SEBI Regulation- Changing Landscape of Investment Advisory

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.

1. Qualification, certification and experience requirements

 Individual IAs

• RIAs that are not having the enhanced qualification would have to within three years
• For certification, CPE program is discontinued.

 Non- Individual IAs

• Appoint a Principal Officer (“PO”) with requisite qualification, certification and experience. PO should be one of the key managerial personnel.
• Person associated with investment advice (“PAA”), would include all clients facing person such as sales staff, service relationship managers, client relationship managers etc, should satisfy the necessary Qualification, certification and experience requirements. Persons handling operational / clerical/administrative work with no client interface would be excluded from this.
• POs and PAAs would need 5 years and 2 years of relevant experience

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.

2. Net-worth/ net tangible assets requirements

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.

3. Corporatization of individual RIA 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; 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.

4. Fees

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;

 Fixed Fee:

• Maximum Rs. 1,25,000/- per annum per family across all schemes/ products/ services provided by IA.
• In consultation paper, Rs. 75,000/- was proposed, but after considering public comments it was revised to Rs. 1,25,000/- in Board Memorandum.

Percentage of Asset under Advice (“AUA”):

• Maximum 2.5% of AUA per annum per family across all schemes/ products/ services provided.
• AUA should be demonstrated using documents related to investments.

 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

5. Agreement between Investment Adviser and client

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:

• • Receiving only advisory fee (no other consideration or distribution fee)
  • Shall not manage funds and securities of clients
  • Not implying assured returns, minimum returns, target returns, percentage accuracy or any other assurance with respect to risk and returns.
  • Not seeking Power of attorney for auto implementation of advice

2.  Fee:

• • • Quantum
    • Manner and modes of payment
    • Periodicity
    • Illustration

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

6. Audit Compliance Report

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.

7. Client level segregation of advisory and distribution activities

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.

Individual IAs

• No distribution services by self or family to advisory client;
• A client who is receiving distribution services from family, cannot be an advisory client

Non-individual IAs

• 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.

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.

8. Implementation of advice or execution

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

Get inspection-ready and prepare for compliance with us. We provide comprehensive compliance support programs and audit service to guide and support your firm through the maze of regulatory requirements. Feel free to contact us discuss our offerings as per your compliance requirement. We will ensure that compliance is no more a burden for you and you can focus on your core advisory activities.

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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.