The SEBI (Investment Advisers) Regulations was notified in 2013 making it mandatory for investment advisers to obtain a certificate of registration from SEBI and to adhere to various safeguards intended at minimizing any conflicts of interest between the interests of the advisers and those of their clients. In its constant endeavour to improve these safeguards, SEBI issued a consultation paper in October 2016 containing various proposals for public comments. SEBI has issued another consultation paper on June 22, 2017, presumably taking into account comments received earlier, proposing numerous amendments to the IA Regulations. The following are some of the key changes proposed in the recent consultation paper.
Stricter segregation of advisory services
Current provisions: Banks, NBFCs and body corporates are permitted to render both distribution/ execution services as well as advisory services as long as the advisory services are being rendered through a separately identifiable department or division. Such entities are required to obtain registration from SEBI and adhere to certain conditions including the requirements of not putting the client under an obligation to utilize the execution services offered by the entity and maintaining an arms-length relationship between the advisory activities and other activities.
Proposed provisions: SEBI now proposes to completely prohibit an entity offering advisory services from offering distribution or execution services. Entities currently providing both execution and advisory services through SIDDs will be permitted to segregate them within six months into a separate subsidiary. It is unclear whether safeguards such as arms-length and prohibition on obligating execution by the adviser’s related parties will be carried forward.
Distributors no longer exempt
Current provisions: Distributors of mutual fund schemes are exempt from the registration requirement under the IA Regulations as long as they only provided investment advice in regard to mutual fund products to their client incidental to their primary activity.
Proposed provisions: SEBI now proposes to prohibit all investment advisory activities by distributors. They can continue to distribute suitable mutual fund schemes to their clients only by describing material facts of the scheme and the associated risk factors of the scheme, etc. SEBI also warns of strict enforcement action against any mis-selling and has enhanced the disclosures that are to be made by distributors to their clients.
Fee based incidental advisory services no longer exempt
Current provisions: Intermediaries such as stock brokers and portfolio managers who provide investment advice to their clients incidental to their primary activity are exempt from the registration requirement under the IA Regulations.
Proposed provisions: SEBI proposes to clarify the position on this exemption by making it mandatory for an intermediary to register where such intermediary is receiving separately identifiable consideration for investment advisory. It follows that, on registration, such entities will be prohibited from rendering execution services. It appears that their only recourse to such entities would be to seek registration as an investment adviser through a subsidiary company.
Relaxed eligibility criteria
Current provisions: Persons/ representatives engaged in providing advisory services have to be a postgraduate or a graduate with 5 years of experience in the financial services industry.
Proposed provisions: SEBI now proposes to relax this requirement in the case for representatives and employees of registered investment advisers to merely a graduate degree in any discipline. However, at least one of the partners or representatives in a partnership firm or body corporate, respectively, will be required to satisfy the original criteria. Such relaxation has not been extended to individual investment advisers. SEBI also proposes to reduce the net worth requirement and the application fee.
Mutual fund ranking
Current provisions: Entities ranking mutual fund schemes are not regulated by SEBI as the ranking is based on an objective statistical analysis of parameters such as risk and return, liquidity, performance ratio, etc. for past years. SEBI noted that such ranking agencies do play a significant role in influencing the investment decision of investors subscribing to schemes through the direct plan. Further, mutual funds are presently prohibited from advertising such rankings primarily due to concerns regarding the lack of transparency in the ranking system employed.
Proposed provisions: SEBI now intends to address these concerns and has proposed to bring such ranking agencies under the ambit of the SEBI (Research Analysts) Regulations, 2014, by introducing a new chapter therein. Such ranking agencies, other than those only engaged in providing ranking of mutual fund schemes on public media such as newspaper, website, etc., will be required to register under the RA Regulations. All such entities will be required to adhere to guidelines governing ranking methodology, disclosure, and independence. SEBI proposes to relax the restriction on advertising of such rankings by mutual funds only once the ranking agencies come within the purview of the RA Regulations.