SEBI Investment Advisors Amendment Regulations 2020

SEBI Investment Advisors Amendment Regulations 2020

The Securities Exchange Board of India recently vide PR No. 37/2020 notified of the amendments to the SEBI (Investment Advisors) Regulations, 2013. The Investment advisors amendment is aimed to strengthen the regulatory framework for investment advisors.

Overview of the SEBI Investment Advisors Amendment

In India, investment advisers (“IAs“) are regulated by the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 (“Principal Regulations“). The Principal Regulations inter alia specify conditions for registration, certification, capital adequacy, risk profiling and suitability, disclosures to be made, code of conduct, records to be maintained, manner of conducting inspection etc. with respect to IAs. Vide its gazette notification of July 03, 2020, the Securities and Exchange Board of India (SEBI) has notified amendments to these Principal Regulations1 .

Earlier, in January, the Securities and Exchange Board of India had floated a consultation paper on review of the regulatory framework for investment advisors and asked for public comments on it. The consultation paper had created speculations among the RIA community concerning the fact of how this new regulatory regime would come forth, considering the challenging and competitive environment.

In January 2020, SEBI had issued a consultation paper on review of regulatory framework for IAs and sought comments from the public and stakeholders on the proposed changes. The consultation paper largely sought to propose clear segregation between advisory, distribution and execution services provided to a client by IAs.

On 3^rd July, the speculations were put to rest when the market regulator (SEBI) came out with the final version of the amendment to SEBI Investment Advisors Regulations, 2013. The notification states that the amendments are slated to come into force on the nineteenth day from the date of publication in the official gazette. The amendments are expected to further strengthen the regulatory framework for Investment advisors.

In the past, distribution and execution services have often been used interchangeably. After considering these issues in its consultation paper, SEBI has approved the proposals on regulatory changes and accordingly notified the SEBI (Investment Advisers) (Amendment) Regulations, 2020 (“Amendment Regulations“). The Amendment Regulations inter alia provide clarity on the segregation of advisory services from distribution services and distinguish between distribution and execution services. The Amendment Regulations shall come into force on the ninetieth day from the day of their publication in the official gazette (i.e. July 03, 2020). This article aims to briefly summarize the key regulatory changes, which have been introduced by way of the Amendment Regulations.

Highlights of the SEBI Investment Advisors Amendment

The main highlights of the recent amendment to SEBI (Investment Advisors) Regulations are as follows:

Eligibility criteria for investment advisors

• Enhanced eligibility criteria for registration as an Investment Adviser including net worth of Rs.50 lakhs for non-individuals and Rs. 5 lakhs for individuals.
• Individual investment adviser or a principal officer of a non-individual investment adviser to have enhanced professional or post-graduate qualification in relevant subjects and relevant experience of five years while grandfathering existing Individual Investment Advisers from complying with the enhanced qualification and experience as specified by SEBI.
• Individuals registered as investment advisers whose number of clients exceed 150 in total, shall apply for registration with SEBI as non-individual investment adviser.

The investment advisors’ eligibility criteria include qualification and net worth requirements. SEBI has amended the qualification and net worth requirement with the Investment advisors amendment.

Eligibility criteria for registering as investment advisor has been enhanced with a net worth of 50 lakh rupees for non-individuals and 5 lakh rupees for individuals.

The individual investment advisors or principal officers of a non-individual investment advisor to have enhanced professional or postgraduate qualification in relevant subjects. Relevant experience of five years is also required while grandfathering exiting individual investment advisors from complying with the enhanced qualification and experience as prescribed by the SEBI .  The requirement of certification in financial planning remains the same.

In case where an individual registered as an individual investment advisor has over 150 clients, then he is required to opt for non-individual investment advisor registration.

It is also noteworthy to state here that the Securities and Exchange Board of India has inserted regulation 3(3), which mentions that anyone except investment advisors registered with SEBI dealing in the distribution of securities will not use “Independent Financial Advisor” or wealth advisor or such other name.

Segregation of Advisory and Distribution Activities

According to regulation 15 (5) of the Investment Regulations, Investment advisors are required to disclose all conflict of interest that pops up while advising its clients. There can be instances where the investment advisors would advise to invest in products that fetch maximum commission. So in order to overcome such a situation, investment advisors are required to disclose conflict of interests. Segregation of Advisory and Distribution Activities to be at the client level with a view to avoiding conflict of interest. The individual investment advisor to have an option to register as an investment advisor or has the option to provide distribution services as a distributor.

In case where a non-individual investment advisor has a clear mechanism, and he also maintains an arm’s length relationship between advisory and distribution services, he can continue with both.

Implementation Services

Investment advisors offer implementation services to their clients, which means the execution of advice provided to the client by charging reasonable consideration. SEBI has emphasized the fact that whether to avail implementation services will be based on the choice of the client, and the investment advisors cannot force its clients to avail the services.

