In continuation with earlier post on the recently notified SEBI(Investment Advisers) Regulations, 2013 (“the Regulations”), the following
further points are worth noting.
further points are worth noting.
1) The Regulations apply to all Investment
Advisers giving investment advice. They are required to register themselves
with SEBI.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.
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.