Unit study guide · NISM Series V-D
Legal and Regulatory Framework
7 questions in this unit
What this unit covers
- Which statement correctly distinguishes SEBI from AMFI in the mutual-fund context?
- A distributor proposes the advertisement: “This market-linked equity fund earned 18% last year, so your investment will earn at least 18% next year.” What is the main defect?
- Two funds are available, but only Fund A fits the client’s short investment horizon and risk needs. Fund B pays the distributor more commission. What is the appropriate recommendation approach?
- An AMC reviews a distributor’s sales process, complaint handling and controls before continuing the relationship. What is the primary purpose of this due diligence?
- An investor has first raised a service complaint with the mutual fund and remains dissatisfied with the response. Which platform is specifically associated with SEBI’s investor-complaint redressal mechanism?
- A client has authorised a purchase of Fund P. A distributor believes Fund Q will perform better and submits a purchase of Q without obtaining fresh client authority. What is the most important problem?
- A fictional ₹100 crore scheme has internal limits of 8% per issuer and 15% per corporate group. It holds ₹6 crore in Issuer A and ₹14 crore across A’s group. It proposes buying another ₹2 crore of A using existing cash, with total scheme assets unchanged. Which conclusion follows? Assumptions: The 8% and 15% limits are fictional internal limits, not current statutory thresholds.
Key ideas
From the practice bank · 1
Which statement correctly distinguishes SEBI from AMFI in the mutual-fund context?
SEBI regulates the securities market, including mutual funds within its remit. AMFI performs industry-association functions and supports standards and practices. Remember: Regulatory oversight and industry coordination are distinct roles.
Hint Do not confuse an industry body with a statutory regulator.
V-D-013From the practice bank · 2
A distributor proposes the advertisement: “This market-linked equity fund earned 18% last year, so your investment will earn at least 18% next year.” What is the main defect?
A past return does not establish a minimum future return for a market-linked scheme. The proposed statement could mislead an investor about uncertainty and downside risk. Remember: Performance communication must not imply certainty that the product does not provide.
Hint Check the step from what happened to what is promised.
V-D-014From the practice bank · 3
Two funds are available, but only Fund A fits the client’s short investment horizon and risk needs. Fund B pays the distributor more commission. What is the appropriate recommendation approach?
A higher commission does not make an unsuitable scheme suitable. The distributor should base the recommendation on the client’s needs and communicate relevant conflicts clearly. Remember: Commercial incentives must not displace a suitability assessment.
Hint The investor’s objective remains the starting point.
V-D-015From the practice bank · 4
An AMC reviews a distributor’s sales process, complaint handling and controls before continuing the relationship. What is the primary purpose of this due diligence?
Due diligence evaluates how the distributor operates, including risks in sales and servicing. It is a control process, not a guarantee of investment performance. Remember: Sound distribution depends on both competence and conduct.
Hint Focus on the quality of the distribution process.
V-D-016From the practice bank · 5
An investor has first raised a service complaint with the mutual fund and remains dissatisfied with the response. Which platform is specifically associated with SEBI’s investor-complaint redressal mechanism?
SCORES is SEBI’s system for lodging and tracking eligible investor complaints. The investor should preserve the complaint record and follow the applicable escalation process. Remember: Use the designated complaint route and retain supporting evidence.
Hint Identify SEBI’s complaints system, not a trading or valuation tool.
V-D-017From the practice bank · 6
A client has authorised a purchase of Fund P. A distributor believes Fund Q will perform better and submits a purchase of Q without obtaining fresh client authority. What is the most important problem?
The distributor should execute the instruction that was actually authorised. If a different product is proposed, it requires an appropriate discussion and valid authority before the transaction. Remember: Accurate consent and records are essential even when intentions are favourable.
Hint Separate the authority to transact from an opinion about performance.
V-D-018From the practice bank · 7
A fictional ₹100 crore scheme has internal limits of 8% per issuer and 15% per corporate group. It holds ₹6 crore in Issuer A and ₹14 crore across A’s group. It proposes buying another ₹2 crore of A using existing cash, with total scheme assets unchanged. Which conclusion follows? Assumptions: The 8% and 15% limits are fictional internal limits, not current statutory thresholds.
Issuer A would be ₹8 crore/₹100 crore = 8%, while the group would be ₹16 crore/₹100 crore = 16%. The group exceeds its 15% cap even though the issuer is at its permitted maximum. Remember: Each applicable concentration constraint must be checked separately.
Hint Add the purchase to both the issuer exposure and the group exposure.
V-D-019