India: Proposed Amendments To Sebi (Investment Advisers) Regulations, 2013

  • SEBI has released a consultation paper proposing clarifications / amendments to the SEBI (Investment Advisers) Regulations, 2013
  • Key changes proposed include relook at exemptions to different persons (including mutual fund distributors), clarifications on concepts of 'investment product' and 'consideration', clarity on activities of research analyst and investment adviser, increased formalization and increased focus on investment advice provided through digital means.
  • Mixed bag for the industry with some proposals being positive guidance while some others may impose restrictions on businesses if effectuated.

BACKGROUND

Before the Securities and Exchange Board of India ("SEBI / Board") issued the SEBI (Investment Advisers) Regulations 2013 ("IA Regulations") to regulate the provision of investment advisory services, the said services were rendered by various market intermediaries which may or may not have been regulated by SEBI such as portfolio managers, stock brokers, merchant bankers and credit rating agencies. Such investment advisers were not obligated to register themselves as a separate class of intermediary. On August 16, 2012, the IA Regulations were approved by the SEBI Board and thereafter IA Regulations were notified on January 21, 2013 and the same came into force on April 21, 20131.

Regulation 3 (1) of the IA Regulations mandates every person which acts as an investment adviser or holds itself out as an investment adviser2 to register itself as an Investment Adviser ("IA") under the IA Regulations, unless the person is exempted from registration under the IA Regulations. Typical examples of exempt persons include regulated persons providing investment advice on specialized products such as insurance agents, pension advisors and regulated persons providing investment advice incidental to their primary activity, such as mutual fund distributors, advocates, registered stock brokers etc.3

PROPOSED AMENDMENTS TO THE IA REGULATIONS

On October 7, 2016, SEBI released a consultation paper on amendments / clarifications to the IA Regulations (the "Consultation Paper").

SEBI, while taking note of actions of other regulators in India and abroad with respect to issuance of guidelines to investment advisors, has proposed certain amendments / clarifications to the IA Regulations. Here, we shall discuss a few key amendments / clarifications proposed by SEBI in the Consultation Paper:

1.Re-look on exemption to mutual fund distributors

Proposal: Currently, mutual fund distributors are permitted to sell mutual fund products, provide incidental or basic advice in respect of such products and can also help in executing transactions (subject to certain conditions). With regard to the provision of such services, distributors get commission from asset management companies and may also charge execution / advisory fees to clients. However, IAs are subject to restrictions on provision of distribution / execution services such as clear segregation of division / department / entity carrying out non-IA services, maintenance of arms-length relationship etc.

In order to have a level playing field in respect of investment advisory services, SEBI has proposed that

1.mutual fund distributors be prohibited from providing incidental or basic investment advice on mutual fund products unless they migrate as IAs by registering themselves with SEBI under the IA Regulations within a period of three years;

2.no person be allowed to use nomenclature such as 'independent financial adviser', 'wealth adviser' etc. without registering as an IA;

3.persons engaging in the distribution of mutual fund products shall use the nomenclature 'Mutual Fund Distributor' and they cannot provide basic or incidental investment advice except describing product specifications without recommending any product; and

4.mutual fund distributors shifting from commission based model to fee based advisory model shall be required to register as an IA.

Analysis: The said proposal by SEBI has faced stiff opposition from MF distributors citing reason that such a move would adversely impact the sector.4

The SEBI proposal requiring mutual fund distributors who provide investment advice incidental to their product to migrate to the IA Regulations must be viewed in light of such considerations and may be considered rather omnibus in scope. A more measured approach would be preferable.

2.Re-look on exemption from registration for certain persons

Proposal: SEBI has proposed a re-look at the exempted persons under Regulation 4 of the IA Regulations and has proposed mandatory registration for persons providing investment advice in respect of securities irrespective of whether such activity is ancilliary to their primary activity. Exemption shall only continue for persons who are carrying out investment advisory activities permitted under other SEBI regulations, such as merchant bankers registered with SEBI, fund managers to mutual funds and alternative investment funds registered with SEBI etc. or to persons providing investment advice on specific products regulated by regulators other than SEBI such as insurance products regulated by the Insurance Regulatory and Development Authority of India ("IRDAI").

