SEBI (INVESTMENT ADVISERS) REGULATIONS, 2013

[Mr. M. GOVINDARAJAN]

INTRODUCTION

Section 30(1) of SEBI Act empowered the SEBI Board to make regulations by Notification, consistent with SEBI Act and the rules made there under to carry out the purposes of the Act.  Section 11(1) of the Act provides that subject to the provisions of the Act, it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market by such measures as it thinks fit.  Section 11(2) (b) of the Act provides that the measures may provide for registering and regulating the working of stock brokers, sub brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment advisers and such other intermediaries who may be associated wit securities market in any manner.

EFFECITVE DATE

In exercise of the powers conferred by Section 30(1) read with Section 11(2)(b) of the Act the Board make the regulations named ‘Securities and Exchange Board of India (Investment Advisers) Regulations, 2013.  These regulations came into effect from 20.04.2013. 

INVESTMENT ADVICE

The term ‘investment advice’ is defined under Regulation 2(l)  as advice relating to investing in, purchasing, selling or otherwise dealing in securities or investment products and advice on investment portfolio containing securities or investment products, whether written, oral or through any other means of communication for the benefit of the client and shall include financial planning.  The investment advice given through newspaper, magazines, any electronic or broadcasting or telecommunications medium, which is widely available to the public shall not be considered as investment advice for the purpose of these regulations. 

INVESTMENT ADVISER

The term ‘investment adviser’ is defined under Regulation 2(m) as 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.

REGISTRATION

No person shall act as in investment adviser or holds itself out as an investment adviser unless he has obtained a certificate of registration from the Board under these regulations.  A person acting as an investment adviser immediately before the commencement of these regulations may continue to do so for a period of six months from such commencement or, six months till the disposal of application for registration.   The following persons are exempted from getting registration:

• Any person who gives general comments in goods faith in regard to trends in the financial or securities market where such comments do not specify any particular securities or investment product;
• Any insurance agent;
• Any pension adviser;
• Any distributor of mutual funds, who provides investment advice incidental to its primary activities;
• Any advocate, solicitor or law firm, who provides investment advice, incidental to their legal practice;
• Any Chartered Accountant, Company Secretary, Cost Accountant or any other professional as may be specified by the Board, who provides investment advice to their clients incidental to their professional service;
• Any stock broker, sub-broker, portfolio manager or merchant banker who provides any investment advice to its clients incidental to their primary activity;
• Any fund manager;
• Any person who provides investment advice exclusively to clients based out of India;
• Any representative and partner of an investment adviser which is registered under these regulations;
• Any other person as may be specified by the Board.

 QUALIFICATIONS

 The qualification prescribed for the investment adviser, his partner and his representative is as follows:

• 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 ;
• A graduate in any discipline with an experience of at least five years in activities relating to advice in financial products or securities or fund or asset or portfolio management;

 In addition to any of the above qualification a certification on financial planning or fund or asset or portfolio management or investment advisory services –

• National Institute of Securities Market (NISM) instituted by the Board; or
• From any other organization or institution including Financial Planning Standards Board India or any recognized stock exchange in India provided that such certification is accredited by NISM.

 The existing investment advisers shall ensure that their partners and their representatives obtain such certification within 2 years from the date of commencement of these regulations.

 PROCEDURE FOR OBTAINING REGISTRATION CERTIFICATE

• An application for grant of certificate of registration shall be made in Form A.  The applicant shall pay the fees within 15 days from the date of receipt of intimation from the Board as detailed below, drawn in favor of ‘Securities Exchange Board of India’ payable at Mumbai or at respective regional or local office as detailed below:
  • Individual – Rs.5,000/-;
  • Corporate – Rs.1,00,000/-
• The Board may require the applicant to furnish further information or clarification and the applicant or his authorized representative shall appear before the Board for personal representation;
• The Board shall take into account all the matters which are relevant to the grant of certificate of registration for the purpose of grant of certificate;
• Investment  advisers which are body corporate shall have a net worth of not les than Rs.25 lakhs and for the individual it is not less than Re. 1 lakhs;
• The Board on being satisfied that the applicant complies with the requirements shall send intimation to the applicant and on receipt of the payment of registration fees grant certificate of registration in Form B subject to terms and conditions as detailed below:
  • The investment adviser shall abide by the provisions of the Act and these regulations;
  • The investment adviser shall forthwith inform the Board in writing, if any information or particulars previously submitted to the Board are found to be false or misleading in any material particular or if there is any material change in the information already submitted;
  • The investment adviser, not being an individual, shall include the words ‘investment adviser’ in its name;
  • Individuals registered as investment advisers shall use the term ‘investment adviser’ in all their correspondences with their clients.
• The certificate of registration shall be valid for a period of five years from the date of its issue.

 REFUSAL OF REGISTRATION

 If the Board is of the opinion, after considering the application, that a certificate should not be granted to the applicant, it may reject the application after giving the applicant a reasonable opportunity of being heard.  The said decision is to be communicated to the applicant within thirty days of such decision.  Where an application for a certificate is rejected by the Board, the applicant shall forthwith cease to act as an investment adviser. 

