Detailed analysis of SEBI (Investment Advisers) (Amendment) Regulations, 2020

To ease your burden, we have come up with a detailed analysis of the amendments to IA regulation by SEBI (Investment Advisers) (Amendment) Regulations, 2020, so that in spite of googling for the same, you may get all your answers at once.

These amendments would be applicable from October 01, 2020.

Following are the key amendments:

Qualification and certification requirements:

• An individual investment adviser or a principal officer of a non-individual investment adviser shall have:
  • professional qualification or post-graduate degree or post graduate diploma in relevant streams
  • 5 years of relevant experience
  • NISM or CFP certification. CPE program discontinued.

• Persons associated with investment advice
  • professional qualification or post-graduate degree or post graduate diploma in relevant streams
  • 5 years of relevant experience
  • NISM or CFP certification. CPE program discontinued

“Persons associated with investment advice” shall mean 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.

For individuals RIA, he along with all persons associated with investment advice would require to comply with qualification and certification requirements. The enhanced qualification and experience requirements are to be complied with within three years.

Net-worth/ net tangible assets requirements:

• Individuals: net tangible assets of value not less than five lakhs
• Non-individuals (including Partnership firms): net worth of not less than fifty lakh rupees

 Partnership firms has been re-categorised as “non-individuals”. This has increased the earlier networth requirement for them to Fifty Lakhs.

Please note that for existing RIAs, the enhanced requirements are to be complied with, within three years.

Individual RIAs with more than 150 clients: Individuals RIAs with more than 150 clients shall apply for registration as non-individual investment adviser within such time as may be specified by the Board. Timeline for the same is not defined; a circular with respect to the same is awaited.

Fees: The fee charged by the Investment Adviser for providing Investment Advice from a client shall be in the manner as specified by SEBI; a circular with respect to the same is awaited. Definition of “assets under advice” is inserted. This is probably with a view to introduce as a part of Assets under advice (AUA) mechanism of fees.

Agreement between Investment Adviser and client: Client agreement has been made mandatory for ensuring greater transparency with reference to advisory activities. A circular with respect to minimum mandatory terms to be incorporated in agreement is awaited.

Audit Compliance Report: Audit Compliance Report is now to be submitted to SEBI. A circular with respect to timeline of the same is awaited. The change in annual compliance audit requirement is very critical as this is the only report as on date submission of which has been made mandatory for a RIA.

Client level segregation of advisory and distribution activities;

• Individual RIAs
  • No distribution services by self or family to advisory client;
  • A client who is receiving distribution services from family, cannot be on-boarded as an advisory client
• Non-individual RIAs- client level segregation at group level for investment advisory and distribution services.
  • Same client cannot be offered both advisory and distribution services within the group;
  • Arm’s length relationship to be maintained between its activities as investment adviser and distributor using separate division or department
  • A client can either be an advisory client where no distributor consideration is received at the group level or distribution services client where no advisory fee is collected from the client at the group level.
  • A separate guideline for client segregation at group or family level from SEBI is awaited.

‘Group’ for this purpose shall mean an entity which is a holding, subsidiary, associate, subsidiary of a holding company to which it is also a subsidiary or an investing company or the venturer of the company as per the provisions of Companies Act, 2013 for non-individual investment adviser which is a company under the said Act and in any other case, an entity which has a controlling interest or is subject to the controlling interest of a non-individual investment adviser.

Implementation of advice or execution:

• No implementation fee to be charged separately
• Only through direct schemes/products in the securities market
• No direct or indirect consideration of any type is allowed at investment adviser’s group or family level for the implementation service
• The client shall not be under any obligation to avail implementation services offered by the investment adviser

Others:

• “Family of client” definition has been introduced to ensure client level segregation at group/family level. More clarification when detailed circular is issued
• “family of an individual investment adviser” definition has been introduced to ensure Client level segregation of advisory and distribution activities
• “Representative” has been substituted as “persons associated with investment advice” increasing the scope of qualification and certification requirements.
• Definition of “principal officer” has been inserted. Now Non-individual entities would need to designate a principal officer who is responsible for the overall function of the business and operations of non-individual investment adviser. The Principal Officer would also be required to comply with the qualification and certification requirements.
• 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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