Analysis: The activities of professionals such as chartered accountants, lawyers etc. may involve the provision of incidental investment advice. However, the Consultation Paper is silent on the continuation of exemption for such persons. It is hoped that the SEBI is cognizant of these scenarios and that any removal of exemptions is carefully considered and does not have unintended repercussions on the conduct of business of various professionals.

3.Investment advisory services through a separate subsidiary

Proposal: Currently, banks, non-banking financial companies ("NBFCs") and body corporates providing distribution or execution services are required to keep investment advisory services segregated from such activities.5 Such entities are only allowed to offer IA services through separately identifiable departments or divisions ("SIDDs"). In order to address conflicts of interest in an effective manner, SEBI has proposed that separate subsidiaries be set up for the provision of IA services and that such services should not be provided through SIDDs. Consequently, those persons offering such services through a separate department or division (as currently permitted) will be required to set up a separate subsidiary in relation to their IA services within three years.

Analysis: If the SEBI were to effectuate the said proposal, it will provide for easier identification of functions performed by different entities. That being said, setting up a separate subsidiary will also entail increased costs and duplication of functions for businesses.

4.Clarifications on 'investment product' and electronic / broadcasting media advice

Proposal: Since there is no existing definition of 'investment product' in the IA Regulations, SEBI has proposed defining investment product as "Investment products shall include all financial instruments that are regulated by any financial sector regulator in India. However, advice exclusively on products in non-securities market which are regulated by sectoral regulators shall be outside the scope of the IA regulations".

Further, SEBI has proposed to clarify that while persons providing investment advice in electronic, broadcasting or telecommunications media will be covered within the purview of the SEBI (Research Analysts) Regulations, 2014 ("RA Regulations"), persons advising clients after their enrolment / registration / subscription on any public media platform shall be required to comply with the IA Regulations.

Analysis: The said proposal is positive in that it clarifies the meanings of certain important concepts in the IA Regulations. A clarification on the meaning of "investment products" would be especially welcome considering that the proposed definition would definitively convey that certain assets which may be held for investment purposes, such as real estate assets or jewellery, are clearly outside the scope of the IA Regulations.

5.Clarification of the meaning of 'consideration'

Proposal: SEBI has proposed to clarify the meaning of 'consideration' to cover all forms of remuneration or compensation, including the receipt of any economic benefit receivable by the IA, its associates or subsidiaries in respect of the underlying securities. For example, a mutual fund distributor providing investment advice and receiving commission from a mutual fund house but not from the client will still be regarded as providing investment advice for consideration although the consideration does not flow from the client and therefore, such mutual fund distributor will be required to be registered as an IA.

Analysis: This would be an important clarification from the point of view of investor protection since it would prevent persons providing investment advice from avoiding registering as IAs on the grounds that there is no remuneration flowing directly from the client.

6.Clarity on activities of research analyst and investment adviser

Proposal: Under the RA Regulations, a research analyst ("RA") includes a person making buy / hold / sell recommendations with respect to securities listed or to be listed. This overlaps to a considerable extent with the function of provision of 'investment advice' by IAs. Therefore, there is considerable ambiguity regarding the scope of functions to be performed by an RA vis-à-vis that to be performed by an IA.

