The Securities and Exchange Board of India (SEBI) had notified SEBI (Investment Advisers) Regulations, 2013 (IA Regulations) to regulate the activities of Investment Adviser. There were amendments carried out vide SEBI (Investment Adviser) (Amendment) Regulations, 2020 dated 3 rd July 2020.
In addition to the amendments, SEBI has issued a Circular dated September 23 rd, 2020 on the applicability of each of the amendments made vide amended regulation and other regulations which are to be complied by a Registered Investment Advisor (RIA).
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Here is the list of regulations prescribed by SEBI which are to be complied with by RIA:
- Client Level Segregation of Advisory and Distribution Activities
- Agreement between IA and the client
- Qualification and certification requirement
- Registration as Non-Individual Investment Advisor
- Maintenance of record
- Risk profiling and suitability for non-individual clients
- Display of details on the website and in other communication channels
Client Level Segregation of Advisory and Distribution Activities
As mentioned in the amended regulation, individual IA will not be eligible to provide distribution services. However, non-individual IA can provide both advisory and distribution services by complying with the defined regulations, which are as follows:-
With respect to the existing clients, an option is available with them to avail of either advisory services or distribution services. Clients will not be eligible to avail other than the service availed with IA within the group/family of IA.
- They can continue to hold the assets acquired before the applicability of the segregation of services and shall not be forced to liquidate or switch the existing holdings.
- ‘Group’ for this purpose shall mean an entity which is a holding, subsidiary, associate or 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 the Companies Act, 2013 for non- individual 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. Family of IA shall include IA, spouse, children, and parents.
- With respect to a new client, an option is available with them to avail of either advisory services or distribution services within the group/ family of IA. Such an option is available at the time of onboarding the client.
- To identify the client-level segregation, PAN shall be considered as a control record.
- The term client here shall be termed as a family of the client. PAN of all the members of the family shall be jointly and severally the control record. The family of the client shall not apply to non-individual clients. The family of a client shall include individual client, dependent spouse dependent children, and parents.
- The client has to provide an annual declaration or periodic upgrade as applicable in respect of such dependent family members.
Compliance by IA
- IA needs to maintain records of each of the clients in which the details of his/her family members along with the dependency for which a copy of declaration annually or periodically has to be collected.
- IAs shall only advise direct plans i.e., non-commission-based products wherever applicable.
- An individual IA shall obtain a certificate from an auditor and a non-individual IA from the statutory auditor for compliance of the client level segregation. Where such a report has to be obtained within a period of six months from the end of the financial year. The same shall form part of the compliance audit.
Agreement between IA and the client
SEBI had mandated an agreement with the client in the amended regulation. In the circular issued, SEBI has mentioned the minimum terms and conditions which are to be prescribed in such agreements. IAs can add additional terms with clients but cannot dilute any of the regulations applicable.
IA shall provide investment advice or collect fees from the client only after the receipt of the signed copy of the agreement.
Therefore, IAs cannot establish an agreement by mere ticks in the checkboxes on the website. IA must collect the signed copy of the agreement. However, IAs can have electronic agreements digitally signed by them.
Compliance by IA
It is mandated to have an investment advisory agreement with all the clients onboarded from 1 st April 2021 and fresh agreements are to be made with the existing clients latest by the aforesaid date. Compliance of the same shall be communicated SEBI by all the RIAs on or before 30 th June 2021.
SEBI had mentioned that the fees collected from the clients have to be regulated in the amended regulation. Accordingly, SEBI has prescribed the following two modes which IA has to comply with:-
- Assets under Advice (AUA) mode
- Maximum of 2.5% of AUA per annum per client for all the services offered by IA.
- AUA has to be supported by the demat statements, unit statements, or any other statements as applicable by IA.
- If AUA includes those assets which are under any pre-existing distribution arrangement with any entity, then the same shall not be considered in the calculation of the AUA to apply 2.5%.
“Assets under advice” means the aggregate net asset value of securities and investment products for which the investment adviser has rendered investment advice irrespective of whether the implementation services are provided by the investment adviser or concluded by the client directly or through another service provider.
- Fixed fee mode
IA can charge a maximum of rupees 1,25,000/- per annum per client across all the services offered.
Compliance by IA
- The term client to be read as a family of the client to charge fees in any of the above modes.
- The mode of charging a fee for the existing clients has to be decided at the latest by 1 st April 2021 and cannot be changed before completion of 12 months.
- The mode of charging a fee for the new clients has to be as per any of the above two modes and cannot be changed before the completion of 12 months of onboarding.
- Upon acceptance by the client, an IA can collect fees in advance. However, the same shall not exceed fees for 2 quarters. This applies to both the mode of charging fees.
- In case of premature termination of agreements, IA is bound to refund the fees collected for the unexpired period. However, IA may retain a maximum breakage fee of not greater than a one-quarter fee.
Qualification and certification requirement
SEBI had enhanced the qualification and certification requirement for the IAs and Persons associated with the investment advice which has to comply within a period of three years from 1 st October 2020.
Compliance by IA
- SEBI has exempted individual IAs aged more than 50 years as of 30 th September 2020, to comply with the enhanced qualification and certification requirement. However, such individual needs to comply with the NISM certification or CFP.
- The said relaxation does not apply to the persons associated with investment advice or the principal officer of the non-individual investment advisor. Therefore, the aforementioned requirements have to be complied with.
