SEBI (Investment Advisers) (Amendment) Regulations, 2020: – Comprehensive Review and its implications

Abstract

Registered Investment Advisors (RIA) who are registered with the Security Exchange Board of India (SEBI) has reported several problems like charges, their role, services, and the exorbitant fees which they charge from their investors.

The Investment Regulation has been laid down to make a framework for investment advisors. Taking a step for numerous complaints filed against investment advisors, it has been addressed with the amendment made in July 2020. These amendments are necessary for the smooth and regulatory functioning of the entity.

The main focus of this amendment has aimed for the interest of investors. Investors are the ones who are investing their money hence they must be given enough security on whatever they invest. The key regulatory changes on fee clause, net-worth clause, segregation of activities, and the agreement must be made between both the client and the investment advisor.

The author in this article has given an overview of the amendment and the reason behind these changes and the positive and negative impacts of the same.

Introduction

Security Exchange Board Regulations, 2013 principle regulates investment advisors in India.  Among other items, the Principal Regulations prescribe requirements for registration, certification, adequacy of capital, risk profiling, and suitability, disclosures to be made, code of conduct, records to be held, manner of performing inspections, etc. about us.

Vide Press Release No. Stock Exchange Board of India (SEBI) PR No.37/2020 dated 03 July 2020 adopted amendments to the SEBI (Investment Advisers) Regulations 2013 to strengthen the Investment Advisors Regulatory Framework[1].

In January 2020, SEBI released a Consultation Paper on the Review of the Investment Advisors Regulatory Framework and sought public feedback on the proposals, and received public comments. The consultation paper is made to clearly distinguish amongst the distribution, advisory, and other execution services that are provided to the client by Investment Advisors.

Distribution and execution services have been used interchangeably during the past time. The changes which were notified by SEBI (Investment Advisers) (Amendment) Regulations, 2020 have been approved by SEBI. After the publication of the amendment in the official gazette, the amendment or regulation must come into force on the 90^th day.

Investment Advisors (IA)

An investment advisor is any person or group that, in exchange for a fee, makes investment recommendations or performs securities research and is often referred to as a financial advisor. Investment advisors offer advice to clients working within the financial industry as a specialist.

Some people are excluded, such as insurance companies, pension advisors, stockbrokers, mutual fund dealers, fund managers, attorneys, law firms, etc. Clients are the consumers who use the services of the investment advisor.

In 2013 SEBI came out with the amendment in the interest of the investors. “As per regulation 2(m) “investment adviser” means 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;”[2]   According to Investment Advisor Regulation, every investment advisor should have the certificate from SEBI of registration. The lack of which may lead to legal actions against that person.

Advisory Segregation and Distribution Services

Both of these services have been brought through this amendment. Advisory service refers to advising on investments to the clients by the Investment advisors whereas distribution services are referred to make the product available to the clients.

Now, as per the regulations made in this amendment, the Investment Advisor can provide both the services whereas before the amendment both these services cannot be practised together by any of the partnership firms or individuals, individuals.

Before this only Non-Banking Financial Company (NBFC), corporate entities, and non-individuals ‘entities, were permitted to do certain things on the condition that Investment Advisors have to maintain distance between its activities which are related to distribution services and investment advisors.

As per the 23^rd regulation, the amendment made is that at the client level itself, non-individual organizations are now supposed to segregate the advisory and distribution services

This indicates that, while certain agencies have separate divisions for both advisory and distribution services, they are unable to provide a single client with both of these services.

Why this change has been bought?

SEBI bought this change for the protection of the investment advisors. It has been bought to avoid the conflict of interest and to act in the best interest of its client. The segregation of these activities is just as they led to a huge conflict. As overlapping leads to interfering and none of the department works smoothly. 

The change has also brought the avenues for the individual that they can register themselves as both the advisers means investment advisors and distributors of the goods.

Implementation Services

The Investment Advisors were overcharging the extra-consideration from their potential customer as observed by SEBI.  In the name of execution fees, the client was supposed to give more money to avail of such services.

This was creating distrust amongst the clients for investment advisers, hence certain changes and amendments have been brought under this clause. Now the investment advisers will charge the fees(execution) from the direct product and schemes which are mentioned in the securities market and consideration cannot be received either directly or indirectly.

Their family members can also not do so. It is mentioned in Regulation 22 A [3].

Fees

Under this clause fees were subjective and Investment Advisers were supposed to charge the amount for fees as per their choice hence more and more complaints were registered in SEBI by the investors on the fees that are charged by Investment advisors.

But with the amendment in the regulation now SEBI will fix the number of fees to be charged by the Investment Advisors. The maximum ceiling has to be fixed.

Is this change good?

Though for the exorbitant fees that are charged by the Investment advisors now it will be done as per the fixation of fees, the change is good but it has some loopholes as investment advice is a time taking activity and few of the cases required a huge amount of time and effort hence it must differ from case to case and mere fixation of the maximum fee will not suffice the problem and might leave either the Investment advisers or investors to the vulnerable stage. Earlier there was no clarity in the fees but now there will be proper clarity.

Investment Adviser and Clients agreement

Earlier there was no such agreement but with the recent amendment, both the investment advisor and the client must have an agreement. The idea behind this change is that it will bring transparency in the process and the client will be aware of the terms and conditions which will be mentioned under the agreement.

The clients now will be aware of their claims and will also be able to exercise their rights over such claims which will become very easy for them. It is mentioned in Regulation 19(1)(d)[4].

Eligibility criteria for Investment Advisers

Before the amendment, the Investment Advisors which were the corporate entities were supposed to have a net worth of not less than twenty-five lakh rupees whereas individual investment advisers were supposed to have a net worth of not less than 1 lakh rupees.

Now, as per the amendment in Regulation 8[3], the net-worth for corporate has been made fifty lakhs and for the Individual Advisers, it is ten lakhs. This has been increased because of their increase in advisory skills hence it is difficult to decide one’s net-worth based on their advisory skills and also not fair in the eyes of the author.

The other change that has been bought is the individual investment advisors or non-individual investment advisers should have the professional qualifications in the subject which is relevant and he must have the 5 years’ experience on the same.

One more change that has been bought is the registration of the non-individual investment adviser with SEBI whose clientele has exceeded 150 in total. With the change of Clientele of SEBI now a greater number of non-individual investment advisors can register with SEBI.

Conclusion

These amendments were a necessity for the healthy and effective regulatory functioning of Investment advisers. SEBI will ensure that no loopholes are being left while performing the advisory activity and the transparency between the clients and investment advisors dealing with each other. Not only the amendment will ensure the protection to the client but also the investment advisors but the primary focus is the protection of the investors.