An investment Adviser (“IA”) is a person who provides investment advice
concerning financial and investment products to its clients for consideration.
SEBI Investment Advisors Regulations, 2013 to govern the activities of investment advisors have been informed by the Securities and Exchange Board of India (SEBI). Certain amendments to the SEBI Registered Investment Advisor (Amendment) Regulations 2020, dated 3 July 2020, have been introduced.
The proposed changes shall apply from the 90th day following the date of publication in the Official Gazette, i.e. 1 October.
Let us understand, at the beginning, who an investment advisor is. An Investment Advisor is a person who provides his clients with investment advice related to investment products for consideration. Unless the individual is exempted from registration, SEBI Investment Advisor Regulations require any individual who works as an Investment Advisor or keeps himself as an Investment Advisor to register himself. These licensed persons or organizations are known as SEBI Registered Investment Advisors (RIAs).
A registered Investment Advisor (RIA) is a person or an entity that provides investment
advice to individuals. In the best interest of their clients, RIAs have a fiduciary responsibility
towards their clients to provide financial advice. RIAs are registered with the Securities and Exchange
Board of India (SEBI), a market regulator. They have more responsibility than mutual fund distributors
towards their clients.
Taking into account their priorities, finances, and their current position, RIAs prepare a financial plan for their investors. For their services, they even charge a fee. It is typically a flat fee and a continuing fee for the support they offer for the financial plan. The two forms of fees collected by RIAs are below:
Percentage of assets: This is equivalent to the Mutual Funds Trail Commission. The main difference, however, is that this fee is received directly from the customer, not from the house of the fund. The charges are dependent on the size of the properties. Usually, it is 1 percent of the assets, and the fee comes down as the asset base rises.
Flat rate: This is a fixed fee paid on an annual basis by the advisor. It is fixed by the investor and advisor’s mutual consent.
(A) (IA) investment adviser shall disclose to a prospective client, all material information about itself including its business, disciplinary history, the terms and conditions on which it offers advisory services, associating with other intermediaries and such other information as is necessary to make an informed decision on whether or not to avail its services.
(B) Investment adviser shall disclose to its client, any consideration by way of remuneration or compensation or in any other form whatsoever, received or receivable 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.
(C) Investment adviser shall, before recommending the services of a stockbroker or other intermediary to a client disclose any consideration by way of remuneration or compensation or in any other form whatsoever, if any, received or receivable by the investment adviser if the client desires to avail the services of such intermediary.
(D) Investment adviser shall disclose to the client its holding or position, if any, in the financial products or securities which are the subject matter of advice.
(E) Investment adviser shall disclose to the client 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 compromise its objectivity or independence in the carrying on of investment advisory services.
(F) Investment adviser shall, while making investment advice, make adequate disclosure to the client of all material facts relating to the key features of the products or securities, particularly, performance track record.
(G) The investment adviser shall draw the client’s attention to the warnings, disclaimers in documents, advertising materials relating to an investment product which it is recommending to the client.
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.
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