All new applicants, both individual and non-individual, have to comply with the qualification and certification requirement at the time of making an application. No relaxation is provided to the new applicants.
Registration as Non-Individual Investment Advisor
Individual IAs can provide investment advisory services to a maximum of 150 clients. If the number of clients exceeds 150, then such IA has to apply for registration as a non-individual IA. Until the registration is approved by SEBI, no new client shall be advised by such IA and only the existing client can be served.
If the registration has been rejected by SEBI, then such individual IA may continue to provide investment advisory services by ensuring that the total number of clients shall not exceed 150 in numbers.
A fresh application has to be made to SEBI to get registered as a non-individual IA and there would be no transfer of registration.
Compliance by IA
- Existing individual IAs who have more than 150 clients as of 30 th September 2020 shall report the number of clients to SEBI through firstname.lastname@example.org on or before 15 th October 2020 in the following format-
|Name of IA||Registration No.||No. of clients as of September 30, 2020||Registered office address|
Existing IAs with more than 150 clients in numbers as of 30 th September 2020 shall not onboard new clients and apply for registration as a non-individual IA on or before 1 st April 2021. During the said period, service can be provided to the existing clients.
Maintenance of Record
SEBI has prescribed the records which are to be maintained in the regulations. There is an increase in the number of records to be maintained where the conversation has taken place with respect to investment advice which includes:-
- Physical record written & signed by the client,
- Telephone recording,
- Email from registered email id,
- Record of SMS messages,
- Any other legally verifiable record
The said documents/ details have to be maintained by IA for all the clients including the prospective client right from the first interaction with the client and shall continue till the completion of the advice.
Compliance by IA
- IAs shall maintain the records for a period of 5years. In case of any dispute has been raised, the same shall be maintained till the resolution of the dispute. However, if SEBI requires the specific records to be preserved, the same shall be maintained by IA till further communication by SEBI.
- The enhanced documentation of records to be complied with by all IAs by on or before 1 st January 2021.
- To comply with the regulation its advisable for IA either to provide advice through email or physical document.
- SEBI has mandated compliance audit, concerning the compliance of all the regulations and circulars issued by SEBI, for both individual IAs and non-individual IAs from a member of the Institute of Chartered Accountants of India or Institute of Company Secretaries of India.
- Such compliance audit has to be completed within a period of 6months from the end of the financial year.
- In case of adverse findings in the audit, then such adverse findings along with the action taken/ approved have to be reported to the respective SEBI office based on the registered address of the IA. Such a report has to be submitted by the individual IA or the management of the non-individual IA as applicable has to be submitted within one month from the date of the audit report but shall not be later than 31 st October.
- With respect to compliance of the client level segregation, a separate certificate has to be obtained by the individual IA from the auditor and non-individual IA has to obtain it from its statutory auditor which forms part of the audit report.
- The said timelines of the audit report and intimation to SEBI shall be applicable for the financial year ending 31 st March 2021.
Risk profiling and suitability for non-individual clients
- Regulation for risk profiling and suitability has been mentioned in the SEBI (Investment Advisers) Regulation, 2013 and it is mandatory for all individual and non-individual clients.
- With respect to non-individual clients, IA has to refer to the investment policy/ relevant excerpts of the policy as approved by the board or the management for risk profiling and suitability.
- In case of non-availability of the same, it’s at the discretion not to onboard the non-individual client as the IA is unable to comply with the risk profiling and suitability.
- All the IAs are required to comply with risk profiling and suitability regulations by on or before 1 st January 2021.
Display of details on the website and in other communication channels
SEBI has enhanced the display of details on the website and other communication channels to enhance transparency in the functioning of the IAs and to protect the interest of investors.
Accordingly, IAs shall display the following information prominently on its website, mobile app, printed or electronic materials, know your client forms, client agreements, and other correspondences with the clients:-
- Complete name of Investment Adviser as registered with SEBI,
- Type of Registration-Individual, Non-Individual,
- Registration number, the validity of the registration,
- Complete address with telephone numbers,
- Contact details of the Principal Officer –contact no, email id, etc.,
- Corresponding SEBI regional/local office address.
The said changes to be made by the IAs on their websites on or before 1st January 2021.
Even though there are several changes made by SEBI, all the said regulations are not made applicable on an immediate basis and have provided a timeframe from which each of the regulations has to be complied. Following is the summary of the dates from which each of the regulations has to be complied with:-
|SL No||Compliance requirement||Applicability|
|1.||Client Level Segregation of Advisory and Distribution Activities||On or before 1 st April 2021|
|2.||Agreement between IA and the client||On or before 1 st April 2021|
|3.||Fees||On or before 1 st April 2021|
|4.||Qualification and certification requirement||Within 3yrs for the existing IAs and for new applicants, immediately.|
|5.||Registration as Non-Individual Investment Advisor||When the number of clients exceeds 150 or before 1 st April 2021|
|6.||Maintenance of record||On or before 1 st January 2021|
|7.||Audit||Starting with FY 2020-2021|
|8.||Risk profiling and suitability for non-individual clients||On or before 1 st January 2021|
|9.||Display of details on the website and in other communication channels||On or before 1 st January 2021|
The aforesaid amendments are a welcome move towards enhancing investor confidence by bringing in transparency and regulation to the modalities of IAs services. However, there are few uncertainties on the changes made by SEBI and has increased the compliance burden to IAs.