In India, investment advisers (“IAs”) are regulated by the Securities and Exchange Board of India (Investment Advisers) Regulations, 2020 (“Principal Regulations”). The Principal Regulations 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 an inspection, etc. Concerning IAs.

Via its gazette notification of July 03, 2020, the Securities and Exchange Board of India (SEBI) has notified amendments to these Principal Regulations. In January 2020, SEBI had issued a consultation paper on the review of the regulatory framework for IAs and sought comments from the public and stakeholders on the proposed changes.

The consultation paper proposed clear segregation between advisory, distribution, and execution services provided to a client by IAs. In the past, distribution and execution services have frequently been used interchangeably. After considering these issues in its consultation paper, SEBI has approved the proposals on supervisory changes and accordingly notified the SEBI (Investment Advisers) (Amendment) Regulations, 2020 (“Amendment Regulations”). The Amendment Regulations 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). The aim is to briefly summarize the key regulatory changes, which have been introduced by way of the Amendment Regulations.

Regulation 22 has been amended to segregate advisory and distribution activities at the client level to avoid conflict of interest. An individual IA shall not provide distribution services. Further, the family of an individual IA shall not provide distribution services to the client advised by the individual IA and no individual IA shall provide advice to a client who is receiving distribution services from other family members.

The Amendment Regulations define a “non-individual” as a body incorporated including a limited liability partnership and a partnership firm. A non-individual IA shall have client level segregation at the group level for investment advisory and distribution services. The Amendment Regulations clarify that the same client cannot be offered both advisory and distribution services within the same group of the non-individual entity. A client can either be an advisory client where no distributor consideration is received at the group level or can be a distribution services client where no consideration is collected from the client at the group level. A non-individual IA is required to maintain an arm’s length relationship between its activities as IA and distributor by providing advisory services through a separately identifiable department or division. The compliance and monitoring process for client segregation at the group or family level shall be by the guidelines as specified by the SEBI.

The newly inserted regulation 22A states that an IA may provide implementation or execution services to the advisory clients in the securities market provided that no consideration including any commission or referral fees, whether embedded or indirect or otherwise, by whatever name called is received, at IA’s group or family level for the said service, as the case may be. Further, implementation amenities can be provided only through direct schemes/products in the securities market. The IA or group or family of IA shall not charge any implementation fees from the client and the client shall not be under any obligation to avail of implementation services offered by the IA.

Regulation 19(1)(d) makes it mandatory for an agreement to be executed between the IA and client for ensuring greater transparency concerning advisory services.

Regulation 15A states that the IA is authorized to charge fees for providing investment advice, from a client, in the manner as detailed by SEBI.

Regulation 8 has been substituted to improve the eligibility criteria for registering as an Investment Advisor. The minimum net worth of non-individuals IAs should be Rs. 50,00,000/- (Rupees Fifty Lakh Only) and for individual IAs, it should be Rs. 5,00,000/- (Rupees Five Lakh Only). Further, existing IAs should fulfill the net worth requirement within 3 (three) years from the date of the beginning of the Amendment Regulations. Further, regulation 13(e) has been inserted which states that registered individual IAs whose number of clients exceeds 150 (One Hundred and Fifty) in total, shall apply for registration with SEBI as a non-individual IA within such time as may be specified by SEBI.

Regulation 3 states that on and from the date of commencement of the Amendment Regulations, no person dealing in the distribution of securities shall use the nomenclature “Independent Financial Adviser or IFA or Wealth Adviser or any other similar name” unless registered with SEBI as an IA.

IA has to maintain and preserve all records either in physical or electronic form as prescribed under Regulation 19 for a minimum period of five years or in case of dispute, till resolution of the dispute, as the case may be.

As per the Guidelines issued by SEBI, IA shall also be required to maintain all interactions regarding any investment advice provided to any client including the prospective client. This would in turn facilitate transparency in the functioning of IAs.

Regulation 16 and 17 of IA Regulations mandates risk profiling and suitability for all categories of clients. IA has to obtain all necessary information from clients as prescribed under Regulation 16 for developing a risk profile of the client. Before advising any client, IA has to assess the potential risk by taking into consideration the risk absorption capacity of the client, risk of loss of capital, and other such factors.

In the case of non-individual clients, IA shall use the investment policy as approved by the board/management team of such non-individual clients for risk profiling and suitability analysis. It is the option for the non-individual client to share the investment policy. However, IA shall have discretion not to onboard non-individual clients in the absence of investment policy/or other relevant facts as required by IA for risk profiling and checking suitability.

To protect the interest of investors and prioritize investors’ interest over the interest of IA, SEBI has provided certain website disclosures to be made by IA. IAs shall display all such information, as provided under Guidelines, on its website, mobile app, printed or electronic materials, know your client forms, client agreements, and other correspondences with the clients.

IApart from the significant regulatory changes as defined above, Regulation 7 has been amended to provide for enhanced professional or postgraduate 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 do not apply to such existing IAs as specified by SEBI. The Amended Regulations also make further amendments to Form A in the First Schedule of the Principal Regulations, which deal with an application for grant of certificate of registration/renewal as an IA. Via its press release dated July 03, 2020, SEBI has explained that the guidelines dealing with various other issues like key terms and conditions of investment advisory services agreement, modes of charging a fee, periodicity, etc. Will be separately detailed through a circular.