SEBI (Investment Advisers) Regulations, 2013

The Securities and Exchange Board of India (‘‘SEBI’’) has issued the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 to regulate unregistered investment advisors. Prior to the issuance of the regulations, SEBI had in 2007 and 2011 issued a consultative paper and a concept paper on regulating investment advisors. These regulations are applicable to Investment Advisors from 21st April 2013.

Who are Investment Advisors?

“investment adviser” means any person, who for consideration, is engaged in the business of providing investment advice to clients or other persons or group of persons and includes any person who holds out himself as an investment adviser, by whatever name called

“Investment Advice” means advise relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products and shall include financial planning. However, investment advice given through newspapers, magazines or any other broadcasting or electronic medium, which is widely available to the public shall not be considered as investment advice for the purpose of these regulations.

“Financial Planning” shall include analysis of clients’ current financial situation, identification of their financial goals, and developing and recommending financial strategies to realise such goals;

Why Registration?

No person shall act as an investment adviser unless he has obtained a certificate of registration from SEBI.

A person acting as adviser on commencement of these regulations shall obtain certificate within 6 months.

Application form to be filled as prescribed in First Schedule to these regulations and Fees to be paid as prescribed in second schedule to these regulations.

Exemption from Registration

Following specific persons are exempted from registration, subject to fulfillment of conditions mentioned in the regulations.

1. Anyone who gives general comments in good faith in regards to trends/investment conditions
2. Insurance agent or broker who offers investment advice only on insurance products and is registered with IRDA

• Pension advisor providing advice only on pension products and in registered with Pension Fund Regulatory and Development Authority

1. Any distributor of mutual funds who is a member of a self regulatory organization or association of AMC of mutual funds who provides investment advice ancillary  to primary activity
2. Advocate, solicitor, legal firm who provides investment advice incidental to legal practice
3. Member of ICAI, ICWA, Actuarial Society of India or other professional body as the SEBI may specify for advice given incidental to his professional service

• Stock broker, Sub broker, Portfolio Manager, Merchant banker who provides investment advice incidental to primary activity. These Intermediaries shall comply with general obligations and responsibilities specified in chapter III

Fund manager of mutual fund, AIF, or other registered intermediary

• Anyone who provides investment advice exclusively to clients based outside India (not NRI or POI)

1. Representative or partner of a registered investment adviser(they should comply with regulation 7 on qualification and certification requirement)
2. Any other person as may be specified.

Note: Existing portfolio manager offering only investment advisory services to apply for registration under these regulations after expiry of his current certificate of registration as a portfolio manager;

Eligibility Criteria

Matters that the SEBI shall take into account

1. Whether individual, body corporate or a firm
2. Whether individual appropriately qualified, body corporate has appropriately qualified representatives; partnership firm has appropriately qualified partners
3. Whether applicant satisfies capital adequacy requirements
4. Whether applicant, representatives, partners as applicable are fit and proper persons as specified in schedule II of the SEBI(Intermediaries) Regulations, 2008
5. Whether applicant has necessary infrastructure
6. Whether applicant or person connected to the application has had application rejected in the past
7. Disciplinary action taken by SEBI or any other regulatory authority
8. In case of Bank/NBFC whether RBI permission has been taken and application through subsidiary or Separately Identifiable Department or Division(SIDD)
9. For body corporate other than Bank/NBFC application is made through Subsidiary or SIDD
10. If entity is registered outside India, subsidiary has been set up in India
11. If foreign citizen proposes to undertake Investment Advisory Service whether the applicant has set up office in India

Qualification and Certification Requirement

Minimum qualifications of individuals, representatives and partners of the entity as applicable

1. A professional qualification or post graduate degree or post graduate diploma in finance, accountancy, business management, commerce, economics, capital market, banking, insurance or actuarial science
2. A graduate degree in any discipline with at least 5 years experience in activities related to financial products or securities or fund or asset or portfolio management
3. Certification on financial planning or fund or asset or portfolio management from NISM or any other organization including financial planning standards board of India or any recognized stock exchange.,
4. Existing individuals investment advisers, or representatives or partners of investment advisers as applicable shall obtain certificate within 2 years of commencement of the regulations

Capital Adequacy

For body corporate minimum net worth must be Rs. 25 lakh

For Individuals and partnership firm net tangible assets must be Rs. 1 Lakh

Certificate of Registration

1. On being satisfied that applicant meets conditions certificate will be granted
2. Such certificate will be valid till it is suspended or cancelled
3. Those who have been granted certificate before commencement, shall be deemed to have been granted certificate under this act
4. If SEBI is of the opinion that certificate should not be granted it may reject application after giving opportunity of being heard. The reason to reject the application must be communicated within 30 days.

