Sebi floats fresh consultation paper; moots split of investment advisor, distributor roles

SEBI Chairman Ajay Tyagi addresses a press conference in Mumbai. (PTI PHOTO)

Markets watchdog Sebi has proposed a new set of norms for investment advisers, under which they will have to segregate their advisory and product distribution activities, as part of its effort to strengthen the regulatory framework.

Besides, the regulator has suggested that Investment Advisers (IA) should not come out with any investment advice suggesting assured returns to clients in the investment advisory document.

Also, Sebi has suggested mechanisms for charging fees from clients and proposed to raise the net worth requirement for IAs.

Further, it has proposed that IA should clearly declare to the client that it will not seek any power of attorney from its clients for auto implementation of investment advice.

The new set of proposals are intended to strengthen the regulatory framework for investment advisers as well as empower them to effectively discharge their responsibilities towards the investors who are their clients, the regulator said in a draft proposal.

Sebi said it has been receiving numerous investor complaints against investment advisers and most of the complaints were related to assured returns being offered by IAs, charging of exorbitant fees from client with a false promises of handsome returns, mis-selling without adhering to the risk profile of the client, non-disclosure of complete service fees and charges and extracting money in the name of various charges.

To further strengthen and make the IA Regulations robust, the regulator has come out with fresh proposals in this regard and sought public comments on the proposals till January 30. The final regulation will be put in place after taking into consideration, views of all stakeholders.

"There should be clear segregation between the two services provided to the client i.e. investment advice and distribution of the investment products," the Securities and Exchange Board of India (Sebi) said in the draft proposal.

IAs should provide a document to the client detailing the terms and conditions of the investment advisory services offered to the client. They should ensure that neither any investment advice is rendered nor any fee is charged until consent is received from the client on the terms and conditions.

The document must clearly indicate that IA should not, in the course of performing its services to the client, hold out any investment advice implying any assured returns or any other nomenclature that gives the impression that the investment advice is risk-free or not susceptible to market risks.

Further, the document must mention about the scope of services, functions of IA, investment objective and guidelines, risk factors, the validity of advisory services, terms of fees, conflict of interest and liability of IA among others.

Besides, it has been suggested that IA should clearly declare to the client that it will not seek any power of attorney or authorisations from its clients for auto implementation of investment advice and it does not derive any direct or indirect benefit out of the client's securities or investment products.

Further, the regulator has proposed two mechanisms under which an investment adviser can charge fees -- Assets under advice (AUA) mechanism of fees and fixed fees.

Under the AUA mechanism, the maximum fees that can be charged will be 2.5 per cent of AUA per annum per family across all schemes or products and the upper limit of Rs 75,000 annually per family has been proposed under the fixed-fee model.

"If agreed by the client, Investment Adviser can charge fees in advance. However, such advance cannot exceed fees for two quarters," as per the proposal.

With regard to networth, Sebi has proposed that IA, who are individuals shall have networth of at least Rs 10 lakh, while the same for non-individual IAs should be at least Rs 50 lakh.

At present, individuals are required to have a networth of Rs 1 lakh, while the same for a body corporate or non-individuals are at least Rs 25 lakh.

The existing investment advisers will have to comply with the new networth requirement within three years.

"Further, any individual registered as investment advisers whose number of clients exceed 150 or whose asset under advice exceed Rs 40 crore shall compulsorily re-register itself as non-individual investment adviser within six months of the trigger event," Sebi noted.

To strengthen the process of grievance handling, Sebi has proposed that records of interactions with the client including prospective clients should be maintained by IAs and they should be required to maintain these records for a period of five years.

It has been proposed that all IAs should be required to obtain fresh certification each time before the expiry of the existing certificate to ensure compliance with the certification requirement.

With regard to compliance audit requirement, the regulator suggested that IA should complete the compliance audit within three months from end of each financial year and post completion of said audit must report the adverse findings along with action taken thereof to Sebi within one month from the date of the audit report but no later than July 31 of each year for the previous fiscal.

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