Excerpts from SEBI Investment Advisers Guidelines

SEBI has come out with detailed guidelines for Investment Advisers on September 23, 2020. Although the guidelines are more or less on the expected lines as most of the terms were already published in 4^th consultation paper, SEBI has, vide this guidelines, provided detailed modus operandi as to client level segregation, transition from individual to corporate IA model upon reaching 150 clients, IA agreement with clients, charging of fees, time limits for meeting with various requirements etc.

The long awaited amendments and guidelines on Investment Advisor regulation has been published. Now, nothing much is awaited or anticipated from SEBI on IA regulations.

We have tried to bring out certain key excerpts from the guidelines for your reference.

let’s have a look at the same.

#1 Client level segregation of Advisory and distribution activities

• Existing Advisory clients will not be eligible for availing distribution services within the group/family of IA. Similarly, existing distribution clients will not be eligible for availing advisory services within the group/family of IA.
• 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.
• 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.
• Dependent family members: 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.
• 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

#2 Agreement between IA and client

• 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.
• 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.

#3 Fees:

AUA mode:

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

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 related to charging of fees:

• In case “family of client” is reckoned as a single client, the fee as referred above shall be charged per “family of client”.
• IA shall charge fees from a client under any one mode on an annual basis. The change of mode shall be effected only after 12 months of on boarding/last change of mode.
• If agreed by the client, IA may charge fees in advance. However, such advance shall not exceed fees for 2 quarters.
• 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.

#4 Qualification and certification

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 specified under Regulation 7(1)(a) and 7(1)(b) of the amended IA Regulations. However, such IAs shall hold NISM certification at all times.

#5 Registration as non-individual IA

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

#6 Maintenance of records

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:

1. Physical record written & signed by client,

2. Telephone recording,

3. Email from registered email id,

4. Record of SMS messages,

5. Any other legally verifiable record.

#7 Audit

• IA shall conduct Annual Audit with respect to the compliance with provisions of IA regulations. The audit shall be completed within six months from the end of each financial year.
• 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 31st of each year for the previous financial year starting with the financial year ending March 31,2021.

#8 Risk profiling and suitability for non-individual clients

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.

#9 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.

Please find below table mentioning the Time limits for meeting with above requirements:

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If you need any consultancy on IA business compliance or audit under the regulation, you can get in touch with me at [email protected] or 9714345677.

Disclaimer: views presented in the above article is my personal view and solely for information purposes. You should not rely on the information contained herein. In no event I shall be liable for any direct or indirect loss or damage resulting from the information contained in this article.