As per the Investment advisors amendment, Investment advisors are permitted to provide implementation services (Execution) through direct schemes or products in the securities market. However, it may be noted that no consideration can be received either directly or indirectly at the investment advisor’s group or family for these services. Investment advisors or group or family of investment advisors cannot charge any consideration, including commission or referral fees for giving implementation services. SEBI has mandated the investment advisors to provide a declaration that no consideration shall be charged for implementation services.

Agreement between investment advisors and client

Under regulation 19, an investment advisor is required to maintain a copy of the agreement with the client with other records prescribed under the regulation. The requirement of the agreement was not mandatory under the erstwhile regulations; therefore, many clients were not aware of the terms and conditions of the advisory services that they received from investment advisors.

SEBI also received numerous complaints against investment advisors regarding their unfair practices such as charging high advisory fees, promising false returns, non-disclosure of fees, etc. Moreover, in the case where there is no agreement between advisor and clients, the client may not be able to prove his claim.

Hence, now there is a requirement for mandatory agreement between investment advisors and clients. It will help in ensuring greater transparency in advisory activities. A circular concerning minimum mandatory term to be incorporated in the agreement is awaited.

Fees

The fee to be charged by the investment advisor shall be as per the manner prescribed by the Securities Exchange Board of India. The circular regarding the same is awaited.

Audit Compliance Report

Audit compliance is now required to be submitted to the Securities and Exchange Board of India. A circular concerning the timeline of the same is awaited.  This change in the annual compliance audit requirement was essential as this is the only report submission of which has been made necessary for an RIA.

In Summary- Following are the key highlights:

• Eligibility criteria for registration as an Investment Adviser including net worth of Rs. 50 lakhs for non-individuals and Rs. 5 lakhs for individuals
• Segregation of Advisory & Distribution Activities at client level to avoid conflict of interest.
• For individual investment advisor there is an option to register as an Investment adviser or provide distribution services as a distributor.
• If a non-individual investment adviser has a clear mechanism and also he maintains an arm’s length relationship between advisory and distribution services, he can continue with both.
• Investment Advisers are allowed to provide implementation services (Execution) through direct schemes/ products in the securities market. However, no consideration can be received directly or indirectly, at investment adviser’s group or family level for these services.
• Mandatory Client agreement between the Advisor and client
• Annual Compliance Audit to be mandatorily submitted to SEBI
• Fee charge by investor advisor shall be as per the manner prescribed by SEBI
• If an individual registered as an individual investment advisor has more than 150 client then he will have to opt for Non- individual investment advisor registration
• Individual investment adviser or a principal officer of a non-individual investment adviser to have enhanced professional or post-graduate qualification in relevant subjects and relevant experience of five years while grandfathering existing Individual Investment Advisers from complying with the enhanced qualification and experience as specified by SEBI

SEBI : Fraudulent trading activities in the name of prominent SEBI registered financial institutions.

• Investors and intermediaries have been complaining to SEBI regarding fraudulent trading activities carried out in the names of well-known financial firms that are registered with SEBI.
• Impersonators use messaging applications and social media sites like Facebook, WhatsApp, and others to carry out their fraudulent schemes and activities. To entice the investors, these impersonators offer alluring guarantees of large profits. Investors download the app and use it to make investments because they think they are working with reputable registered intermediaries. These investments, however, never really happen on stock exchanges or depository systems. When investors attempt to withdraw significant amounts of securities, the application abruptly stops working.
• Investors are cautioned against falling for these phoney investment programmes and apps that guarantee astronomical profits. Investors are also encouraged to check the details of registered CDSL Depository Participants by visiting the following link on the CDSL website.
• Additionally, a few of the DPs offer investors online demat account services including online holding/transaction statements, online account opening, etc. You can also use your DP’s online closure feature if it offers a variety of online depository-related services.

Link for verification of registered investment advisors: https://www.sebi.gov.in/sebiweb/other/OtherAction.do?doRecognisedFpi=yes&intmId=13

Conclusion

The SEBI Investment Advisors Amendment is expected to regulate the role of Investment advisors, and the glaring gaps that were visible earlier are expected to be filled with these amendments.

Apart from the key regulatory changes as described above, Regulation 7 has been amended to provide for enhanced professional or post-graduate qualifications of the IA or a principal officer of a non-individual IA registered as an IA in relevant subjects with relevant experience. However, these qualification requirements shall not apply to such existing IAs as may be specified by SEBI. The Amended Regulations also make further amendments to Form A in First Schedule of the Principal Regulations, which deal with application for grant of certificate of registration/renewal as an IA. Vide its press release dated July 03, 2020, SEBI has clarified that the guidelines dealing with various other issues like key terms and conditions of investment advisory services agreement, modes of charging fee, periodicity etc. will be separately specified through a circular2.

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