In the Consultation Paper, SEBI has observed that some persons take advantage of the ambiguity by registering themselves as RAs in order to avoid compliance requirements under the IA Regulations. Such persons thereafter provide stock specific recommendations and / or research services to specified clients wherein such clients are sent recommendations through e-mails or SMS without the accompanying research report as required under the RA Regulations. While SEBI has typically held these to fall within the purview of investment advisors6 it has also occasionally held that the provision of stock specific recommendations falls under the purview of RA Regulations7. In many of the decisions referred to, SEBI has passed orders against persons for failure to register under both the IA Regulations and the RA Regulations. In order to provide clarity regarding the differences in the functions to be performed by an IA as against those performed by an RA, SEBI has proposed that all RAs shall provide research reports to all classes of clients at the same time. In case RAs provide research services to retail clients for a separate fee, they shall act in a fiduciary capacity undertaking general obligations and responsibilities as applicable to IAs. Further, SEBI has proposed that the making of a buy / sell / hold recommendation by providing an entire research report shall continue to be governed by the RA Regulations. This implies that provision of such recommendations without an accompanying report may make a person including RAs liable to be registered as IAs.

Analysis: Considering the possibility of overlap between functions performed by an IA and an RA, especially with regard to the making of buy / sell / hold recommendations, it would be preferable to lay down certain more determinable criteria on the basis of which a distinction may be made. It appears that the intention is that an RA's activities should generally be more generic and not tailor-made to specific clients (unless research services are specifically sought out by the client, in which case the proposal is that they should undertake obligations and responsibilities applicable to an IA) and that a research report is essential for an RA relationship. If such is in fact the case, it would be preferable for this to be clarified as such by SEBI. Another helpful measure can be the release of a circular, possibly in frequently-asked-questions format with examples of concrete fact patterns based on which a differentiation can be made out between IAs and RAs.

7.Increasing formalization through 'Rights and Obligations' document and Advertisement Code

Proposal: Under the current IA Regulations, it is not mandatory to enter into a written document specifying the terms and conditions of the advisory services offered. SEBI has proposed that at least two days before onboarding clients, an IA shall provide a 'Rights and Obligations' document to clients stating the inter se relationship and terms and conditions of investment advisory services. The document is required to contain information / details including scope of services, type of instruments, disclosures on fees, risks, liabilities, termination etc. Further, the document should provide contacts for grievance redressal and for dispute resolution through arbitration.

Another important step towards formalization is the proposed advertisement code which would lay down certain guidelines with respect to advertisements by IAs. The objective appears to be to curtail untrue, misleading, exaggerated advertising. Advertisements should not contain performance assurances or guarantees. Factors such as limitations on the information and independence of the reports, analyses or services relied on should be disclosed.

Analysis: The proposal for a 'Rights and Obligations' document is an important step to ensure proper disclosure to clients. It is advisable that IAs seek help of legal counsel in drafting the 'Rights and Obligations' document.

However, with the increasing digitalization of investment advisory services (discussed below), the requirement for a two-day period between the provision of the 'Rights and Obligations' document and the onboarding of the client is anachronistic.

8.Increased focus on regulating digital means of advice dispensation

Proposal: SEBI has proposed that no person should be allowed to provide trading tips, stock specific recommendations etc. to the general public through social networking media such as Whatsapp, Facebook, Twitter etc. unless such person obtains registration under the IA Regulations or is exempt under the same. Further, no person shall organize or offer any scheme / competition / game / league on securities or related to the securities market.

Taking note of a report published by the International Organization of Securities Commissions ("IOSCO") on Social Media and Automation of Advice Tools Surveys8, SEBI in the Consultation Paper has proposed certain additional compliance requirements for IAs providing online investment advisory services using automated tools. Some of these measures include disclosures to clients on the working of automated tools and limitations of the output, usage of automated tools only for target clients for which it is designed, and subjecting the tools to audit and inspection.

Analysis: These proposals by SEBI indicate a laudable effort being made to adhere to global standards and provide protection to investors in the face of increased digitalization of investment advisory services and increased influence of fintech.

CONCLUSION

The current IA Regulations has certain lacunae that SEBI is aiming to address. Currently there is substantial confusion as to when certain activities tantamount to investment advice attracting registration under the IA Regulations, when they are covered by other regulations such as the RA Regulations and when they are exempt from registration.

