SEBI- Changes in Investment Advisers business practice w.e.f. 01.10.2020

Changes in Investment Advisers business practise purusant to SEBI amendment w.e.f. 01 Octoebr 2020

As you all are aware that SEBI has come out with amendment in IA regulation through notification dated July 03, 2020 which require great amount of shift in existing IA business practice. The new IA amendment regulation talks about enhanced qualification and Net worth criteria, mandatory agreement, segregation of business at client level, compliance Audit etc. this changes will come into effect from 1^st October, 2020.

The guidelines dealing with various other issues like key terms and conditions of Investment Advisory Services agreement, modes of charging fee, periodicity etc. will be separately specified through a Circular.

In order to help IAs understand the implications of new amendment and to take crucial decisions regarding their IA practice to comply with amended IA regulation, we have endeavored to explain each and every point of IA amendment to the best of our knowledge.

Let’s have a look.

#1 Enhanced Qualification

• SEBI has enhanced qualification criteria to include ‘experience’ also which was not required earlier. Now, Individual IA or in case of non-individual IA, ‘principal officer’ and ‘person associated with investment advice’ are require to have i) professional qualification or post graduate degree ii) experience and iii) certification from NISM or CFP.
• Principal officer should have experience of minimum 5 years in relevant field and person associated with investment advice need to have experience of 2 years in relevant field.
• Principal officer shall mean Managing Director or Designated Director or Managing Partner or Executive Chairman of the Board or equivalent management body and person associated with investment advice shall include all client facing person such as sales staff, service relationship managers, client relationship managers etc.
• It is to be noted that existing investment advisers (individual and non-individual) are given 3 years’ time period to comply with qualification and experience requirement.
• Individual IAs who may not likely meet the experience criteria within 3 years may consider adopting corporate model and appoint suitable person as principal officer to continue his business.

#2 Enhanced Networth

• Net worth requirement has been raised from 1 lac to 5 lacs for individual IAs and from 25 lacs to 50 lacs for non-individual IAs.
• It is to be noted that partnership firms have been categorized under non individual category. Earlier, partnership firms were excluded from non-individual category. Hence, partnership firms also need to maintain net worth of 50 lacs.
• Existing Investment Advisers (individual and non-individual) are given 3 years’ time period to comply with net worth requirement.

#3 Segregation of business at client level

• Individual IA:
• SEBI has made clear that individual IAs cannot provide distribution service.
• The family of individual IA shall not provide distribution services to the IA client; and individual IA shall not provide advice to the distribution client of family.
• It means a client can not avail both the services within the family of IA.
• Family of individual IA shall include individual IA, spouse, children and parents.
• Non-Individual IA:
• Non-individual IA shall be allowed to offer both advisory as well as distribution services provided they maintain client level segregation at group level.
• For clarity, if a non-individual IA provides advisory services to a client then it cannot provide distribution services to the same client within its group entities and vice versa.
• Same client cannot be offered both services within the group of the non-individual entity.
• ‘Group entities’ shall include its holding, subsidiary, associate, subsidiary of holding company to which it also a subsidiary (two layer subsidiary). In any other case (other than company form), an entity which has a controlling interest or is subject to controlling interest of non-individual IA.

#4 Fees

• As per extent regulation, there is no restriction on mode of collecting fees and also no ceiling on amount of fees.
• In 4^th consultation paper, SEBI has prescribed two fee models which can be adopted by IA: 1) Fixed fee or 2) % of AUA.
• In fix fee model, IA can charge maximum 1.25 lacs p.a. from family of client while in AUA model, IA can charge maximum 2.5 % of AUA p.a. from family of client.
• IA can adopt any one fee model at the time for a particular client.
• Profit-sharing model cannot be adopted as the regulator looks at it like a PMS structure.
• Here words used is ‘family of client’ which includes individual client, dependent spouse, dependent children, dependent parents.
• It means IA cannot charge fees separately from dependent family members. In otherwise case, IA shall bear the onus to prove non-dependency of family member to charge fees separately from family members.
• Though, SEBI is yet to clarify on fee structure, but IAs should be ready to embrace somewhat similar fee structure as mentioned above any time soon.

#5 Limited implementation service

• SEBI has allowed IAs to provide implementation or execution service only through direct schemes/products in securities market.
• While providing execution services, IA shall ensure that no consideration including any commission or referral fees shall be received.
• IA shall not charge any fees from the client for providing implementation services.

#6 Corporatization of business

• One of the crucial point SEBI has brought through amendment is corporatization of business. Now, Individual IAs whose number of clients exceed 150 in total, shall convert his business into corporate model.
• One important question arise here is whether 150 clients shall include non-active clients also? In our opinion, only those clients who are still availing your services should be counted, non-active client should not be taken in count.
• IA can consider adopting partnership firm, LLP or company (private or public) form for converting his business into non-individual category.
• Individual IA shall adopt corporate model within 6 months from the date of trigger.

#7 Mandatory agreement

• IAs shall have to enter into a written agreement with client detailing terms of advisory services, duties and obligation of both parties and other terms.
• IAs shall not provide any advice or charge fees from client before entering into agreement.

#8 Compliance audit

• IAs shall have to conduct yearly Audit in respect of compliance with IA regulations from practicing CS or CA within 6 months from end of Financial year.
• An Audit report shall be submitted to SEBI along with adverse finding and action taken thereon within 1 month from the date of the audit report.

#9 No CPE for renewal of NISM certification

• SEBI has discontinued renewal of NISM certification through CPE program. Earlier, CPE program was allowed to renew NISM IA certification by attending training conducted by NISM. Henceforth, IAs have to compulsorily appear for exam to validate continuity of NISM certification.

#10 Nomenclature

• Distributors shall not be allowed to use nomenclature such as independent financial advisers (IFA) or wealth advisers etc. unless registered with SEBI as an Investment adviser.
• Most of the distributors use the word such as IFA or wealth advisor or financial advisor. They have to consider changing their business name to avoid disciplinary action from SEBI.

If you need any consultancy on IA business compliance or audit under the regulation, you can get in touch with me at access2harshit@gmail.com 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.