Regulatory Insights
from India Tax & Regulatory Services
www.pwc.in
SEBI (Investment Advisers)
(Amendment) Regulations, 2020 notified
July 6, 2020
In brief
On 3 July 2020, the Securities and Exchange Board of India (SEBI) notified the SEBI (Investment Advisers) (Amendment) Regulations, 2020.1 The amendments to the SEBI (Investment Advisers) Regulations, 2013 (SEBI Regulations) primarily intend to introduce transparency in the activities of investment advisers and strengthen the regulatory framework for investment advisers.
In detail
Background
The SEBI Regulations laid down the regulatory
framework for persons acting as investment advisers (IA).
The SEBI has been receiving complaints concerning malpractices/ misconduct of investment advisers with respect to mis-selling by IAs, charging of exorbitant fees, false promises of handsome returns, etc.
Hence, it was necessary to strengthen the regulatory framework of IAs. In this regard, the SEBI issued several consultation papers over the years (October 2016, June 2017, January 2018 and January 2020) seeking comments from the public on the proposals. After
considering the issues in all four consultation papers and the public comments received, the SEBI Board approved the proposals on the regulatory
1Notification No. SEBI/LAD-NRO/GN/2020/22 dated 3 July 2020
changes and amendments to the SEBI Regulations in its meeting in February 2020.
On 3 July 2020, the SEBI notified the SEBI (Investment Advisers) (Amendment) Regulations, 2020 to give effect to such approved proposals. The amendments will come into effect from 1 October 2020. The key
amendments in the regulations are summarised below.
Segregation of advisory and distribution services – Regulation 22
The existing regulation 22
‘segregation of execution services’ is substituted with
‘segregation of advisory and distribution services.’
Individual IA
An individual IA cannot provide distribution services.
The family of an individual IA cannot provide
distribution services to the client advised by the individual IA.
No individual IA shall provide advice to a client who is receiving
distribution services from other family members.
Non-individual IA
Client level segregation needs to be done at the group level for investment advisory and distribution services.
The same client cannot be offered both advisory services and distribution services within the group of IA.
‘Group’ shall mean an entity which is a holding,
subsidiary, associate, subsidiary of a holding company to which it is also a subsidiary or an investing company or the venturer of the company, as per the
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Companies Act, 2013, for non- individual IA, which is a company under the aforesaid Act and in any other case, an entity which has a controlling interest or is subject to the controlling interest of a non- individual IA.
Arm’s length relationship to be maintained between activities as IA and distributor by providing advisory services through a separately identifiable department or division.
Implementation of advice or execution – Regulation 22A
An IA may provide
implementation services to its advisory clients in the
securities market. However,
no consideration, commission or referral fees, embedded or indirect or otherwise, can be received directly or indirectly at IA’s group or family level for such service.
Implementation service can be provided to advisory clients only through direct schemes/
products in the securities market.
No implementation fees can be charged by an IA or a group or family of IAs.
The client shall not be under any obligation to avail implementation services offered by the IA.
Agreement between IA and Client – Regulation 19
A mandatory agreement is to be entered between the IA and the client, incorporating the terms and conditions as may be specified by SEBI.
Fees – Regulation 15A The fees charged by an IA for providing investment advice shall be in the manner as specified by SEBI.
Eligibility criteria – Regulation 6 and 8
The eligibility criteria of all persons applying for IA certificate are enhanced.
1. Compliance with qualification and certification. A quick glance of the qualification and certification as per regulation 7 is provided below.
Applicant Qualification and certification as per regulation 7 to be complied by Individual He and all persons associated with investment advice
Body corporate or firm or limited liability partnership
Principal officer and all persons associated with investment advice
2. The applicant is required to fulfil the “net worth”
requirement, as against the erstwhile “capital adequacy”
requirements.
Non-individuals: net worth of minimum INR 5m (erstwhile INR 2.5m for body corporate and INR 0.1m for partnership firm);
Individuals: net tangible assets of minimum INR 0.5m (erstwhile INR 0.1m).
Existing IAs to comply with the net worth requirement within three years.
3. Fit and proper person criteria would now have to be satisfied by the applicant, its partners, principal officers and persons associated with investment advice.
