2025 (6) TMI 1892 - Board - SEBI

Non- compliance with the qualification and certification requirements for the employees of the Noticee - Failure to maintain records and call recordings - Noticee charged fees from his clients without entering into any agreement with the clients - Similar products sold for concurrent period - Seeking another opportunity of personal hearing - Fees received from clients to personal account of compliance officer - Providing Free Trial to Clients - risk profiling questionnaire - Conducting operations from an unregistered office - Failure to publish investor charter - Fake Reviews about Monetary Solutions through the Website - violation of the Regulations. HELD THAT - The proof of delivery is on record. Additionally the Noticee was also sent a reminder vide email dated December 17 2024 and was advised to make his submissions on or before December 23 2024. I note from the material available on record that the Noticee has failed to make any submissions as regards the Post Enquiry SCN. To conclude I find the Noticee to have committed the below-mentioned violations a. The employees of the Noticee did not comply with the certification requirements in terms with the IA Regulations; b. The Noticee failed to maintain records in terms of the IA Regulations; c. The Noticee has sold similar products to his clients for concurrent periods; d. The Noticee received fees from the clients in his personal bank; e. The Noticee provided free trial to his clients; f. The risk profiling questionnaire had misleading/ vague questions; g. The Noticee was functioning from an address other than the registered address; h. The Noticee failed to publish investor charter on his website; and i. The Noticee published fake testimonials on his website. Having found the Noticee to have committed the violations as aforesaid I am inclined to agree with the recommendation made by the DA.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered by the Tribunal in the present proceedings are as follows:

• Whether the employees of the Noticee complied with the qualification and certification requirements mandated under the SEBI (Investment Advisers) Regulations, 2013 ("IA Regulations").
• Whether the Noticee failed to maintain requisite records and call recordings as required under IA Regulations and relevant SEBI Circulars.
• Whether the Noticee sold similar investment advisory products/services concurrently to clients, thereby violating fiduciary duties and regulatory provisions.
• Whether the Noticee received fees from clients into his personal bank account and failed to disclose complete information regarding fee collection.
• Whether the Noticee provided free trial services to clients in contravention of SEBI Circular prohibiting such practice.
• Whether the risk profiling questionnaire used by the Noticee contained vague and misleading questions in violation of IA Regulations.
• Whether the Noticee operated from an office address not registered with SEBI.
• Whether the Noticee failed to publish the Investor Charter and provide a link for complaints on the SCORES platform as mandated by SEBI Circulars.
• Whether the Noticee published fake client testimonials on his website, amounting to fraudulent and unfair trade practices under PFUTP Regulations and SEBI Act.

2. ISSUE-WISE DETAILED ANALYSIS

A. Compliance with Qualification and Certification Requirements

The relevant legal framework includes Regulation 15(13) read with Regulation 7 of the IA Regulations, and Clauses 1, 2, and 8 of the Code of Conduct for Investment Advisers under the Third Schedule. These provisions require that all persons associated with investment advice hold valid certifications from the National Institute of Securities Markets (NISM) at all times and act honestly, fairly, and with due skill and diligence in clients' best interests.

The Tribunal noted that six employees, including the Noticee, were involved in providing investment advice. The Noticee submitted evidence of certification for three individuals but failed to provide such evidence for four employees, two of whom lacked Level 1 certification and two lacked both Level 1 and Level 2 certifications. The Noticee did not dispute their employment status.

The Tribunal held that the absence of requisite NISM certifications for these employees constituted a clear violation of the regulatory provisions. The Noticee's failure to ensure compliance with certification requirements undermined the integrity and professionalism expected of an investment adviser.

Competing arguments by the Noticee, including partial submissions of certificates, were rejected due to incomplete compliance and lack of evidence. The Tribunal concluded that the Noticee violated the IA Regulations and Code of Conduct.

B. Failure to Maintain Records and Call Recordings

The relevant provisions include Regulations 19(1) and 19(2) of IA Regulations, Clauses 1, 2, 8, and 9 of the Code of Conduct, Clauses 2(ii) and 2(vi) of the 2020 SEBI Circular, and Regulations 16 and 17 of IA Regulations. These require maintenance of records such as agreements, KYC documents, invoices, risk profiling, email communications, and call recordings for a minimum period of five years.

Inspection revealed that the Noticee did not maintain agreements with clients, call recordings, or rationale documents for investment advice. The Noticee claimed data loss due to hard disk failure but failed to provide corroborative evidence. Additionally, client master data was incomplete, and records for 10 sample clients were entirely missing.

The Tribunal found that the Noticee's failure to maintain and produce records as mandated was a serious breach of regulatory obligations. The Noticee's explanation of data loss was not accepted due to lack of supporting evidence. The Noticee's conduct was inconsistent with the requirement to act honestly, fairly, and with due skill and diligence.

The Tribunal rejected the Noticee's submissions and upheld the findings of violation of the IA Regulations and SEBI Circulars.

C. Sale of Similar Products for Concurrent Periods

The IA Regulations and Code of Conduct require fiduciary duty towards clients, prohibiting practices that maximize fees at clients' expense. The Noticee was found to have sold identical advisory products/services to clients for overlapping periods, effectively charging multiple fees for the same service.

Evidence showed overlapping subscription periods and multiple invoices for the same products to two clients. The Noticee alleged typographical errors but failed to provide supporting evidence or corrected data.

The Tribunal held that such conduct amounted to a breach of fiduciary duty and regulatory obligations, aimed at unjust enrichment. The Noticee's competing argument was rejected due to lack of corroboration.

