Impact and Analysis of the SEBI (Investment Advisers) (Amendment) Regulations, 2020

Earlier this year SEBI has issued the Consultation Paper on 16th January, 2020 seeking public comments on the proposed changes. Post this, in February, 2020 SEBI in its Board Meeting approved certain changes to it. Now on 3rd July, 2020 SEBI has notified amendments to SEBI (Investment Adviser) Regulations, 2013 to further strengthen the regulatory framework for investment advisers. These will be effective on 90th day from the date of its Publication in Official Gazette.

This Article discusses the impact of the provisions of the SEBI (Investment Advisers) (Amendment) Regulations, 2020 and is prepared with a view to give an overview of the Regulation wise amendments as mentioned in the Amended Regulations, 2020.

Sr. No. Regulation Amendment Impact
1. Regulation 2(1)(aa) –

Definition of “Assets under advice”

New Definition has been inserted

 

“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;”

This definition has been added because it is proposed to fix the fees based on AUA and to shift the individuals to non-individual structure based on certain AUA amount.

Further details are awaited in this regard.

2. Regulation 2(1)(ga) – Definition of “CPE” “CPE” means continuing professional education in terms of clause (f) of sub regulation (1) of regulation 2 of the SEBI (Certification of Associated Persons in the Securities Markets) Regulations, 2007 This definition has been added in order to discontinue the practice of obtaining the fresh certification through CPE program.
3. Regulation 2(1)(gb) – Definition of “family of client” “family of client” shall include individual client, dependent spouse, dependent children and dependent parents This definition has been added to ensure the compliance of Client level segregation of advisory and distribution activities
4. Regulation 2(1)(gc) – Definition of “family of an individual investment adviser” “family of an individual investment adviser” shall include individual investment adviser, spouse, children and parents This definition has been added to ensure the compliance of Client level segregation of advisory and distribution activities.

For example if a individual is providing advisory services to a client, then the same client cannot be provided distribution services by any of his family member.

5. Regulation 2(1)(pa) – Definition of “non-individual” “non-individual” means a body corporate including a limited liability partnership and a partnership firm;” This definition has been added to differentiate between individual and non-individual Investment Advisers.
6. Regulation 2(1)(r) – Definition of “persons associated with investment advice” “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;

Explanation. —

All client-facing persons such as sales staff, service relationship managers, client relationship managers, etc., by whatever name called shall be deemed to be persons associated with investment advice, but do not include persons who discharge clerical or office administrative functions where there is no client interface.”

Definition of Representative has been substituted with this definition.

This definition will broadly cover all the employees who are in interaction with clients

7. Regulation 2(1)(s) – Definition of “Principal Officer” “principal officer” shall mean the managing director or designated director or managing partner or executive chairman of the board or equivalent management body who is responsible for the overall function of the business and operations of non-individual investment adviser. Earlier only representative word was used. Now in the new regulations, persons associated with the investment advice and Principal Officer has been clearly identified and distinguished.
8. Regulation 3 (1)(A) Notwithstanding anything contained in sub-regulation (1), any application made by a person prior to coming into force of these regulations containing such particulars or as near thereto as mentioned in Form A of First Schedule shall be treated as an application made in pursuance of sub-regulation (1) and dealt with accordingly New sub-regulation has been inserted.

Any existing application for Registration pending with SEBI will be now dealt as per the new qualification and net worth requirements.

9. Regulation 3(3) 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. This sub-regulation has been inserted to discontinue the practice of using the nomenclature of IFA/ Wealth Adviser by the persons who are not registered with SEBI
10. Regulation 4(j) the word “representative,” wherever it occurs, shall be substituted with the words and symbol “principal officer, persons associated with advice”
11. Regulation 6 (a) the words “a body corporate or a firm” shall be substituted with the words “a non-individual” Earlier there were three terms viz. individual, firm and body corporate.

Now there are only two terms; individual and non-individual.

