Analysis of Amendment in SEBI Guidelines for Investment Advisers

Securities and Exchange Board of India (SEBI) has notified Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 on 21st January, 2013 and amended from time to time. SEBI, after considering the inputs from public consultation, reviewed the framework for regulation of Investment Advisers (IA) and in exercise of the powers conferred under Section 11(1) of the Securities and Exchange Board of India Act, 1992, to protect the interests of investors in securities and to promote the development of and to regulate the securities market, issued and notified Securities and Exchange Board of India (Investment Advisers) (Amendment) Regulations, 2020 (hereinafter referred as “amended IA Regulations”) on July 03, 2020 which came into force on September 30, 2020 (Vide SEBI Circular No. SEBI/HO/IMD/DF1/CIR/P/2020/182 dtd. September 23, 2020). The Company Secretary, being a Corporate Compliance Manager, Corporate Governance Professional with in depth knowledge of the Capital Market Regulations, it is prima facie requirement to update and hence, an attempt is made to narrate and analyze such amendment.

The IA Regulations contain definitions, out of which relevant are extracted as under:

(l) “investment advice” means advice 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 the public shall not be considered as investment advice for the purpose of these regulations;

(m) “investment adviser” means any person, who for consideration, is engaged in the business of providing investment advice to clients or other persons or group of persons and includes any person who holds out himself as an investment adviser, by whatever name called;

(r) “persons associated with investment advice” means any member, partner, officer, director or employee or any sales staff of such investment adviser including any person occupying a similar status or performing a similar function irrespective of the nature of association with the investment adviser who is engaged in providing investment advisory services to the clients of the investment adviser

In addition to the compliance mentioned in IA Regulations, 2013, the Investment Advisers shall ensure following compliance with the guidelines:

(i) Client Level Segregation of Advisory and Distribution Activities

To ensure client level segregation at Investment Adviser’s group/family level, following compliance and monitoring process shall be adopted:

a. Existing clients, who wish to take advisory services, will not be eligible for availing distribution services within the group/family of IA. Similarly, existing clients who wish to take distribution services will not be eligible for availing advisory services within the group/family of IA.

b.  A new client will be eligible to avail either advisory or distribution services within the group/family of IA. However, the option to avail either advisory services or distribution services shall be made available to such client at the time of on boarding.

c. Client under these guidelines shall include individual client or non-individual client. (“non-individual” means a body corporate including a limited liability partnership and a partnership firm)

d. The client shall have discretion to continue holding assets prior to the applicability of this segregation under the existing advisory/distribution arrangement. However, the client shall not be forced to liquidate/switch such existing holdings.

e. PAN of each client shall be the control record for identification and client level segregation.

f. In case of an individual client, “family of client” shall be reckoned as a single client and PAN of all members in “family of client” would jointly and severally be the control record. However, the same is not applicable for non-individual clients.

g. The dependent family members shall be those members whose assets on which investment advisory is sought/provided, originate from income of a single entity i.e. earning individual client in the family. The client shall provide an annual declaration or periodic updation as the case maybe in respect of such dependent family members.

h.  IA shall, wherever available, advice direct plans (non-commission based) of products only.

i. The investment adviser shall maintain on record an annual certificate from an auditor (in case of individual IA) and its statutory auditor (in case of a non- individual IA) confirming compliance with the client level segregation requirements as specified in Regulation 22 of amended IA Regulations. Such annual certificate shall be obtained within 6 months of the end of the financial year and form part of compliance audit, in terms of Regulation 19(3) of the amended IA Regulations. 

(ii) Agreement between IA and the client

a. IA shall enter into an investment advisory agreement with its clients. The said agreement shall mandatorily cover the terms and conditions which are summarized as under :

1. Appointment of the Investment Adviser

2. The agreement shall clearly provide for in the first page

(a) the consent of the client on the following understanding

• • • “I / We have read and understood the terms and conditions of Investment Advisory services provided by the Investment Adviser along with the fee structure and mechanism for charging and payment of fee.
    • Based on our written request to the Investment Adviser, an opportunity was provided by the Investment Adviser to ask questions and interact with ‘person(s) associated with the investment advice’”.

(b) Declaration from the Investment Adviser that:

• • • Investment Adviser shall neither render any investment advice nor charge any fee until the client has signed this agreement.
    • Investment Adviser shall not manage funds and securities on behalf of the client and that it shall only receive such sums of monies from the client as are necessary to discharge the client’s liability towards fees owed to the Investment Adviser.
    • Investment Adviser shall not, in the course of performing its services to the client, hold out any investment advice implying any assured returns or minimum returns or target return or percentage accuracy or service provision till achievement of target returns or any other nomenclature that gives the impression to the client that the investment advice is risk- free and/or not susceptible to market risks and or that it can generate returns with any level of assurance.

(c) Fees specified under Investment Adviser Regulations and relevant circulars issued thereunder.

(d) Fees charged to the client

3. Scope of services

4. Functions obligations, duties and responsibilities of the Investment Adviser (including principal officer and all persons associated with the investment advice), Maintenance of records, Undertaking to abide by the Code of Conduct

5. Investment objective and guidelines containing types of securities, particulars regarding financial plan or model or strategy as agreed with the client, Tax related aspects pertaining to investment advice and as applicable on the investment adviser’s fee

6. Risk Factors

7. Validity of advisory services

8. Amendments and mode

9. Termination clause

10. Implications of Amendments and termination

11. Relationship with related parties

12. Investment Adviser engaged in other activities:

13. Representation to client

14. No right to seek Power of Attorney

15. No conflict of interest

16. Maintenance of accounts and confidentiality:

17. Terms of fees, mode of payment and billing:

18. Liability of Investment Adviser

19. Representations and covenants

20. Death or Disability of client

21. Death or Disability of investment adviser

22. Settlement of disputes and provision for arbitration

23. Adherence to grievance redressal timelines

24. Severability

25. Force Majeure

26. Miscellaneous

b. IA can include additional terms and conditions in the agreement without diluting the provisions of SEBI (Investment Advisers) Regulations, 2013 and amendments thereto as well as circulars issued there-under.

c. IA shall ensure that neither any investment advice is rendered nor any fee is charged until the client has signed the aforesaid agreement and provided copy of signed agreement to the client.

d. IA shall enter into investment advisory agreement with its clients including existing clients latest by April 01, 2021 and submit a report, confirming the same to SEBI latest by June 30, 2021. 

(iii) Fees

Investment Advisers shall be entitled to charge fees from a client in the manner as specified by SEBI, accordingly Investment Advisers shall charge fees from the clients in either of the two modes:

(A)        Assets under Advice (AUA) mode

a. The maximum fees that may be charged under this mode shall not exceed 2.5 percent of AUA per annum per client across all services offered by IA.

b. IA shall be required to demonstrate AUA with supporting documents like demat statements, unit statements etc. of the client.

c. Any portion of AUA held by the client under any pre-existing distribution arrangement with any entity shall be deducted from AUA for the purpose of charging fee by the IA.

Here, “Assets under Advice” shall mean the aggregate net asset value of securities and investment products for which the investment adviser has rendered investment advice irrespective of whether the implementation services are provided by investment adviser or concluded by the client directly or through other service providers.

(B)        Fixed fee mode

The maximum fees that may be charged under this mode shall not exceed INR 1,25,000 per annum per client across all services offered by IA.

General conditions under both modes

a. In case “family of client” is reckoned as a single client, the fee as referred above shall be charged per “family of client”.

b. IA shall charge fees from a client under any one mode i.e. (A) or (B) on an annual basis. The change of mode shall be effected only after 12 months of on boarding/last change of mode.

c. If agreed by the client, IA may charge fees in advance. However, such advance shall not exceed fees for 2 quarters.

d. In the event of pre-mature termination of the IA services in terms of agreement, the client shall be refunded the fees for unexpired period. However, IA may retain a maximum breakage fee of not greater than one quarter fee.

(iv) Qualification and certification requirement

(1) An individual investment adviser or a principal officer of a non-individual investment adviser registered as an investment adviser under these regulations, shall have the following minimum qualification, at all times –

(a) A professional qualification or post-graduate degree or post graduate diploma (minimum two years in duration) in finance, accountancy, business management, commerce, economics, capital market, banking, insurance or actuarial science from a university or an institution recognized by the Central Government or any State Government or a recognised foreign university or institution or association or a CFA Charter from the CFA Institute;

(b) An experience of at least five years in activities relating to advice in financial products or securities or fund or asset or portfolio management;

(c) Persons associated with investment advice shall meet the following minimum qualifications, at all times –

(i) a professional qualification as provided in clause (a); and

(ii) an experience of at least two years in activities relating to advice in financial products or securities or fund or asset or portfolio management

(2) An individual investment adviser or principal officer of a non-individual investment adviser, registered under these regulations and persons associated with investment advice shall have, at all times a certification on financial planning or fund or asset or portfolio management or investment advisory services –

(a)         from NISM; or

(b)         from any other organization or institution including Financial Planning Standards Board of India or any recognized stock exchange in India provided such certification is accredited by NISM:

Please note that the existing individual IAs above fifty years of age (as on September 30,2020) shall not be required to comply with the qualification and experience requirements, if such IAs shall hold NISM accredited certifications and comply with other conditions as specified at all times.

