SEBI Investment Advisers Regulations – an overkill?

In continuation with earlier post on the recently notified SEBI(Investment Advisers) Regulations, 2013 (“the Regulations”), the following
further points are worth noting.
1)     The Regulations apply to all Investment
Advisers giving investment advice. They are required to register themselves
with SEBI.
2)     The term investment advice has been defined to
cover advice relating to securities and investment products. This covers a very
wide range of products. Investment products may also cover even real estate, gold, etc., i.e., non-financial products. It appears from the Scheme of the Regulations though that the intention may not be to cover such non-financial
products. However, every form of securities/investment products, including even
bank deposits, national savings certificates, company deposits, etc. would be
covered, apart from shares, derivatives, insurance products, mutual fund units,
etc.
3)     The investment advice needs to be rendered for
consideration in cash or in kind. It is not clear whether the intention is to
cover only those Investment Advisers who accept consideration from their
clients. From the wording of the Regulations, it appears that the consideration
may flow from any person. If this is not the intention, then it will need
clarification since otherwise many persons would inadvertently get covered by
the definition of Investment Advisers.
4)     A person rendering such investment advice for
consideration (in cash or in kind) is an Investment Adviser. However, there are
several exclusions.
a)     Insurance brokers/agents registered with IRDA
are excluded, provided they offer advice solely
in investment products. Same for pension advisers. It is common to see advisers
offering advise on a range of products and insurance, pension, etc. are part of
such products.
b)     Distributors of mutual funds, stock brokers,
sub-brokers, etc. are excluded provided that they give investment advice
incidental to their respective primary activity.
c)      Similarly, professionals like CAs, CSs, ICWAs
and lawyers are excluded if they given investment advice incidental to their
respective professional service/practice. However, considering the wide definition
of investment advice, professionals who specialise in financial advice
generally may have to consider whether they are covered.
5)     Since the exclusions are specific, any other
person who acts as investment adviser, whether full time or part time and
whether gives advice generally even incidental to the financial products that
he is distributing would be covered. Concern thus arises for persons who act as
agents for small savings, company deposits, etc.
6)     Considering the fairly broad definition of Investment
Advisers and the limited exclusions, it would appear that perhaps lakhs of
persons operating in the financial markets as agents and the like may also get
covered. However, it appears, from the history of these Regulations that the
intention does not seem to cover persons already regulated by other authorities
such as IRDA, etc. In particular, the intention may be to cover only those
Investment Advisers whose primary or sole business to render investment advice
for consideration. This, however, has not been brought out and a clarification
is needed.
7)     Small investment advisers may face the
elaborate requirements of registration and compliance of various requirements
particularly cumbersome and costly. The Investment Advisers are required to
obtain annual a certificate of compliance of Regulations. There are numerous
other requirements/procedures some of which are similar to codes of conducts
and some involve heavy documentation.
a)     The requirements of disclosure and
documentation are so elaborate so as to be unrealistic, even if well intended.
KYC documents of each client have to be obtained and kept. Risk profiling and
risk assessment of every client has to be maintained in writing. The investment
advice provided and rationale for it has to be documented. And so on. These
requirements are quite unrealistic and even extraordinary. Even professionals
like CAs, lawyers, etc. give various types of professional advice for
consideration but they are not required to maintain such records in writing. It
may be different if there are a few large clients for whom certain infrequent
large transactions are advised on. For small and medium sized clients, this may
be meaningless and they may end up implementing in a cursory/summary way.
8)     If, as expected, a very large number of
Investment Advisers are covered and have to apply for registration, it will be
a mammoth job for SEBI to register them, to keep track of them and to ensure
that they comply with the elaborate requirements. And, as it is quite likely,
there will be numerous non-compliances, small and big, and SEBI will have to
spend time and energy in taking action. The question will whether such effort
will be worth it and effective.
a)     There is a strong case for exempting Investment
Advisers earning income below a certain limit. Else, assuming that the
definitions are broadly applied, thousands of Investment Advisers may simply
have to close down shop.
9)     There are valid complaints against many Investment
Advisers. That they give biased advice to favor products where they get larger
commission/fees directly or indirectly, that they take positions conflicting to
their advice, that they act negligently without carefully considering what the
client needs/risks. And so on. Thus, some sort of regulation was quite overdue.
However, it appears that placing such elaborate but often vague
requirements/formalities creates disproportionate costs and efforts on one hand
but not being able to control such mal practices on the other hand.
10)   The requirements of basic qualification and specialized
training/qualification are fair and it is obviously a must that only qualified,
knowledgeable and trained people enter this field. Though not wholly clear, it
appears that apart from the basic qualification, an additional certificate in
the finance field is also required. A two year period is given for those who do
not have such certification.
11)   Body corporates and firms who act as Investment
Advisers need to appoint a compliance officer who would be responsible for
compliance of the Act, these Regulations, etc.

It seems that SEBI will need to interact much more
with Investment Advisers in the field and make a realistic assessment of the
field, before bringing these Regulations into effect. 