12. Regulation 6 (b) in case the applicant is an individual, he and all persons associated with investment advice are appropriately qualified and certified as specified in regulation 7 In case of Individual, investment adviser and all the persons associated with the investment advice shall be appropriately qualified
13. Regulation 6 (c) in case the applicant is a body corporate, the principal officer and all persons associated with investment advice of the applicant are appropriately qualified and certified as specified in regulation 7 In case of Body Corporate, principal officer and all the persons associated with the investment advice shall be appropriately qualified
14. Regulation 6 (d) in case the applicant is a firm or a limited liability partnership, the principal officer and all persons associated with investment advice of the applicant are appropriately qualified and certified as specified in regulation 7 In case of firm or a LLP, principal officer and all the persons associated with the investment advice shall be appropriately qualified
15. Regulation 6 (e) the words “capital adequacy” shall be substituted with the words “net worth
16. Regulation 6 (f) whether the applicant, its partners, principal officer and persons associated with investment advice, if any, are fit and proper persons based on the criteria as specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008
17. Regulation 6 (k) the words “body corporate” shall be substituted with the words “non-individual”
18. Regulation 7 –

Qualification and certification requirement

7(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) of sub-regulation (1) of regulation 7; 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:

Provided that investment advisers registered under these regulations as on the date of commencement of these regulations shall ensure that the individual investment adviser or principal officer of a non-individual investment adviser registered under these regulations and persons associated with investment advice comply with such qualification and experience requirements within three years:

Provided further that the requirements at clauses (a) and (b) shall not apply to such existing individual investment advisers as may be specified by the Board.

(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:

Provided that fresh certification must be obtained before expiry of the validity of the existing certification to ensure continuity in compliance with certification requirements:

Provided further that fresh certification before expiry of the validity of the existing certification shall not be obtained through a CPE program.”

Qualification criteria has been modified as now Individual Investment Adviser or a Principal officer of a non-individual investment adviser shall have both:

Professional qualification/ post graduate degree

And

5 years’ experience in securities market

Further, persons associated with investment advice shall have:

Professional qualification/ post graduate degree

And

2 years’ experience in securities market

Furthermore, existing Investment Advisers have been given time period of 3 years from commencement of this Regulations to comply with this new provisions.

Further, all the above mentioned persons shall have all times certifications from NISM or any other organization or institution (accredited by NISM).

Further, obtaining fresh certification through a CPE Program has been discontinued

19. Regulation 8 – Net worth 8(1) Investment advisers who are non-individuals shall have a net worth of not less than fifty lakh rupees.

Explanation. — For the purposes of this regulation, “networth” means the aggregate value of paid up share capital plus free reserves (excluding reserves created out of revaluation) reduced by the aggregate value of accumulated losses, deferred expenditure not written off, including miscellaneous expenses not written off, and networth requirement for other services offered by the advisers in accordance with the applicable rules and regulations.

(2) Investment advisers who are individuals shall have net tangible assets of value not less than five lakh rupees:

Provided that existing investment advisers shall comply with the networth requirement within three years from the date of commencement of the SEBI (Investment Advisers) (Amendment) Regulations, 2020.

Net worth requirements for non-individual investment advisers have been increased to Rs.50 lakhs and for individual investment advisers it has been increased to Rs.5 lakhs.

Further, existing Investment Advisers shall comply with this provision within 3 years from commencement of this Regulations.

20. Regulation 13(e) individuals registered as investment advisers whose number of clients exceed one hundred and fifty in total, shall apply for registration as non-individual investment adviser within such time as may be specified by the Board. Individual Investment Advisers whose total number of clients exceeds 150 shall have to apply for registration as non-individual investment advisers.

Further details in this regard are not yet specified by SEBI. So we can expect a Circular shortly from SEBI to brief in this point.

21. Regulation 15A – Fees Investment Adviser shall be entitled to charge fees for providing investment advice from a client in the manner as specified by the Board. A cap on fees to be charged from the client will be provided by the SEBI.

Further details in this regard are not yet specified by SEBI. So we can expect a Circular shortly from SEBI to brief in this point.

22. Regulation 18 – Disclosures to clients sub-regulations (2) and (3) have been omitted

(2) An investment adviser shall disclose to its client, any consideration by way of remuneration or compensation or in any other form whatsoever, received or receivable by it or any of its associates or subsidiaries for any distribution or execution services in respect of the products or securities for which the investment advice is provided to the client.

(3) An investment adviser shall, before recommending the services of a stock broker or other intermediary to a client, disclose any consideration by way of remuneration or compensation or in any other form whatsoever, if any, received or receivable by the investment adviser, if the client desires to avail the services of such intermediary.

Disclosure requirement pertaining to compensation / remuneration obtained from its subsidiary/associates for distribution / execution services have been omitted
23. Regulation 19 (d) Copies of agreements with clients, incorporating the terms and conditions as may be specified by the Board For ensuring greater transparency, now it will be mandatory for Investment Advisers to enter into Agreement with its clients.

Further details in this regard are not yet specified by SEBI. So we can expect a Circular shortly from SEBI to brief in this point.

24. Regulation 19 (3) after the words “Institute of Company Secretaries of India” the words “and submit a report of the same as may be specified by the Board” shall be inserted Now, post completion of the Compliance Audit, a report has to be submitted to SEBI.

Further details in this regard are not yet specified by SEBI. So we can expect a Circular shortly from SEBI to brief in this point.

25. Regulation 22 – Client level segregation of advisory and distribution activities (1) An individual investment adviser shall not provide distribution services.

(2) The family of an individual investment adviser shall not provide distribution services to the client advised by the individual investment adviser and no individual investment adviser shall provide advice to a client who is receiving distribution services from other family members.

(3) A non-individual investment adviser shall have client level segregation at group level for investment advisory and distribution services.

Explanation. —

(i) The same client cannot be offered both advisory and distribution services within the group of the non-individual entity.

(ii) 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.

(iii) ‘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.

(4) Non-individual investment adviser shall maintain an arm’s length relationship between its activities as investment adviser and distributor by providing advisory services through a separately identifiable department or division.

(5) Compliance and monitoring process for client segregation at group or family level shall be in accordance with the guidelines specified by the Board.

Distribution and Advisory services will be segregated. Single person cannot provide both the services, either one can register as Investment Adviser or as a Distributor. Further, for non-individual Investment Advisers segregation will be at group level through a separate department or division and shall maintain arm’s length relationship between its activities.

Further, a client cannot be offered both advisory and distribution services within the same group.

Furthermore, Compliance and monitoring process related to client segregation will be specified by the Board.

26. Regulation 22 A- Implementation of advice or execution (1) Investment adviser may provide implementation services to the advisory clients in securities market:

Provided that investment advisers shall ensure that no consideration including any commission or referral fees, whether embedded or indirect or otherwise, by whatever name called is received; directly or indirectly, at investment adviser’s group or family level for the said service, as the case maybe.

(2) Investment adviser shall provide implementation services to its advisory clients only through direct schemes/products in the securities market.

(3) Investment adviser or group or family of investment adviser shall not charge any implementation fees from the client.

(4) The client shall not be under any obligation to avail implementation services offered by the investment adviser.

Execution services can be provided by the Investment Advisers to its advisory clients only through direct schemes only, but consideration shall not be received by Investment Adviser directly or indirectly for these services.

DISCLAIMER: The information given in this article has been made on the basis of the provisions stated in the SEBI (Investment Advisers) (Amendment) Regulations, 2020 and SEBI (Investment Advisers) Regulations, 2013. It is our personal opinion and does not represent view of any regulatory authority. It is based on our analysis, interpretation and understanding of applicable laws as on date. Under no circumstances whatsoever, we shall be responsible for any loss, claim, liability, damage(s) resulting from the use, omission or inability to use the information provided in the document.

Further it is for informational purpose only. In case of any query feel free to connect us at info.compliancemanager@gmail.com

Tags:

Author Bio

More Under SEBI

6 Comments

  1. Vikas Kumar says:

    Can you please elaborate the implication of this policy change on Broking Houses like Motilal, Geojit and even Banks. As they do both advisory as well as distribution.

    Thanks

    1. CS_Ali says:

      As per the Amendment regulations, they wont be able to provide advisory and distribution services to the same client. Further more details in this regard are awaited from the SEBI.

Leave a Comment

Your email address will not be published. Required fields are marked *

Search Posts by Date

October 2020
M T W T F S S
 1234
567891011
12131415161718
19202122232425
262728293031