(v) Registration as Non Individual Investment Advisor

a. an individual IA shall apply for registration as non-individual investment adviser on or before reaching 150 clients.

b. Such application for registration shall be made in FORM-A as per the amended IA regulations, along with the requisite fee.

c. Once number of clients reaches 150 and till grant of registration as a non- individual IA, Individual IA shall not on-board fresh clients. However, during the period of examination of application by SEBI, individual IA shall continue to service existing clients. In case the aforesaid IA does not get registration as non-individual IA, such IA shall continue the advisory activities as an Individual IA while ensuring that the numbers of clients does not exceed 150 in total.

d. existing Individual IA having more than 150 clients as on September 30, 2020 shall not on-board fresh clients and such Individual IA shall apply for registration as non- individual IA latest by April 01, 2021. However, during the period of examination of application by SEBI, individual IA shall continue to service existing clients.

e. Existing Individual IA, having more than 150 clients on September 30, 2020, shall report their number of clients to SEBI through [email protected], latest by October 15, 2020 in the following format: Name of IA, Registration No., No. of clients as on Sept. 30, 2020, Registered office address.

(vi) Maintenance of record

IA shall maintain records with respect to her/his activities as an investment adviser. The records must include:

a. IA shall maintain records of interactions, with all clients including prospective clients (prior to on-boarding), where any conversation related to advice has taken place inter alia, in the form of:

i. Physical record written & signed by client,

ii. Telephone recording,

iii. Email from registered email id,

iv. Record of SMS messages,

v. Any other legally verifiable record.

b. Such records shall begin with first interaction with the client and shall continue till the completion of advisory services to the client.

c. IAs shall be required to maintain these records for a period of five years. However, in case where dispute has been raised, such records shall be kept till resolution of the dispute or if SEBI desires that specific records be preserved, then such records shall be kept till further intimation from SEBI.

(vii) Audit

a. IA shall ensure that annual audit in respect of compliance of SEBI (Investment Advisers) Regulations, 2013 and circulars issued thereunder is conducted. The audit shall be completed within six months from the end of each financial year.

b. The adverse findings of the audit, if any, along with action taken thereof duly approved by the individual IA/management of the non-individual IA, shall be reported to respective SEBI office (based on the registered address of IA) within a period of one month from the date of the audit report but not later than October 31^st of each year for the previous financial year starting with the financial year ending March 31,2021.

(viii) Risk profiling and suitability for non-individual clients

a. Risk profiling and suitability are mandatory for all categories of clients.

b. In order to further enhance the risk profiling and encompass suitable factors in case of non-individual clients, IA shall use the investment policy as approved by board/management team of such non-individual clients for risk profiling and suitability analysis.

c. The discretion to share the investment policy/relevant excerpts of the policy shall lie with the non-individual client. However, IA shall have discretion not to onboard non-individual clients if they are unable to do risk profiling of the non-individual client in the absence of investment policy.

(ix) Display of details on website and in other communication channels

In order to protect the interest of investors and bring more transparency in the functioning of investment advisers, IAs shall display the following information prominently on its website, mobile app, printed or electronic materials, know your client forms, client agreements and other correspondences with the clients:

• Complete name of Investment Adviser as registered with SEBI,
• Type of Registration-Individual, Non-Individual,
• Registration number, validity of registration,
• Complete address with telephone numbers,
• Contact details of the Principal Officer –contact no, email id etc.,
• Corresponding SEBI regional/local office address.

Applicability

Client level segregation of advisory and distribution activities, agreement and fees to be charged are aligned together. IA shall ensure compliance with measures stated above at clause 2(i), 2(ii) and 2(iii) latest by April 01, 2021.

Compliance with measures referred above at clause 2 (vi), 2(viii) and 2(ix) shall be ensured latest by January 01, 2021. Further timelines have been specified under clause 2(iv), 2(v) and 2(vii).

All professionals, at the time of making application for availability of name of Company/LLP either for new or for change of name of Company/LLP, must keep in mind shall that “On and from the date of commencement of these regulations, no person, while dealing in distribution of securities, shall use the nomenclature “Independent Financial Adviser or IFA or Wealth Adviser or any other similar name” unless registered with the Board as Investment Adviser.”

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Acknowledgement:  This Article of Author is published in E-Corporate Manager, presented By Ahmedabad Chapter of WIRC of ICSI in the month of October, 2020.

Web-link and Source of Information:

The text of SEBI Circular is available at: https://taxguru.in/sebi/sebi-guidelines-investment-advisers.html

 The Author can be contacted at email id [email protected]