Qualification and certification requirement – Regulation 7
The existing qualification and
certification requirements have been widened by
substituting new regulation 7.
An individual IA or principal officer of the IA and persons associated with investment advice shall require the following minimum qualification at all times:
a) A professional qualification or post- graduate degree or post- graduate diploma (minimum two years in duration) in prescribed subject from a university or an institution
recognised by the Central Government or any State Government or a
recognised foreign university or institution or association or a CFA Charter from the CFA Institute.
b) Experience of at least five
years (minimum two years for person associated with investment advice) in activities relating to advice in financial products or securities or fund or asset or portfolio management.
Existing IAs to ensure compliance with the above qualification requirements within three years.
An individual IA or principal officer of the IA and person associated with investment advice shall require at all times, a certification on financial planning or fund or asset or portfolio management or investment advisory services –
a) From NISM;
b) From any other organisation or
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institution, including Financial Planning Standards Board of India or any recognised stock exchange in India provided such
certification is accredited by NISM.
Fresh certification before expiry of the validity of the existing certification shall not be obtained through a CPE program.
Other key amendments
Any individual registered as IA whose number of clients exceeds 150 shall apply for registration as a non-
individual IA within such time as specified by SEBI.
Yearly audit report for compliance with the
regulations shall be required to be submitted to SEBI in the manner as may be specified.
Persons dealing in distribution of securities shall use the nomenclature “Independent Financial Advisor or IFA or Wealth Advisor or any other similar name” only if registered with SEBI as IAs.
New definitions
‘Assets under advice’ shall mean the aggregate net asset value of securities and
investment products for which the IA has rendered
investment advice, irrespective of whether the implementation services are provided by IA or concluded by the client
directly or through other service providers.
‘CPE’ means continuing professional education in terms of clause (f) of sub regulation (1) of regulation 2 of the SEBI (Certification of Associated Persons in the Securities Markets) Regulations, 2007.
‘Family of client’ shall include individual client, dependent spouse, dependent children and dependent parents.
‘Family of an individual IA’
shall include individual IA, spouse, children and parents.
‘Non-individual’ means a body corporate including a limited liability partnership and a partnership firm.
Definition of ‘representative’
substituted with the following:
‘persons associated with investment advice’ shall mean any member, partner, officer, director or employee or any sales staff of such IA, including any person occupying a similar status or performing a similar function, irrespective of the nature of association with the IA who is engaged in providing investment advisory services to the clients of the IA.
Explanation. — All client- facing persons such as sales staff, service relationship managers, client relationship managers, etc., by whatever name called shall be deemed to be persons associated with
investment advice, but do not include persons who discharge clerical or office administrative functions where there is no client interface.
‘Principal officer’ shall mean the managing director or designated director or
managing partner or executive chairman of the board or equivalent management body who is responsible for the overall function of the business and operations of non-individual IA.
At various places, reference to the Companies Act, 1956 is updated to the Companies Act, 2013.
The takeaways
The amendments relating to enhanced eligibility criteria, qualification and certification requirements would improve the quality of investment advice provided to clients. The
segregation of investment advice and distribution services would help avoid conflict of interest. The amendments relating to fees and agreement for services would lead to increased trust and
transparency between IA and clients. These measures would contribute significantly in
increasing customer confidence in IAs, and it may also lead to consolidation of small IAs.
Let’s talk
For a deeper discussion of how this issue might affect your business, please contact your local PwC advisor
Regulatory Insights
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This publication has been prepared for general guidance on matters of interest only, and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is given as to the accuracy or completeness of the information contained in this publication, and, to the extent permitted by law, PwCPL, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it. Without prior permission of PwCPL, this publication may not be quoted in whole or in part or otherwise referred to in any documents.
© 2020 PricewaterhouseCoopers Private Limited. All rights reserved. In this document, “PwC” refers to PricewaterhouseCoopers Private Limited (a limited liability company in India having Corporate Identity Number or CIN : U74140WB1983PTC036093), which is a member firm of PricewaterhouseCoopers International Limited (PwCIL), each member firm of which is a separate legal entity.
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