Conditions for certificate

1. Abide with provisions of act and regulations
2. If any information submitted to SEBI is found to be false, must inform SEBI in writing
3. If not individual, must include investment adviser in name if it is SIDD or Subsidiary then such SIDD or subsidiary must include investment adviser
4. Individuals must include the term investment adviser in all correspondence

General Obligations and Responsibilities

General

1. Shall act in fiduciary capacity and disclose all conflict of interest
2. Shall not receive any consideration from any person other than the person being advised in respect of underlying products or securities
3. Shall maintain arms-length relationship between investment advice activities and other activities.
4. Clear segregation between activities must be maintained.
5. Disclosure of any conflict of interest must be given.
6. Shall not divulge confidential information about its client
7. Shall not enter any transactions on own account contrary to advice for 15 days. May do so after giving client 24 hours notice
8. Shall follow KYC procedure
9. Shall abide by Code of Conduct as specified

• Shall not knowingly sell or buy securities or investment product to and from client
• Prior approval from SEBI must be obtained for change in control of investment adviser
• Shall furnish to SEBI information and reports as may be specified
• Investment advisor shall ensure that representatives and partner comply with regulation 7 on qualification and certification requirement

Risk profiling

1. Investment advisor must obtain from client all information such as age, investment objectives, income, existing investments and assets, risk appetite/tolerance, liability borrowing
2. It should have process to assess client risk ability including assessing client capacity to absorb loss, to identify if client is unable or unwilling to accept loss, to interpret client response appropriately.
3. Tools for risk profiling should be fit for the purpose
4. Questionnaires for risk profiling should be clear
5. Risk profile should be communicated to client
6. Information provided by client should be updated

Suitability

1. All investment advice should be as per clients risk appetite
2. It must have documented process for selecting investments based on clients investment objective and financial situation
3. It must understand nature and risks of products or assets
4. It has a reasonable basis for believing that a recommendation or transaction entered into:
   1. meets the client’s investment objectives;
   2. is such that the client is able to bear any related investment risks consistent with its investment objectives and risk tolerance;
   3. is such that the client has the necessary experience and knowledge to understand the risks involved in the transaction.
5. Whenever a recommendation is given to a client to purchase of a particular complex financial product, such recommendation or advice is based upon a reasonable assessment that the structure and risk reward profile of financial product is consistent with clients experience, knowledge, investment objectives, risk appetite and capacity for absorbing loss

Appointment of Compliance Officer

Any investment adviser who is a body corporate shall appoint a compliance officer who is responsible for ensuring compliance with regulations, notifications etc

Redressal of client grievances

Investment adviser must redress client grievances promptly, and must have procedure for expedite grievance redressal. Client grievances pertaining to financial products that have invested in based on investment advice shall be within the purview of regulator of financial products. Disputes between client and adviser to be solved through arbitration or ombudsman

Disclosures to client

1. All material information about itself including its business, disciplinary history, the terms and conditions on which it offers advisory services, affiliations with other intermediaries and such other information as is necessary to take an informed decision on whether or not to avail its services
2. Consideration receivable by associates or subsidiaries for distribution or execution services
3. Any consideration received from stock broker whose services he recommends
4. Holding or position in financial products or securities which are subject matter of advice
5. An investment adviser shall disclose to the client any actual or potential conflicts of interest arising from any connection to or association with any issuer of products/securities, including any material information or facts that might compromise its objectivity or independence in the carrying on of investment advisory services.
6. Material facts related to key features of the products or securities must be disclosed while making investment advice
7. Draw clients attention to disclaimers and warnings in documents, advertising materials relating to an investment product

Maintenance of records

The following records must be maintained

1. KYC records
2. Risk profiling and risk assessment
3. Suitability assessment
4. Copies of agreement
5. Investment advice
6. rationale for arriving at investment advice (duly signed and dated)
7. Register containing list of clients, date of advice, nature of advice, products securities in which advice was rendered and fee

Records must either be physical or electronically maintained for at least five years

Annual audit in respect of compliance with these conditions to be maintained by member of ICAI or ICSI

Segregation of execution services:

Investment advisers that are banks, NBFCs, and Body Corporates providing distribution or execution services shall keep investment advice activities segregated from such activities.

It shall be subject to the following conditions

1. The client shall not be under obligation to avail any distribution or execution services offered by the investment advisor
2. The investment adviser shall maintain arms length relationship between its activities as an investment adviser and distribution and execution services.
3. All fees and charges paid to distribution or execution service providers by the client shall be paid directly to the service providers and not through the investment adviser.

FAQs on the applicability:

SEBI has issued Frequently Asked Questions (FAQs) on the applicability of SEBI (Investment Advisers) Regulations, 2013 to address the queries of various market participants vide Press Release No. 44/2015 dated 25th February, 2015 which can be referred for further clarity.