SEBI (Investment Advisers) Regulations, 2013

Objective:

To solicit the comments/clarification/views from public on the consultation paper proposing amendments to the SEBI (Investment Advisers) Regulations, 2013 (hereinafter referred as “IA Regulations”). The objective of consultation paper is to specify uniform standards across all the intermediaries/persons engaged in providing investment advisory services irrespective of whether such activity is incidental to their primary activity or not and to address the gaps or overlaps in legal or regulatory standards.

Background:

IA Regulations were notified on January 21, 2013. The object of IA Regulations, inter alia, was to lay the framework for independent financial advisors and to address the conflict of interest arising due to the dual role played by distributors of financial products. To address such conflicts, IA Regulations specified that the investment adviser shall :

Act in a fiduciary capacity towards its clients and shall disclose all conflicts of interest as and when arise.
Not received any consideration by way of remuneration or compensation or in any other form from any person other than the clients being advised, in respect of the underlying products or securities for which advice is provided.
Maintain an arms-length relationship between its activities as an investment adviser and other activities.
Disclose to its clients, any consideration by way of remuneration or compensation or in any other form whatsoever, received or received by it or any of its associates or subsidiaries for any distribution or execution services in respect of the products or securities for which the investment advice is provided to the client.
Disclose to its clients any actual or potential conflicts of interest arising from any connection to or association with any issuer of products/securities, including any material information or facts that might comprise its objectivity or independence in the carrying on of investment advisory services.

As on September 28, 2016, 515 investment advisers are registered with SEBI.

Recent Development:

RBI, vide circular dated April 21, 2016, issued guideline on investment advisory services offered by banks. It is inter alia stated in the guidelines that the banks cannot offer investment advisory services departmentally. Accordingly, banks desirous of offering investment advisory services may do so either through a separate subsidiary set up for the purpose or one of the existing subsidiaries after ensuring the there is an arm-length relationship between the bank and the subsidiary.
AMFI in consultation with SEBI has clarified that the data feed of the investors who subscribe to direct plan on the advice of the investment advisers may be shared with such investment advisers after taking the explicit written consent of the investors.
Globally, many regulators of the countries such as United Kingdom, United States of America, Australia, Canada, etc. are in the process of moving towards fee based investment advisory model.

Proposals:

The amendments/clarifications proposed to the IA Regulations are enumerated as under:

Relook on the exemption from registration provided to Mutual Fund Distributors:

Regulation 4(d) of the IA Regulations, inter alia, provides exemption from registration as an investment adviser to any distributor of mutual funds, who is a member of a self-regulatory organization recognized by SEBI or is registered with an association of asset management companies of mutual funds, providing any investment advice to its clients incidental to its primary activity.
Under the existing framework, a mutual fund distributor can sell mutual fund products and also provide incidental or basic advice on mutual fund products and can also help in executing the transactions. Such distributors are required to conduct risk profiling and comply with the requirement of appropriateness of the product. Distributors are getting the commission from the fund houses i.e. AMC’s and additionally can also charge execution/advisory fee to the client.
In term of IA Regulations, investment advisers are not allowed to sell any product and/or to provide execution services. Only corporate entities registered as investment adviser can offer execution or distribution services, subject to the condition that the investment advisory services are offered through separate identified division or department. Such entities are required to keep their investment advisory services clearly segregated from other activities and shall be required to maintain arms-length relationship between their activity as an investment adviser and other activities. Further, investment adviser can obtain consideration/fee from the client being advised only and is required to comply with the higher requirements than that of distributors such as fiduciary obligation, maintenance of records, etc.

Re-look on the exemptions from registration provided to certain persons engaged in providing investment advice:

Under the existing framework, exemption from registration as an investment adviser have been granted to various persons under Regulation 4 of IA Regulations, such as any person giving incidental advice to their clients, stock brokers, portfolio managers, chartered accountants, company secretaries, etc.
All the persons engaged in financial planning services shall mandatorily be required to register themselves as investment adviser.
Exemption shall be applicable only to the persons carrying out investment advisory activities which are permitted under any other regulations specified by SEBI such as merchant bankers registered with SEBI can render corporate advisory services etc. and to the persons providing advice only on insurance products regulated by IRDA, pension products regulated by PFRDA, etc.

Investment advisory services through a separate subsidiary:

Under the existing framework, individuals registered as investment adviser are not allowed to provide distribution, referral or execution services as it is not practically possible for them to maintain segregation between advisory activities and other activities.
RBI has issued circular dated April 28, 2016 on investment advisory services offered by Banks. It is, inter alia, stated in the guidelines that banks desirous of offering investment advisory services may do so either through a separate subsidiary set up for the purpose or through one of the existing subsidiaries after ensuring that there is an arm-length relationship between bank and the subsidiary.

Clarification in respect of investment product and advice in electronic/broadcasting media:

In terms of Regulation 2(i) of IA Regulations, “investment advice” means advise relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products, whether written, oral or through any other means of communication for the benefit of the client and shall include financial planning.

Provided that investment advice given through newspaper, magazines, any electronic or broadcasting or telecommunications medium, which is widely available to public shall not be considered as investment advice for the purpose of IA Regulations.

Restrictions on providing Trading tips:

It is observed that, many persons are engaged in providing/sending the trading tips/securities specific recommendations, etc. using various electronic modes such as bulk- short message services (SMSs), e-mails, blogs, internet or through any other social networking media such as WhatsApp, ChatOn, WeChat, Twitter, Facebook, etc. The general public is getting attracted or lured by such trading tips, securities specific recommendations and their investment decisions are being influenced by such message which solicit investments and/or promise unrealistic return in the securities market.

