The Securities and Exchange Board of India (SEBI) had notified SEBI Investment Advisors Regulations, 2013 to regulate the activities of Investment Advisors. There are certain amendments carried out vide SEBI Registered Investment Advisor (Amendment) Regulations, 2020 dated 3rd July 2020.
The proposed amendments are applicable from the ninetieth day from the date of publication in the official gazette i.e., 1st October 2020.
At the outset, let us understand who is an Investment Advisor is. An Investment Advisor is a person who provides investment advice relating to investment products to his clients for consideration. SEBI Investment Advisor Regulations mandates every person who acts as an Investment Advisor or holds itself out as an Investment Advisor to register itself unless the person is exempted from registration. Such registered individuals or entities are referred to as SEBI Registered Investment Advisors(RIAs).
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Given the above background, we wish to provide with an update on the changes proposed to Investment Advisor regulations vide the proposed amendment as follows:
- Segregation of Advisory & Distribution Activities
- Implementation Services
- Agreement between Investment Advisor and client
- Eligibility Criteria for Investment Advisors
Segregation of Advisory & Distribution Activities
There is a possibility that an RIA would advise a client to invest in those products which fetch maximum commission. As per the regulation, an RIA is required to disclose all the conflicts of interest that arise while serving its clients. Hence, to address the same, the following amendments have been made by SEBI:
For Individual Registered Investment Advisor (RIA)
An individual RIA cannot provide distribution services. In this regard, a distribution activity includes the distribution of mutual funds, insurance products, or any such investment products where the RIA or its family member gets compensation by way of commission/brokerage or any other mode.
A family member includes a spouse, parents, and children. Therefore, these family members of the individual RIA cannot provide distribution services to a client advised by the RIA.
Also, the RIA cannot provide advisory service to the client who has received distribution services from his family members.
For Non-Individual Registered Investment Advisor (RIA)
Non-Individual RIAs need to have client level segregate at group level for providing advisory and distribution services.
Also, advisory and distribution services can be provided but there must be separate identifiable divisions with the arm length relationship between them.
Summarising both the amendments, it can be said that the same client cannot be provided with the advisory as well as distribution services.
Group level means being a company, an entity that is a holding, subsidiary, associate, group subsidiary, or any entity which has a controlling interest or is subject to the controlling interest of a non-individual RIA.
RIAs is allowed to provide implementation services through direct schemes or products in the securities market.
However, there shall be no consideration (including any commission/ referral fees whether embedded or indirectly) be received either directly or indirectly by the RIA or the RIA group or RIA’s family for the said service.
Further, there shall be no obligation for the client to avail of the implementation services offered by the RIA.
Agreement between RIA and Clients
To ensure greater transparency between the clients and the RIA, a mandatory agreement has to be executed regarding the advisory services.
The agreement format is not specified by SEBI. However, the guidelines, key terms, and conditions in an Investment Advisory Services agreement will be specified separately through a circular.
As per the Code of Conduct, RIA are required to charge fair and reasonable fees to the clients for providing advisory services. The mechanism to charge fees has to be made in a manner as specified by SEBI in the amended regulations.
There are two proposals for the levy of fees:
- To levy a fee at 2.5% of the Assets Under Advice (AUA) per annum per family across all schemes/ products/ services provided.
- A fixed fee of Rs. 75,000/- per annum per family across all schemes/ products/ services provided.
Further, SEBI has introduced the definition of ‘Assets Under Advice (AUA)’ and ‘family of client’ as follows:-
“Assets under advice” means the aggregate net asset value of securities and investment products for which the RIA has rendered investment advice irrespective of whether the implementation services are provided by an investment advisor or concluded by the client directly or through another service provider.
“Family of Client” which constitutes individual, dependent spouse, dependent children, and dependent parents.
The above-mentioned proposals for charging the fees are yet to be finalized by SEBI and will be specified by way of circular and the same must be mentioned in the agreements executed with the client.
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Eligibility Criteria for Registered Investment Advisor
SEBI has amended the eligibility criteria to get registered as an RIA by enhancing the Net worth and Qualification requirements for both individuals and non-individuals.
SEBI has amended the definition of net worth and revised the limits to get registered as Investment Advisor. The amended net worth is summarized in the below table:
All the existing Investment Advisors are required to comply with these regulations within 3 years from the date of commencement of the regulations.
Enhanced Qualification & Experience
SEBI has enhanced the qualification requirements by mandating professional qualification / post-graduation plus 5 years of relevant experience.
Also has mandated 5yrs of experience in activities relating to advice in financial products or securities or fund or asset or portfolio management.
SEBI has introduced two key terms in the amended regulations “principal officer” and “persons associated with investment advice” which replaces the term “representative”.
The term “principal officer” means managing director/managing partner, designated director, etc. who is responsible for overall business operations of non-individuals. Therefore, all non-individual RIAs need to designate one person as a Principal Officer.
The term “persons associated with investment advice” means any member, partner, officer, director, or an employee or any sales staff who are all facing the client who is engaged in providing investment advisory services to the clients of Investment Advisor.
The summary of qualification & experience criteria for Investment Advisor or the Principal officer in case of Non-individual Investment Advisor before and after amendments are as follows:
Individual RIAs needs to get themselves registered as non-individual Investment Advisor with SEBI if the number of clients exceeds 150 in total.
The term ‘total’ is not defined by SEBI to calculate whether the term includes the inactive and expired clients. Also, the period for the same is not defined. It is expected that the SEBI will be clarifying the same.
The aforesaid amendments are a welcome move towards enhancing investor confidence by bringing in transparency and regulation to the modalities of Investment Advisors services.