SEBI Investment Advisors Amendment Regulations 2020

Ashish M. Shaji

19 Jan, 2021

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

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.

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.

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

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^[1].  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.

Conclusion

Also, read: A Brief Overview on Risk profiling by Investment Advisors