Since the commencement of IA Regulations, SEBI has prevented various unregistered advisory firms from rendering their services to the investors and sought reasons for non-compliance.9 Yet, it has been observed that SEBI has been forbearing in most of its decisions against the unregistered persons providing investment advice and has not levied any kind of penalty10. This may be a tacit acceptance that the boundaries of "investment adviser" and "investment advice" remain uncertain in many situations.

SEBI seems to be serious in its intent in curtailing situations of conflict of interest among intermediaries such as mutual fund distributors who may also provide investment advice while conducting their primary business and receiving compensation in regard to multiple services, from either or both parties. While the intent is laudable, it is debatable whether requiring intermediaries and other professionals to compulsorily register themselves under the IA Regulations is a step forward considering that the exigencies of their business often require them to provide incidental investment advice and adopt a commission based model rather than a fee based model. It is expected that an improper removal of exemptions can add to the prevailing confusion as to who may be considered as an investment adviser. Perhaps a more measured approach towards a level playing field may be considered by SEBI.

The increased attempt at pigeon-holing and requirements of adhering to multiple regulations and regulators may affect the Central Government's initiative to enhance the 'Ease of Doing Business'. For example, a company / group wishing to provide investment advice across various asset classes such as insurance, real estate, mutual funds etc. may have to deal with numerous regulators, adding to costs and inefficiencies.

Certain other measures proposed by SEBI such as those towards greater formalization of relations between the IA and the client, as well as the increased focus on regulating the provision of investment advice through digital means are commendable and would further the cause of investor protection.

Footnotes

1 Regulation 1 (2) of the IA Regulations.

2 "Investment adviser" has been defined to mean "any person, who for consideration, is engaged in the business of providing investment advice to clients or other persons or group of persons and includes any person who holds out himself as an investment adviser, by whatever name called."

"Investment advice" has been defined to mean "advice relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products, whether written, oral or through any other means of communication for the benefit of the client and shall include financial planning."

3 Regulation 4 of the IA Regulations. Also see, SEBI PR No. 53/2013 dated May 29, 2013

4 http://economictimes.indiatimes.com/markets/stocks/news/sebi-extends-deadline-for-comments-on-investment-advisor-norms/articleshow/55293481.cms

5 Regulation 22 of the IA Regulations.

6 SEBI Order No. WTM/RKA/ISD /108/2014 in respect of Mansoor Rafiq Khanda and anr.; SEBI Order No. WTM/SR/IMD-DoF/ILO/ 39 / 03/2015 in respect of M/s, Global Mount Money Research and Advisory Pvt. Ltd. and ors.; WTM/SR/SRO-BLO/ 115/ 06/2015 in respect of M/s. HBJ Capital Services Pvt. Ltd. and ors.

7 WTM/SR/SEBI/IMD/27/05/2016 in respect of Mr. Anirudh Sethi

8 Accessible at http://www.iosco.org/library/pubdocs/pdf/IOSCOPD445.pdf

9 SEBI Order No. WTM/RKA/ISD /108/2014 in respect of Mansoor Rafiq Khanda and anr.; SEBI Order No. WTM/SR/IMD-DoF/ILO/ 39 / 03/2015 in respect of M/s, Global Mount Money Research and Advisory P vt. Ltd. and ors.; WTM/SR/SRO-BLO/ 115/ 06/2015 in respect of M/s. HBJ Capital Services Pvt. Ltd. and ors.; WTM/SR/SEBI/IMD/27/05/2016 in respect of Mr. Anirudh Sethi; Order No. WTM/SR/SEBI/IMD/57/11/2016 in respect of CapitalVia Global Research Limited and ors.; Order No. WTM/SR/SEBI/IMD/56/11/2016 in respect tof Motivate Financial Services Private Limited.

10 Recourse to penal provisions has been usually taken only in cases where of repeated offences.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Mondaq Free Registration
Gain access to Mondaq global archive of over 375,000 articles covering 200 countries with a personalised News Alert and automatic login on this device.
Mondaq News Alert (some suggested topics and region)
Select Topics
Registration (please scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions