Sebi Amendment to Investment Advisors Regulation 2024 & What It Means For Investment Advisers & Research Analysts?
Introduction
Recently, the Securities and Exchange Board of India (“SEBI”) issued amendments to the SEBI (Investment Advisers) Regulations, 2013 and SEBI (Research Analysts) Regulations, 2014 dated 16 December 2024 (Amendments) and has revised the regulatory framework for Investment Advisers and Research Analysts in India.
On 8 January 2025, SEBI issued two circulars in respect of the Amendments titled Guidelines for Investment Advisers (Circulars) and Guidelines for Research Analysts (Circulars) also in furtherance of the Amendments, providing detailed guidelines to the regulatory framework for Investment Advisers and Research Analysts.
This introduction of the Amendments and Circulars is according to the SEBI Consultation Paper on Review of Regulatory Framework for Investment Advisers and Research Analysts dated 6 August 2024 (Consultation Paper).
Through this blog, the author will discuss the key highlights of the amendments and their impact on the Indian Landscape.
Major Highlights
The amendments and circulars mark a decisive departure from the prior regulatory regime concerning the requirements for registering Investment Advisers and Research Analysts, the scope of the investment advice/services that can be provided, the threshold for net worth, fees, etc. Apart from the above the amendments and circulars have also been spelt out regarding several new concepts such as part-time registration of Investment Advisers / Research Analysts, appointment of independent professionals as compliance officers, etc. A few of the key highlights and their impact that will be discussed are:
1.Relaxation of the standards for acquiring registration: Minimum qualification for an individual Investment Adviser / Research Analyst or a principal officer of a non-individual Investment Adviser / Research Analyst is reduced from a postgraduate degree to a graduate degree either in the specified field of investment advising / research advising or ancillary field. The minimum qualification for the persons associated with investment advice/research services has been reduced to a graduate degree in any discipline.
In addition, the experience requirement of five years in activities about the advice of financial products or securities or fund or asset or portfolio management for an individual Investment Adviser / Research Analyst and/or a Principal Officer of a non-individual Investment Adviser / Research Analyst has been deleted.
2. Registration on a part-time basis: Partnership firms and individuals in other business activities other than securities or employment (i.e. they are not involved in the securities industry or employment), may apply for registration as a part-time Investment Adviser / Research Analyst subject to obtaining a no objection letter from their employer and declaration that business of Investment Adviser / Research Analyst will be kept separate from any other business activity.
These disclosures must be made that neither their other business activities nor their employment are under the purview of SEBI, and that no complaint can be raised about what they do — or do not — do at work against SEBI.
It has been made clear to an explicit extent that persons who, without the approval of SEBI, claim, or purport to offer investment advice and make claims of returns on securities (Finfluencers), persons advising or advising on assets that include gold, real estate, cryptocurrency etc., shall not be qualified to be registered as the part-time Investment Adviser /Research Analyst.
3. Disclosure of AI Use: Another important requirement is the mandatory reporting of applications that use artificial intelligence (AI) techniques. It is increasingly necessary for RAs and IAs to concisely and clearly state the extent to which AI tools are incorporated into their services. This new legislation demonstrates SEBI’s dedication to improving technical transparency and helping clients comprehend the technology foundations of financial advice.
Challenges that are being posed due to the changes and their Solutions
Part-time Professionals: Securities Market is a very dynamic and fast market; hence, there should be a saturation in terms of compliance focus and focus on catering for client needs as well as to serve the market with the right quality.
If they allow part-time professionals, professionalism and accountability to be diluted. For instance, medical and law professions are professions where the risk is roughly the same or even higher, and they hardly ever have part-time engagements because of the responsibility of such roles. For that reason, advisors must also stay focused on their duty of care—a way of doing business full time in the securities market.
The ‘client first principle’ should be the rigorous fiduciary standard that has to be applied to the IAs. Such standards would focus on the interest of clients rather than the interest of the advisor or their organization. A good lesson can be learned from the United Kingdom’s Financial Conduct Authority regulations that enforce very strict fiduciary duties on financial professionals. Such steps are desirable for tracking dual employment and keeping conflict of interest apart that would keep the securities market transparent and accountable.
Relaxation of Eligibility Criteria: Eligibility criteria of IAs have been relaxed for graduates of all disciplines to encourage graduates of all different disciplines in the market, as an attempt to promote graduates in all different skills that the market needs. Yet, a ‘finance degree’ to ‘graduate in any discipline’ would risk dilution of quality unless compensated with additional training.
This might cause investors to get lousy advice. For instance, in the United States, the role is granted to candidates from all disciplines for being financial advisor only after they clear their qualification exams like the Series 7 or Series 65. In a similar manner, there should similar mechanisms to be adopted by SEBI as without these measures, the advice given into the market will be subpar, reduced investor trust and a “race to the bottom” in service quality is a danger.
AI Regulation: Mandatory AI tool usage regulation is a useful instrument to promote the use of ethical AI and ensure that the clients are informed about the presence of automated decision-making systems. But, such proprietary AI systems could turn out to be a possible competitive disadvantage for the firms. For example, an algorithmic methodology or disclosure of outputs may expose trade secrets, which would also lead to such anticompetitive activities.
Hence, SEBI needs to demarcate the extent of such disclosures; Ideas could be taken from the approach of the European Union’s AI Act towards regulating AI systems without harming innovation can be observed in their approach to AI that has the potential to be high risk, encouraging transparency in that context while not stifling proprietary algorithms.
While SEBI wants to keep an eye on how AI is used and wants the disclosure of it, SEBI does not have clear rules about how to protect the ethical use of AI or data privacy. Unlike in the United States, where even though there is no particular AI rule, the Securities and Exchange Commission (SEC) serves as the market regulator that has many tech oversight initiatives and steps that maintain strict data privacy laws.
Conclusion
The recent amendments by SEBI are a major change in the regulatory landscape for Investment Advisers and Research Analysts in India. Democratization of the profession through relaxation in eligibility criteria and introduction of part time registration as well, although aimed at bringing in more players to this market, presents it with its own issues regarding quality, accountability, investor protection.
Transparency has been advancing in the form that the mandatory AI usage disclosures are a progressive move, but it will need to balance with innovation and proprietary integrity. SEBI must keep its framework refined to ensure that these reforms benefit investors to the extent and as per their intended spirit and should borrow from the set of best practices from the global context and work towards a robust fiduciary ethos. The achievement of these reforms, however, will be the result of implementation and industry’s willingness to keep the bar high in professionalism and ethics as an industry.
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