On July 3, 2020, the Securities and Exchange Board of India (“SEBI”) amended the SEBI (Investment Advisers) Regulations, 2013 (“Amendment”). The Amendment will be effective from September 30, 2020. The amendments include SEBI’s power to prescribe the fee structure for Investment Advisers, the requirements for Investment Advisers to segregate advisory and distribution services, restrictions on charging for implementation services and enhanced eligibility criteria for Investment Advisers.
The object of the SEBI (Investment Advisers) Regulations, 2013 (hereinafter referred to as “IA Regulations”) is to provide a regulatory framework for functioning of Investment Advisers. Before notifying the Amendment, the regulatory authority had issued a consultation paper proposing various changes to the IA Regulations. The consultation paper received more than 2800 comments from various stakeholders such as investors, registered Investment Advisers, distributors, etc.
After considering the comments received from the stakeholders, the SEBI has notified the following major amendments to the existing regulatory framework:
1. Fees Structure Mandated by SEBI
The fee charged by Investment Advisers for providing advisory services has to be in the manner as specified by SEBI. Although the structure of the fees has not been prescribed yet, the Consultation Paper released by SEBI indicates that fees may be charged either on the basis of (1) assets under advice mechanism, or (2) fixed fees. The Consultation Paper indicated that the fixed fees that can be charged by any Investment Adviser will be INR 75000 per annum per family across all schemes/ products/ services provided, and the maximum fees that can be charged under the assets under advice mechanism shall be 2.5 percent of AUA per annum per family across all schemes/ products/ services provided.
2. Segregation of Advisory and Distribution Services
- An individual can either register as an Investment Adviser or provide distribution services.
- The Amendment requires non-individual Investment Advisers to have client level segregation at group level. This implies that a client can either be an advisory client or a distribution client. Such segregation aims at avoiding situations of conflict of interests.
3. Implementation Services
- The Investment Advisers are allowed to provide implementation services to their clients. However, no consideration can be received, directly or indirectly, at the Investments Adviser’s group or at family level for such services.
- Further, the client won’t be under any obligation to avail implementation services offered by the investment adviser i.e. the client may choose to avail implementation services from any other entity (outside the group/family) .
4. Mandatory Agreement between Investment Adviser and Client
Earlier, Investment Advisers were not mandatorily required to maintain records to copies of agreement with clients. It has not been mandated that Investment Advisors have to maintain records of copies of agreements with clients. Further, SEBI has the power to specify the terms and conditions to be incorporated in such an agreement. This requirement will ensure greater transparency between the parties with respect to advisory activities.
5. Enhanced Eligibility Criteria for Investment Advisers
- The requirement of net worth has been enhanced from Rs. 1,00,000 to Rs. 5,00,000 for individuals and from Rs. 25,00,000 to Rs. 50,00,000 for non-individual Investment Advisers.
- The Amendment requires individual Investment Advisers or Principal Officers of Non-individual Advisers to have post-graduation qualification in relevant fields and relevant experience of 5 years. It further requires individual Investment Advisers or Principal Officers of non-individual Advisers and persons associated with investment advice to have a certification o financial planning or fund or asset or portfolio management from NISM or from any other recognised institute accredited by NISM.
- The Amendment requires individual Investment Advisers with more than 150 clients to register with SEBI as non-individual Investment Advisers.
The changes have been introduced to strengthen the current regulatory framework by addressing the issues like the ones relating to conflict of interest between the advisory and distribution businesses of Investment Advisers and complaints received by SEBI regarding the fees charged by the Investment Advisers. The enhanced eligibility criteria for Investment Advisers and mandates like disclosure of interest in situations of conflicting interests intend to protect the interests of the clients and encourage the Investment Advisers to act in fiduciary capacity.
This post has been contributed by Ms. Vaneesa Agrawal and Ms. Ketaki Vatsa.
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