 OBLIGATIONS AND RESPONSIBILITIES

 General Responsibility

• An investment adviser shall act in a fiduciary capacity towards its clients and shall disclose all conflicting interests as and when they arise;
• He shall not receive any consideration by way of remuneration or compensation or in any other form from any person other than the client being advised, in respect of the underlying products or securities for which advice is provided;
• He shall maintain an arms-length relationship between its activities as an investment adviser and other activities;
• He shall ensure that its investment advisory services are clearly segregated from all its other activities;
• He shall not divulge any confidential information about its client without taking prior permission of its clients, except where such disclosures are required to be made in compliance with any law for the time being in force;
• He shall not enter into transactions on its own account which is contrary to its advice given to clients for a period of 15 days from the day of such advice;
• He shall follow Know Your Client procedure as specified by the Board from time to time;
• He shall abide by the Code of Conduct as specified in Third Schedule;
• He shall not act on its own account, knowingly to sell securities or investment products to or purchase securities or investment products from a client;
• In case of change in control of the investment adviser, prior approval from the Board shall be taken;
• He shall furnish to the Board information and reports as may be specified by the Board from time to time;
• He shall ensure the certification and qualification requirements.

 Risk Profiling:

 

• He shall ensure that he obtains from the client necessary information such as age, income details, investment objective, existing investment/assets, risk appetite/tolerance, liability/borrowing details;
• He has a process for assessing the risk a client is willing and able to take;
• He shall ensure that the tools used for risk profiling are fit for the purpose and any limitations are identified and mitigated;
• Risk profile of the client is communicated to the client after risk assessment is done;
• Information provided by clients and their risk assessment is updated periodically.

 Suitability

 Investment adviser shall ensure that-

• All investments on which investment advice is provided is appropriate to the risk profile of the client;
• It has a documented process for selecting investments based on client’s investment objectives and financial situation;
• It understands the nature and risks of products or assets selected for clients;
• It has a reasonable basis for believing that a recommendation or transaction entered to meets the client’s investment objectives;
• 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.

Disclosure to clients

 An investment adviser shall disclose to his client-

• All material information about itself, the terms and conditions for offering advisory services etc.,;
• Any consideration by way of remuneration or compensation or in any other form whatsoever received or receivable by it or any of its associates or subsidiaries for any distribution or execution services in respect of the products or securities for which the investment advice is provided to the client;
• Any actual or potential conflicts of interest arising from any connection to or association 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;
• All material facts relating to the key features of the products or securities, particularly, performance track record;
• Draw the client its attention to the warnings, disclaimers in documents, advertising materials relating to an investment product which it is recommending to its client.

 Maintenance of Records

                         An investment adviser shall maintain the following records:

v  Know your client records of the client;

v  Risk profiling and risk assessment of the client;

v  Suitability assessment of the advice being provided;

v  Copies of agreements with clients, if any;

v  Investment advice provided, whether written or oral;

v  Rationale for arriving at investment advice, duly signed and dated;

v  A register or record containing list of clients, the date of advice, nature of the advice, the products/securities in which advice was rendered and fee, if any charged for such advice;

 All records shall be maintained either in physical or electronic form and preserved for a period of minimum of five years.    Yearly audit in respect of compliance with these regulations from a member of Chartered Accountants of India or Institute of Company Secretaries of India shall be conducted.

 Redressal of client grievances

 An investment adviser shall redress the grievances of the clients promptly.   For this purpose he shall have adequate procedure for expeditious grievance redressal.    Client grievances pertaining to financial products in which investments have been made based on investment advice, shall fall within the purview of the regulator of such financial product.   Any dispute between the investment adviser and his client may be resolved through arbitration or through Ombudsman authorized or appointed for the purpose by any regulatory authority, as applicable.

 Appointment of Compliance Officer

 An investment adviser which is a body corporate or a partnership firm shall appoint a compliance officer who shall be responsible for monitoring the compliance by the investment adviser in respect of the requirements of the Act, regulations, notifications, guidelines, instructions issued by the Board.

 INSPECTION BY BOARD

 The Board is having right to inspect the books of accounts, records and documents relating to investment advisers.  Before ordering an inspection the Board shall give not less than ten days notice to the investment adviser.  Where the Board is satisfied that in the interest of the investors no such notice should be given, it may by an order in writing direct that the inspection of the affairs of the investment adviser be taken up without such notice.   During the inspection in the investment adviser to produce such books, accounts and other documents in its custody or control and furnish with such statements and information as the inspecting authority may require for the purposes of inspection.  The investment adviser shall give to the inspecting authority all such assistance and shall extend all such co-operation as may be required in connection with the inspection and shall furnish such information as sought by the inspecting authority in connection with the inspection.   The authority shall submit the inspection report to the Board.   The Board may on the report may issue such directions, after giving reasonable opportunity of being heard, requiring the investment advisers not to provide investment service for a particular period; to refund any money collected as fees, charges or commissions or otherwise to the concerned clients along with the requisite interest; or prohibit from operating in the capital market or accessing the capital market for a specified period.