Unit study guide · NISM Series XXI-A
Regulatory, Governance and Ethical Aspects of Portfolio Managers
15 questions in this unit
What this unit covers
- A salesperson supplies a portfolio manager’s trading name and registration number. What is the most appropriate first verification step?
- Under SEBI’s 16 July 2025 PMS master circular, what should a person understand after passing the required NISM distributor examination?
- Which distributor-payment arrangement matches the ordinary requirements in SEBI’s 16 July 2025 PMS master circular?
- Under 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?
- A 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?
- A 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?
- A 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?
- A 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?
- A 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?
- Two 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?
- A 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?
- A 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?
- Under 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?
- SEBI’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?
- A client changes bank details but continues to expect payments using the old registered instructions. Which action best supports safe service administration?
Key ideas
From the practice bank · 1
A salesperson supplies a portfolio manager’s trading name and registration number. What is the most appropriate first verification step?
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 Common mistake: Checking a number without confirming that the salesperson represents the same entity.
XXI-A-136From the practice bank · 2
Under SEBI’s 16 July 2025 PMS master circular, what should a person understand after passing the required NISM distributor examination?
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 Common mistake: Confusing distributor certification with authorisation to act as a portfolio manager.
XXI-A-137From the practice bank · 3
Which distributor-payment arrangement matches the ordinary requirements in SEBI’s 16 July 2025 PMS master circular?
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 Common mistake: Assuming that disclosure alone makes any payment structure permissible.
XXI-A-138From the practice bank · 4
Under 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?
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 Common mistake: Treating a manager-funded commission as information the client need not know.
XXI-A-139From the practice bank · 5
A 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?
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 Common mistake: Treating disclosure as a substitute for suitability.
XXI-A-140From the practice bank · 6
A 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?
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, 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 Common mistake: Assuming that similar investments make repeated switching harmless.
XXI-A-141From the practice bank · 7
A 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?
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 Common mistake: Believing that removing a name alone always makes detailed account data anonymous.
XXI-A-142From the practice bank · 8
A 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?
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 Common mistake: Assuming that indirect trading is acceptable when direct trading is not.
XXI-A-143From the practice bank · 9
A 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?
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 Common mistake: Mistaking access to an order for permission to profit from it.
XXI-A-144From the practice bank · 10
Two 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?
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 Common mistake: Treating exchange execution as proof that a trading pattern is proper.
XXI-A-145From the practice bank · 11
A 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?
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 Common mistake: Confusing courteous client communication with permission to disclose confidential reporting.
XXI-A-146From the practice bank · 12
A 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?
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 Common mistake: Treating a risk label as a substitute for evidence and documented review.
XXI-A-147From the practice bank · 13
Under 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?
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 Common mistake: Treating disclosure of a conflict as equivalent to the client consenting to it.
XXI-A-148From the practice bank · 14
SEBI’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?
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 Common mistake: Treating Board approval as automatic proof that every proposed provision is already usable.
XXI-A-149From the practice bank · 15
A client changes bank details but continues to expect payments using the old registered instructions. Which action best supports safe service administration?
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 Common mistake: Assuming that sharing new bank details informally completes the official update.
XXI-A-150Liquidity describes how easily a given quantity can be traded.
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