which cover the move from old rules to new. Do not fill missing legal details with a date you assume. Remember: Check legal commencement and scope before turning an announced reform into an operational claim.
Hint, shown before you answer in practice mode: Common mistake: Treating Board approval as automatic proof that every proposed provision is already usable.
XXI-A-149hardapplication
Q15A client changes bank details but continues to expect payments using the old registered instructions. Which action best supports safe service administration?
Option A. Ask the distributor to alter records without any client authentication
Why it is wrong: This hands the change to the distributor without checking the request came from the client. That weakens the protection on payment instructions.
Option B. Notify the manager through the prescribed authenticated change process and retain confirmation — Correct answer
Option C. Send new details through an unverified message and assume they are effective immediately
Why it is wrong: An informal message may not pass the checks on identity and on changing instructions.
Option D. Wait for a failed payment before telling the manager about the change
Why it is wrong: Waiting can cause problems that could have been avoided. It also does not keep the records up to date.
Answer: B. Investors have duties. One is to give accurate information. Another is to use a secure, recorded process for important changes to instructions. So report the change through the manager’s approved process. Complete the checks it requires. Keep proof that the change was received. Then check later statements or payments. This supports safe running of the service. It does not assume that an informal message has changed the mandate. Remember: Keep material client details current through authenticated channels.
Hint, shown before you answer in practice mode: Common mistake: Assuming that sharing new bank details informally completes the official update.
XXI-A-150easyapplication
Regulatory, Governance and Ethical Aspects of Portfolio Managers: common questions
How many practice questions are there on Regulatory, Governance and Ethical Aspects of Portfolio Managers?
15 questions, all written out on this page with the correct answer and why each other option is wrong. This unit is one of the 12 practice topics for NISM Series XXI-A, which has 150 questions in total.
Are these real NISM Series XXI-A questions on Regulatory, Governance and Ethical Aspects of Portfolio Managers?
No. LearnNifty wrote every question from NISM's public syllabus. NISM does not publish its question bank, so nobody can offer you the real paper. Use these questions to check that an idea has gone in. Use the official NISM workbook to see what is examined.
Does negative marking apply to NISM Series XXI-A?
Yes. NISM takes off 10% of a question's marks for a wrong answer. On a 1-mark question that is 0.1 marks off. A blank question earns nothing and loses nothing, so a wrong guess costs marks on this paper. Timed practice here uses the same rule.
Are these practice questions kept up to date?
Each question is written against the rules printed on this page, last checked on 5 September 2026. A Budget or a SEBI circular can change a rate, a lot size or an expiry day. If one of those rules changes before your exam, treat the questions that use it as out of date. Then check NISM's current workbook.
Try a paper on all of NISM Series XXI-A
This is the last unit of Portfolio Management Services (PMS) Distributors. The series page runs one quiz across every unit.
Open the NISM Series XXI-A practice page