An Overview of the SEBI (Investment Advisers) (Amendment) Regulations, 2020
In India, investment advisers (“IAs“) are regulated by the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 (“Principal Regulations“). The Principal Regulations inter alia specify conditions for registration, certification, capital adequacy, risk profiling and suitability, disclosures to be made, code of conduct, records to be maintained, manner of conducting inspection etc. with respect to IAs. Vide its gazette notification of July 03, 2020, the Securities and Exchange Board of India (SEBI) has notified amendments to these Principal Regulations1 . In January 2020, SEBI had issued a consultation paper on review of regulatory framework for IAs and sought comments from the public and stakeholders on the proposed changes. The consultation paper largely sought to propose clear segregation between advisory, distribution and execution services provided to a client by IAs. In the past, distribution and execution services have often been used interchangeably. After considering these issues in its consultation paper, SEBI has approved the proposals on regulatory changes and accordingly notified the SEBI (Investment Advisers) (Amendment) Regulations, 2020 (“Amendment Regulations“). The Amendment Regulations inter alia provide clarity on the segregation of advisory services from distribution services and distinguish between distribution and execution services. The Amendment Regulations shall come into force on the ninetieth day from the day of their publication in the official gazette (i.e. July 03, 2020). This article aims to briefly summarize the key regulatory changes, which have been introduced by way of the Amendment Regulations.
Client Level Segregation of Advisory and Distribution Activities.
Regulation 22 has been amended to segregate advisory and distribution activities at the client level in order to avoid conflict of interest. An individual IA shall not provide distribution services. Further, the family of an individual IA shall not provide distribution services to the client advised by the individual IA and no individual IA shall provide advice to a client who is receiving distribution services from other family members.
The Amendment Regulations define a “non-individual” as a body incorporate including a limited liability partnership and a partnership firm. A non-individual IA shall have client level segregation at the group level for investment advisory and distribution services. The Amendment Regulations clarify that the same client cannot be offered both advisory and distribution services within the same group of the non-individual entity. A client can either be an advisory client where no distributor consideration is received at the group level or can be a distribution services client where no consideration is collected from the client at the group level. A non-individual IA is required to maintain an arm’s length relationship between its activities as IA and distributor by providing advisory services through a separately identifiable department or division. Compliance and monitoring process for client segregation at group or family level shall be in accordance with the guidelines as specified by the SEBI.
Implementation of Advice or Execution.
The newly inserted regulation 22A(1) states that an IA may provide implementation or execution services to the advisory clients in securities market provided that no consideration including any commission or referral fees, whether embedded or indirect or otherwise, by whatever name called is received, at IA’s group or family level for the said service, as the case may be. Further, implementation services may be provided only through direct schemes/products in the securities market. The IA or group or family of IA shall not charge any implementation fees from the client and the client shall not be under any obligation to avail implementation services offered by the IA.
Mandatory Agreement Between IA and Client.
Regulation 19(1)(d) makes it mandatory for an agreement to be executed between the IA and client for ensuring greater transparency with reference to advisory services.
Regulation 15A states that the IA shall be entitled to charge fees for providing investment advice, from a client, in the manner as specified by SEBI.
Eligibility Criteria for IAs.
Regulation 8 has been substituted to enhance the eligibility criteria for registration as an IA. The minimum net worth of IAs who are non-individuals shall be Rs. 50,00,000/- (Rupees Fifty Lakh Only) and for individual IAs, it shall be Rs. 5,00,000/- (Rupees Five Lakh Only). Further, existing IAs shall comply with the net worth requirement within 3 (three) years from the date of commencement of the Amendment Regulations. Further, regulation 13(e) has been inserted which states that registered individual IAs whose number of clients exceed 150 (One Hundred And Fifty) in total, shall apply for registration with SEBI as a non-individual IA within such time as may be specified by SEBI.
Person Dealing in Distribution of Securities.
Regulation 3(3) states that on and from the date of commencement of the Amendment Regulations, no person 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 SEBI as an IA.
Apart from the key regulatory changes as described above, Regulation 7 has been amended to provide for enhanced professional or post-graduate qualifications of the IA or a principal officer of a non-individual IA registered as an IA in relevant subjects with relevant experience. However, these qualification requirements shall not apply to such existing IAs as may be specified by SEBI. The Amended Regulations also make further amendments to Form A in First Schedule of the Principal Regulations, which deal with application for grant of certificate of registration/renewal as an IA. Vide its press release dated July 03, 2020, SEBI has clarified that 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 circular2.