SEBI (Investment Advisers) (Amendment) Regulations, 2020– Changing Landscape Of Investment Advisory
Being a financial advisor is not easy, specially in the current situation when the coronavirus pandemic and containment measures have plunged the global economy into deep contraction. Investment advisory fraternity is not only engaging with their clients to support them in this crisis like situation but also struggling to find answer to the questions that has been coined to them in the amendment to the Investment Advisers Regulations, 2013, issued on July 03, 2020 by SEBI.
The amendment, on one hand ended the long dragged discussions among the community with respect to the possible outcome of all those proposals through various consultation papers issued by SEBI. On the other hand, it has coined multiple questions which were left unanswered by SEBI in the said amendment.
Amendment is applicable in a fortnight and SEBI is yet to come out with various guidelines on different aspects of the amendment in terms of charging fees, segregation of business, corporatization, Investment Advisory Services agreement etc.
In the last two months, we have received numerous calls from RIAs, who were much confused about their very course of action after the amendment, in the absence of broad guidelines/circulars from SEBI.
Like always, we tried to come out with possible answers to some of your queries. Below are based on the deductions made from the amendment, the consultation paper and the board memorandum of SEBI. Things would get finalized any time soon after circular/guidelines from SEBI, in the meantime since the amendment would be in force in a fortnight, these would possibly help you to plan your next course of action on time.
Education + Relevant Experience + Certification
|Graduate + 5 years + NISM||PG + 5 years + NISM||PG + 2 years + NISM|
|PG+ 0 years + NISM|
Non- Individual IAs
(for Principal Officer)
|Education + Relevant Experience + Certification||Graduate + 5 years + NISM||PG + 5 years + NISM||
PG + 2 years + NISM
PG+ 0 years + NISM
1. Qualification requirement has been enhanced to include only professional qualification or post-graduate degree or post graduate diploma in relevant streams
2. For certification, CPE program is discontinued.
3. The enhanced qualification and experience requirements are to be complied with within three years.
i. Individuals: Net tangible assets of value not less than five lakhs
ii. 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 net worth requirement for them to Fifty Lakhs.
Please note that for existing RIAs, the enhanced requirements are to be complied with, within three years.
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; but a hint from the board memorandum of SEBI for amendment proposal indicate that it would be within 6 (six) months of the trigger event.
The consultation paper and board memorandum of SEBI indicate that two modes of charging fees would be allowed and only one can be used on an annual basis;
Percentage of Asset under Advice (“AUA”):
i. “Family of client” constitutes individual, dependent spouse, dependent children and dependent parents.
ii. Up to 2 quarters fees can be charged in advance.
iii. Refund of fees in case of pre-mature termination of agreement, subject to a maximum breakage fee of not greater than one quarter can be retained.
iv. No Profit-sharing model
Client agreement has been made mandatory. A circular with respect to minimum mandatory terms to be incorporated in agreement is awaited, however, the consultation paper and board memorandum of SEBI indicates that a detailed terms and conditions documents to be provided to the client, without consent of client on the same neither advice should be provided nor fees should be charged.
As indicated, the mandatory details to be included in Terms and conditions documents would probably be most or all of below:
1. Declaration by RIA regarding:
2. Scope of Service
3. Functions of Investment Adviser
4. Risk Factors
5. Validity of Advisory Services
6. Amendments and Terminations
7. Disciplinary History
8. Associates and Conflict of interest
9. Maintenance of Accounts and confidentiality
10. Liability of Investment Adviser
11. Settlement of Disputes and Provision of Arbitration
i. Compliance audit should be completed within six months from end of each financial year.
ii. Post completion the report should be filed with SEBI with one month along with action taken report.
Segregation of advisory and distribution activities at client level i.e. an entity can provide both advisory and distribution but not to the same client.
1. Existing client should be given an option to choose between advisory or distribution services going forward.
2. Timeline of 6 months may be provided to entities (both individuals and non- individuals) for ensuring the clients level segregation.
3. Family of client would be reckoned as a single client
4. Family shall mean individual, dependent spouse, dependent children and dependent parents.
‘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.
1. No implementation fees
2. Wherever available, advice direct version (non-commission based) products only
3. Clients should not be under any obligation to mandatorily avail implementation services
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Disclaimer: The views and opinions expressed herein are my personal views and opinions and do not necessarily reflect the official policy and position of any other agency, organization, employer or company. Assumptions made in the analysis are not of the position of any entity other than me. I make no representations as to accuracy, completeness, correctness, suitability or validity of any information and will not be liable for any errors, omissions or damages arising from its use. It is reader’s responsibility to verify their own facts.