Distribution, Investor Protection, Ethical and Operational Practices
Domain 4 - Distribution, investor protection, ethical and operational practices
The exam tests how AIF units are sold, what a distributor may and may not say, and the operational ethics expected between distributor, manager and investor.
Distribution mechanics
AIF units are privately placed. Distribution is done by AIF distributors and authorised personnel holding the NISM Series XIX-C certification, under a written agreement with the manager, with no public advertising or mass solicitation. The offer must follow the PPM; no oral or written representation outside it.
Investor protection
- Minimum commitment ₹1 crore per investor (₹25 lakh for employees/directors of the manager); pooling money from several persons to cross the threshold is not permitted.
- Verify suitability: the investor must understand strategy, illiquidity, tenure, leverage and risk of capital loss; complete KYC/AML and FATCA documentation.
- Prohibited: any assurance or guarantee of returns, capital protection promises, or projected performance presented as fact.
- Disclose fees, distributor remuneration or trail, conflicts, exit and liquidity terms, valuation approach, tax treatment and key risks before subscription.
- Grievance path: manager's compliance officer, then SEBI SCORES; keep solicitation records and investor communications.
Ethics and operations
Fair treatment of all investors in a scheme; no side letters giving selective liquidity or valuation; no front-running or misuse of confidential investor information; no rebating of undisclosed commission; accurate books and a complete audit trail.
Worked example
A distributor tells a prospect that a Category II fund offers "capital protection with 15% IRR" and accepts ₹40 lakh from the client plus ₹40 lakh from the same client's HUF to build an ₹80 lakh ticket. Three failures: guaranteed-return representation, sub-₹1 crore ticket, and artificial pooling to meet the minimum. Each is independently reportable, and the manager must refuse the subscription.
Traps
The ₹1 crore test applies per investor, not per family or PAN group; past performance may be shown only for the same scheme, net of fees, with a clear statement that it is not indicative of future results; "assured returns" is never a marketing nuance - it is prohibited.