SEBI passed an order on January 20, against CapitalVia Global Research Limited (CapitalVia), a registered investment adviser (IA) and its directors, for non-compliance with several provisions of the SEBI (Investment Advisers) Regulations, 2013. SEBI had issued an interim order-cum-show cause notice in November 2016 against the noticees prohibiting them from undertaking new advisory business till further directions.
Some of the infractions by CapitalVia are as follows: charging disproportionately high fees, undertaking improper risk profiling, diluting suitability norms, making inadequate disclosures and failing to segregate advisory and execution business. For instance, the risk profiling questionnaire did not seek basic and necessary information from clients, such as, their investment objectives and risk appetite; there was no documented process for investment recommendations; short-term oriented products suitable for high risk investors were recommended for even low/moderate risk investors.
Although the Regulations do not contain a framework for measuring reasonableness of the fee levied, as contended by the noticees, SEBI held that the mandate to not charge unreasonable fees is an extension of the due care and good faith obligations of an IA, as unreasonably high fee may lead to unrealistic expectations by investors and push them to invest in risky products. It was also stated that the fee has to be fair in terms of accuracy, reliability and duration of the advice, and not in terms of the expected returns for the client. Further, SEBI held that risk assessment has to be meticulous, scientific and based on a proper appraisal of the investors’ ability to absorb risks, and even a minor lapse would affect the foundation of the advisory business.
While discussing the scope and object of the Regulations, SEBI explained that IAs play a significant role by securing investors’ confidence in the securities market. The adviser has to apply its mind and it cannot avoid such responsibilities by using technology and placing blanket disclaimers about its services. The advice provided has to be honest, unbiased, not driven in any manner by short term profit motives and should be arrived at methodically.
The lucid and detailed order in the matter, while directing the noticees to not solicit fresh business for 4 months from the date of the order highlights the fiduciary nature of the advisory relationship and how critical it is for advisers to comply with the obligations under the Regulations and begins new jurisprudence in the area.