Restrictions on offerings or organizing schemes/competitions/games related to securities market:

It is observed that various entities are offering schemes/competitions/games/leagues, etc. related to securities market through various modes and/or soliciting public participation thereon. Such schemes/competitions/games/leagues etc. are generally based on predicting the price movement of securities and are neither approved nor endorsed by SEBI. There is no recourse available to investors from SEBI with regard to loss in competition, etc.

Clarification in respect of receipt of consideration:

The term consideration is being misinterpreted. The persons engaged in providing investment advisory services without obtaining consideration from the clients directly are of the view that their activity does not fall under the purview of IA Regulations, as they are not taking any consideration from the client being advised.

It is proposed to clarify that, consideration covers all forms of remuneration or compensation including the receipt of any economic benefit, whether in the form of advisory fees, some other fee relating to the total services rendered, commission received or receivable by an investment adviser or any of its associates or subsidiaries either directly or indirectly in respect of the underlying products or securities for which advice is being provided.

Clarity on the compliance audit requirement:

In terms of Regulation 19(3) of IA Regulations, an investment adviser shall conduct yearly audit in respect of compliance with these regulations from a member of Institute of Chartered Accountants of India or Institute of Company Secretaries of India.
In order to provide clarity in respect of compliance audit requirement, it is proposed that the compliance audit shall be completed within 3 months after end of financial year and adverse observances or comments, if any, shall be brought to the notice of SEBI.

Clarity on mode of acceptance of fees:

In terms of IA Regulations, investment adviser shall ensure that fees charged to the clients is fair and reasonable. IA Regulations do not specify the mode of payment of It is observed that many investment advisers are receiving advisory fee in the form of cash deposit.
It is therefore, proposed that an investment advisor shall accept fees strictly by account payee crossed/cheque /demand draft or by way of direct credit into bank account through NEFT/RTGS/IMPS or any mode allowed by RBI.

General Obligations of the Investment Adviser:

The investment adviser shall act in a fiduciary capacity towards its clients and shall disclose all conflicts of interests as and when they arise;

The investment adviser shall provide suitable investment advice to the client which is in best interest of the client after assessing risk profile of the client;

The investment adviser shall disclose the following information /details to the client before accepting advisory fee from the client:

Scope of services to be provided by the investment adviser subject to the activities permitted under IA Regulations;

type of instruments for which advice is proposed to be provided;

tenure of the services;

fees payable to the investment adviser and the quantum and manner thereof;

Disclosure on performance fee, if any;

risks involved;

liabilities and obligations relating to advisory services;

Disciplinary history;

Settlement of grievances/disputes and provision for arbitration;

any other information relevant to IA Regulations.

The investment adviser shall clearly and concisely state the terms and conditions of investment advisory services being provided for easy understanding of the potential client.

The investment adviser shall charge an agreed fee from the clients for rendering investment advisory services without guaranteeing or assuring, either directly or indirectly, any return.

The ‘Rights and Obligations’ document shall contain the following risk factors:

investments in securities are subject to market risks and there is no assurance or guarantee that the objective of the investments will be achieved.

past performance of the investment adviser does not indicate its future performance.

The investment adviser shall obtain an acknowledgement from the client that he has read and understood the terms and conditions of the advisory services and fee structure.

Termination of Relationship:

The relationship between the investment adviser and the client shall be terminated if the registration as an investment adviser is cancelled by SEBI for any reason including voluntary surrender of registration, death, expulsion, etc.
The investment adviser and the client shall be entitled to terminate the relationship between them after giving notice in writing of not less than one month to the other party. Notwithstanding any such termination, all rights, liabilities and obligations of the parties arising out of or in respect of transactions entered into prior to the termination of this relationship shall continue to subsist and vest in/be binding on the respective parties or his/its respective heirs, executors, administrators, legal representatives or successors, as the case may be.
In case the clients are not satisfied with the services being provided by the investment adviser and want to terminate/ stop the advisory services or the investor adviser is unable to provide the advisory services, either party shall have a right to terminate the advisory relationship at any time subject to refund of the proportionate advisory fee.

The investment adviser can add additional clauses in the ‘Rights and Obligations’ document which are not in contravention with the aforesaid clauses and provisions and circulars issued under IA regulations.

Display of details on website:

It is observed that many investment advisers are providing investment advisory services through websites without disclosing their details in a proper manner and thereby creating confusion to the investors with regard to authenticity of their registration.
It is, therefore, proposed that all investment advisers shall display more prominently their name as registered with SEBI, registration number, validity of registration, own logo, if any, and complete address with telephone numbers on its portal /web site, if any, notice / display boards, advertisements, publications, know your client forms, client agreements and correspondences with the clients.

Restriction on providing free trial trading tips:

It is observed that many investment advisers are engaged in providing free trial trading trips for two to three days to prospective clients without considering whether such advice is suitable to them.
Such free trial services are being provided to the prospective clients without any thorough analysis of their needs and without considering the risk profile of the client and suitability of the product and the same may not be in their best interest.
In order to curb the practice of providing free trial trading tips, it is proposed that investment adviser shall not be allowed to provide free trial of trading tips to prospective clients.

Online Investment Advisory Services and Use of Automated Tools:

It is proposed that the investment advisers providing online investment advisory services using automated tools, shall ensure the following compliance requirements in addition to the compliance with the existing provisions of IA Regulations:

ensuring that the automated tools used are fit for the purpose;

robust systems and controls to be in place to ensure that any advice made using the tool is in the best interest of the client and suitable for the clients;

automated tool is to be used only for the target clients, for which it is designed;

disclosure to the clients in relation to how the tool works and its limitations of the outputs it generates;

comprehensive system audit requirements are put in place;

Investment adviser using the tool shall be held responsible for the advice;

The automated tools used by the advisers shall also be subject to audit and inspection.