D. Receipt of Fees into Personal Bank Account and Non-Disclosure

Clause 1 and 2 of the Code of Conduct and Regulation 25(1) and (2) of IA Regulations require transparency and proper disclosure of fee collection mechanisms. The Noticee, acting as compliance officer, received fees into three bank accounts, including one (ICICI Bank) not disclosed on the website or to the inspecting authority initially.

The Noticee admitted receiving fees into the ICICI Bank account after inspection queries. The client master data submitted was incomplete, omitting fees collected through this account. The Tribunal found this to be a failure to provide complete and true information to the regulatory authority.

The Tribunal emphasized that as a registered entity, the Noticee was obliged to disclose all bank accounts used for fee collection publicly and to SEBI. The Noticee's contention that there was no bar on receiving fees in a personal account was insufficient to justify non-disclosure.

The Tribunal concluded that the Noticee violated the Code of Conduct and IA Regulations by receiving fees in a personal account without proper disclosure and by submitting incomplete information during inspection.

E. Provision of Free Trial to Clients

Paragraph 1(i) of the 2019 SEBI Circular and Clauses 8 and 9 of the Code of Conduct prohibit providing free trials for investment advisory products/services. The Noticee's onboarding emails offered a "2 days Free Trial and evaluation" to clients.

The Noticee denied providing free trials after the issuance of the Circular but failed to remove the standard email paragraph offering free trials or provide evidence of rectification.

The Tribunal found that the Noticee was indeed providing free trials in violation of the regulatory provisions and Code of Conduct. The Noticee's denial was not supported by evidence, and the failure to amend communications was viewed as non-compliance.

F. Vague and Misleading Risk Profiling Questionnaire

Regulation 16(d)(i) and (ii) of IA Regulations and Clauses 1, 2, and 8 of the Code of Conduct require that risk profiling questionnaires be clear, fair, and not misleading. The Noticee's questionnaire contained questions that were ambiguous and appeared designed to bias client responses towards riskier investments.

Examples included questions conflating risk and return in a manner that could mislead clients, and options that encouraged preference for high risk without adequate explanation.

The Noticee argued that SEBI had not issued standard guidelines for risk profiling questionnaires. The Tribunal rejected this, emphasizing that the IA Regulations themselves mandate clarity and fairness in such questionnaires.

The Tribunal held that the Noticee's questionnaire failed to meet regulatory standards and was misleading, undermining the foundation for appropriate investment advice.

G. Conducting Operations from Unregistered Office

Regulation 13(b) of IA Regulations and Clauses 1, 8, and 9 of the Code of Conduct require that investment advisers operate from registered office or branch addresses disclosed to SEBI.

Inspection revealed that the Noticee operated from a branch office in Udaipur not registered with SEBI. Documentary evidence such as salary sheets and attendance records confirmed this. The Noticee admitted the existence of the Udaipur branch.

The Tribunal found this to be a violation of the IA Regulations and Code of Conduct, as the Noticee failed to operate solely from registered locations.

H. Failure to Publish Investor Charter

Paragraphs 2 and 4 of the 2021 SEBI Circular and Clauses 8 and 9 of the Code of Conduct require investment advisers to publish an Investor Charter on their website and provide a link for lodging complaints on the SCORES platform.

The Noticee admitted to not displaying the Investor Charter on his website and the website was found to be non-traceable during inspection. No evidence was provided to counter this finding.

The Tribunal held that the Noticee violated the relevant Circular and Code of Conduct by failing to publish the Investor Charter and provide complaint mechanisms.

I. Publishing Fake Testimonials on Website

Regulations 3(d), 4(1), and 4(2)(k) of the PFUTP Regulations read with Section 12A(c) of the SEBI Act prohibit fraudulent and unfair trade practices, including dissemination of false or misleading information. Clauses 1 and 2 of the Code of Conduct also require honesty and integrity.

Inspection found that the Noticee's website contained positive testimonials from persons who were not clients, admitted by the Noticee as fake for advertisement purposes. The Noticee later retracted this admission but failed to provide evidence to prove genuineness of the testimonials.

The Tribunal held that publishing fake testimonials constituted fraudulent and unfair trade practices and violated the IA Regulations and SEBI Act. Such conduct was intended to induce investors deceptively.

3. SIGNIFICANT HOLDINGS

The Tribunal made the following crucial legal determinations:

"The absence of requisite NISM certifications for employees involved in investment advice is a clear violation of Regulation 15(13) read with Regulation 7 of the IA Regulations and the Code of Conduct."

"Failure to maintain records including agreements, call recordings, and rationale for advice, and submission of incomplete client data, violates Regulations 19(1), 19(2), 16, 17 of IA Regulations and corresponding SEBI Circulars."

"Selling identical advisory products with overlapping subscription periods to the same clients breaches fiduciary duties and regulatory obligations under IA Regulations."

"Receiving fees into a personal bank account without proper disclosure and submitting incomplete information to SEBI violates Clause 1 and 2 of the Code of Conduct and Regulation 25 of IA Regulations."

"Providing free trials to clients after issuance of SEBI Circular prohibiting such practice is a violation of Paragraph 1(i) of the 2019 Circular and the Code of Conduct."

"Risk profiling questionnaires must be clear and not misleading; the Noticee's questionnaire failed this standard, violating Regulation 16(d) of IA Regulations."

"Operating from an unregistered office address contravenes Regulation 13(b) of IA Regulations."

"Failure to publish the Investor Charter and complaint link on the website violates the 2021 Circular and Code of Conduct."

"Publishing fake testimonials constitutes fraudulent and unfair trade practices under PFUTP Regulations and SEBI Act."

Based on these findings, the Tribunal agreed with the Designated Authority's recommendation and, exercising powers under Section 19 of the SEBI Act read with Regulation 27(5) of the Intermediaries Regulations, prohibited the Noticee from onboarding new clients for six months.