SEBI has notified the Investment Advisers Regulations, 2013 on 21st January 2013. The objective is to require persons engaged in the business of advising on investments to get registered with SEBI and be subject to fairly elaborate regulations. The intention seems to create/recognise a separate category of advisers rendering investment advice and who are not affected by biases of distributors. Such Advisers would thus ideally advise clients on which investment mix is best suited to the clients’ needs and risks and get paid by the client for such advice.
Presently, there are certain concerns in respect of persons providing services in investments. Often, they are not paid by the clients to whom they render services, but are paid by the entities whose products they deal in. Even if they are paid by clients, they may get commissions and other amounts from entities whose products they recommend or distribute. Thus, there is an inherent conflict of interest. Further, even otherwise, if an adviser is paid in other manner such as the quantity of stock in which the client has traded or similar criteria, he faces other types of conflict of interest such as making the client trade more, etc. By such conflicts which over a period the client also understands and realises, the concept and field of investment advice itself is brought to disrepute. Some of those engaged in investment advice have been known not to follow a wholly ethical and professional practice. The advice may be without doing due diligence of the client of his risks and objectives. The advice may even be malafide in the sense that the adviser may himself trade in the opposite direction, while advising the client to take a particular direction.
Thus, there was a need for creating such a separate category of advisers who are engaged almost exclusively in rendering such advice, who take fees from the clients and who make due disclosures about the fees he receives and the trades he himself carries out and so on. It appears that the intention was also to either prohibit the adviser from distributing products himself or making due disclosures of that, particularly of the fact of the consideration he receives if the client buys products that he advises. These Regulations are intended to carry out such objectives. However, the intention also seems to exclude several categories of persons who are otherwise regulated by other regulators such as IRDA, by other professional organisations or even by SEBI itself. Important features of these Regulations are explained as follows.
All Investment Advisers will be required to register with SEBI as a pre-condition to carry on the business of rendering investment advice. The term “investment advice” is broadly framed and includes advice on dealing in investment related products. The Investment Advisers will need to have certain basic relevant qualification and also obtain specialised training/certification. The process of registration is elaborate. They are subject to a detailed code of conduct. The requirements of documentation for clients and in particular the advice given are quite detailed. However, these requirements are perhaps impractical or infeasible particularly for small advisers, though they do set a high benchmark of standards of ethics and good business practices.
The Regulations are dated 21st January 2013 and will come into effect from the ninetieth day of their notification. An existing Investment Advisers is required to apply for registration within six months of their coming into effect and if he has done so may to carry on the activity continue till disposal of his application. New Investment Advisers will have to first apply and obtain registration before commencing such activity.
Investment Adviser is a person who is engaged in the business of rendering investment advice to clients or other persons for a consideration. Thus, persons giving free advice/tips are not covered. Having said that, the business need not be the main business (though see later exemptions for certain categories). Investment advice is broadly defined. It essentially means, advice relating to dealing in securities or investment products. It is not clear whether this would exclude products like gold, real estate, etc. since these are investment products too, though the scheme of the Regulations seem to indicate that they may not be intended to be covered. Even otherwise, it is arguable whether SEBI has jurisdiction over investments in gold, real estate, etc. But even then, a large variety of products would be covered, such as shares, derivatives, mutual fund and other units, shares of unlisted companies, company deposits (even bank deposits), insurance policies/products, small savings like national savings certificates, public provident fund, etc. Viewed even in this way, the impression would be that it would cover almost every agent/ broker dealing in financial products. However, since the requirement is that the Investment Adviser should be rendering advise for consideration, and if one takes a view that the consideration should flow from the clients, then many distributors who earn purely through commissions and the like may not get covered.
There are certain specific exclusions and thus the Regulations will not apply to such excluded persons. Insurance agents/brokers registered with IRDA, who offer investment advice solely in insurance products are excluded. So are pension advisers registered with PFRDA advising solely in pension products. Question is whether advisers who advise on multitude of products (subject, of course, to restrictions by the Regulator) would also need registration.
Distributors of mutual funds registered with specified bodies and registered stock-brokers/sub-brokers who render investment advice to their clients incidental to their primary activity are also excluded.