About the author

CA Jayant Thakur

9 comments

  • “The term investment advice has been defined to cover advice relating to securities and investment products. This covers a very wide range of products. Investment products may also cover even real estate, gold, etc., i.e., non-financial products.”
    On these limited observations, wish to share a few more thoughts:
    If the term ‘investment products ‘ were to be so liberally construed, that will mean, SEBI would be within its powers to try and overreach all and sundry, – including any non-financial product – regardless of whether or not it has the characteristics of the shares or stocks. What ought not to be forgotten is that, SEBI’s powers, in terms of the special statute of which it is a creature, are confined to regulating exclusively the market for the said financial products. In this context, one has to remember the ego war between SEBI and IRDA that raged the economic scenario not long ago. The worrisome controversy, though was eventually given a quietus, was hotly debated; for knowing more, besides the other material in public domain, the article @ http://www.taxguru.in/sebi/sebi-v-irda-%E2%80%93-unfolding-turf-war.html may be read.

    Nonetheless, in reality,the stock market, has, by its very nature, always been , and remained to be, vulnerable to, and many times widely impacted /impaired by so many other extraneous factors or considerations; that is, whether or not related directly or indirectly to ‘stock’.

  • How SEBI will ensure all Advisers (confined to Shares & Stocks) are registered with it and how it can take action on those not registered and offering Investment Advise ?
    The Regulation does not give power to SEBI to penalise those who offer advise for a consideration by whatever name it is called.

  • You are incorrect when you say that insurance agents and CAs, etc are exempted under the regulations. I spoke with a gentleman at SEBI and asked him this question specifically. His response was that these persons are only exempt from registration because SEBI believes they are must be registered under some other body of the government. They need not register but definitely have to comply with the provisions of the regulations.

  • @ Anand Raja

    As mentioned in my post – "Insurance brokers/agents registered with IRDA are excluded, provided they offer advice solely in investment products." So, indeed, apart from other conditions, insurance agents/brokers need to be registered with IRDA for availing of exemption.

    CAs, CSs, etc. are of course already registered with their respective professional bodies.

    It is also true that the intention appears to be that even exempted category of investment advisors should follow applicable regulations like documentation, etc. Unfortunately, in the wording of the Regulation, this aspect is ambiguous. Even otherwise, the regulations that apply only to registered investment advisers and those that apply to all investment advisers are not clearly bifurcated.

  • @Anand Raja and Jayant Thakur,

    What's about CA and CS (who although are under the guidance of their respective professional bodies ICAI and ICSI) who renders investment advice through a body corporate, like small CS who forms a co with few other CS or accounting/ tax firms who render services through company form of business (classic eg being Big 4'S). Although inidvidually they may be goverend by ICAI and ICSI reg but when they come under a company form of business they may not.

  • @Anonymous…

    Acting as Investment Adviser through a corporate body would attract registration even if, in a practice sense, main or sole operating person is a CA/CS. In fact, it would attract stricter requirements such as higher net worth requirements. Moreover, even the CA/CS himself who acts as representative of the company would need certification, etc.

  • I see. But would that actually be the intention of the legislator? I mean, if lawyers can provide the same advice they are exempted, if CA and CS provide the same advice as a part of the transaction, then also they are free. But as soon such professionals render the service under the cover of company form of businesss, they are required to be complied with?

    To illustrate more, a law firm advises ABC limited to use, say a combination of debt/ equity instrument, to make an investment in PQR. This doesn't come under the ambit of the IA reg. If the same advice is given by practicing CA or CS, then also it is fine. But the moment such professinals render the same advice through a company form of business, they are immediately required to be goverened as per the IA reg?!

  • @Anonymous…

    This is partly also because the corporate form is not registered and regulated by the respective body (ICAI, ICSI, etc.). Also, the company may change the persons in charge from professionals like CA/CS/lawyer to non-professionals. Since this cannot be controlled, the corporate body as a whole would need to be registered and regulated. This seems to be the intention as far as I can gather.

  • Dear Sir,

    My name is Shashank, and I am Mechanical Engineer with 10 years of Experience. Stock market trading has been my passion, I have been trading for the past 8+ years. After facing initial hurdles, I have been trading profitably for the last 3 years. Now, I want to leave my day job and become a full time trader.

    As you must be knowing, in trading, we don't get a regular income. Income generally comes in bursts. So, to get steady income, I was also thinking of opening a subscription based service for trading advice, only on Nifty Futures. I already have many followers on trading forums, who are willing to subscribe to me.

    Can you please guide me as to how you obtained the Investment Adviser Certificate from SEBI?

    Further, since I will be giving advice only on Nifty Futures, am I exempt from taking a certificate, as per the following clause: "(a) Any person who gives general comments in good faith in regard to trends in the financial or securities market or the economic situation where such comments do not specify any particular securities or investment product;".

    Finally, if I don't get the certificate from SEBI, on eligibility ground etc., does it mean that I cannot run such a subscription based service or is there any rule under which I can be exempt from registering as an investment adviser?

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