Professionals like Chartered Accountants, Company Secretaries, lawyers, etc. find a special mention. They too are excluded if they provide advice incidental to their professional service/legal practice. However, the wording is ambiguous. For example, Chartered Accountants are excluded if they provide “investment advice to their clients, incidental to his professional service”. There are Chartered Accountants who, for example, as part of their tax advice, also advice on investments. However, there are Chartered Accountants for whom rendering of financial advice is the main and not incidental professional service they render. It is not clear whether the intention is to exclude all practicing professionals or only those whose principle professional service is other than investment advice.
Thus, if giving such advice is not merely incidental to their professional activity, they too may require registration, irrespective of the fact that they may be regulated by their parent body. It is possible that some of such professionals may thus be covered. Entities such as individuals, firms, corporates, etc. are all covered. The Investment Adviser needs to have formal qualification. The recognised qualifications include professional qualification/post-graduate degree/diploma in finance, accountancy, etc. from recognised institutions, etc. Alternatively, the person may be a graduate in any discipline with at least five years’ experience in areas such as advice in financial products, securities, etc. Individuals and representatives of Investment Advisers need to have – in addition to such qualification it appears – a certification in financial planning from recognised institutions.
Corporate Investment Advisers need to have a minimum net worth of at least Rs. 25 lakh. Individuals and firms need to have net tangible assets of at least Rs. 1 lakh. Elaborate responsibilities and code of conduct have been provided. In particular, stress is given on not placing oneself in conflict of interest.
More important to highlight are the elaborate documentation requirements expected of Investment Advisers. Extensive disclosures relating to the Investment Advisers to the clients need to be made. Significant information has also to be collected of the client. A formal process has to be laid down to assess and analyse the client data from various perspectives including risk profiling. There has to be a documented process for selecting investments based on the client’s investment objectives and financial situation. Know Your Client records of the client’s need to be maintained by the Investment Advisers.
Curiously, the investment advice provided, written or oral, and even its rationale, has to be recorded. This innocuous and even well intended requirement can have serious practical and legal consequences. It is interesting that professionals like CAs, lawyers, etc. need not record or render every professional advice they offer in writing, but Investment Advisers are being required to so record. This may be impractical and cumbersome where clients are numerous and amounts of investments involved small, as they often are. Of course, in case of advising high net worth clients and the like, recording such advice makes sense. No specific requirement is made to take acknowledgement of the client of having received such advice and in such a case, the one-sided recording does not make sense.
The Investment Advisers are required to carry out a yearly audit of compliance of the Regulations by a Chartered Accountant or Company Secretary. Moreover, an Investment Adviser, other than an individual, is required to appoint a Compliance Officer for monitoring the compliance of the Act, Regulations, etc.
The scheme of the Regulations has a few puzzling as-pects. Whom do the Regulations really intend to cover and what types of activities? Is the intention to cover only those Investment Advisers who are not otherwise regulated by SEBI or other bodies? Is the intention not to cover mere distribution of investment products? Or is the intention to cover only those people who carry out investment advice business as their primary activity? The Regulations are not wholly clear and it is just possible that any person who carries out, wholly or partly, the business of giving investment advice would be covered. Thus, there will be multiple and even overlapping regulation.
However, in the other extreme, if the intention is to totally exclude persons already regulated by other bodies or totally exclude distributors of investment products, then the scope of the Regulations may be too narrow and the ills sought to be cured by Regulations will remain only partially touched.
There is yet another confusing area. Is the intention to cover only those Investment Advisers who are compensated by the clients and not by the issuer of the products? The Regulations seem to suggest that the Investment Advisers may receive consideration for advice from any source and not merely the client. In such a case too, intentionally or otherwise, the scope of the Regulations is broadened.
In any case, there are many types of investment products where there are thousands of small investment advisers/agents. These include, for example, agents of public provident funds, small savings, etc. It is arguable that though these too render “investment advice”, SEBI may not have jurisdiction over such products/advice. It will also be cumbersome and expensive for such agents to register themselves and difficult for them to maintain the type of records expected of them, apart from other compliances. SEBI could specifically clarify – since this seems to be the intention also – that unless they receive consideration directly from the client, the Regulations should not apply.
Another concern is of multi -service financial companies. It appears that the intention is to create chinese walls between product distribution department and investment advice department and only the latter would come under the purview of these Regulations. However, in practice, these chinese walls can be expected to be porous and this will thus make a mockery of the Regulations.
SEBI needs to relook at the Regulations to consider the difficulties highlighted above and have a dialogue with the industry and its participants, before bringing the Regulations into effect.
