SEBI (Investment Advisers) Regulations, 2013

SEBI (Investment Advisers) Regulations, 2013 (Part 1)

• Definition of Investment Adviser: A person who, for consideration, provides investment advice to clients or other persons, including part-time investment advisers.
• Investment Advice: Advice relating to investing in, purchasing, selling, or dealing in securities, including financial planning, but excluding advice given through public media or trading calls.
• Asset under Advice: The aggregate net value of securities for which the investment adviser has rendered investment advice.
• Persons Associated with Investment Advice: Members, partners, officers, directors, employees, or sales staff of an investment adviser who provide investment advisory services to clients.

Key Concepts

• Registration with SEBI: Investment advisers are required to register with SEBI, except for certain exempted individuals, such as insurance agents, pension advisors, and distributors of mutual funds.
• Exemptions: Certain individuals, such as advocates, solicitors, and members of professional bodies, are exempt from registration if they provide investment advice incidental to their primary activity.
• General Responsibilities: Investment advisers must act in a fiduciary capacity, disclose conflicts of interest, maintain an arms-length relationship with other activities, and ensure confidentiality of client information.
• Code of Conduct: Investment advisers must abide by a code of conduct, which includes provisions for know-your-client procedures, transaction rules, and reporting requirements.
• Risk Profiling: Investment advisers must identify the risk profile of their clients, including their age, investment objectives, income, existing investments, risk appetite, and liability details.

Important Terms

• Investment Adviser Administration and Supervisory Body (IAASB): A recognized body or body corporate that administers and supervises investment advisers.
• BSE Administration & Supervision Ltd (BASL): The first IAASB recognized by SEBI, which is responsible for registering and supervising investment advisers.
• Know Your Client (KYC): A procedure specified by SEBI for investment advisers to follow when dealing with clients.
• Investor Charter: A document specified by SEBI that outlines the rights and responsibilities of investors and investment advisers.

SEBI (Investment Advisers) Regulations, 2013 (Part 2)

• Risk Assessment: The risk profile of the client should be communicated to the client after a risk assessment is done. The questionnaire used to establish the risk a client is willing and able to take should be fair, clear, and not misleading.
• Suitability of Advice: The suitability of the advice by the investment adviser is required to be ensured as per Regulation 17, which states that all investments on which investment advice is provided should be appropriate to the risk profile of the client.
• Disclosures by Investment Advisers: Investment Advisers are required to make certain disclosures to their clients, including:
  • Material information about themselves, including their business and disciplinary history
  • Their holding or position in the financial products or securities which are the subject matter of advice
  • Any actual or potential conflicts of interest arising from any connection to or association with any issuer of products/securities
  • Key features of the products or securities, including performance track record
• Client Level Segregation of Advisory and Distribution Activities: Regulation 22 provides details of segregation of advisory and distribution activities requirements, including:
  • An individual investment adviser shall not provide distribution services
  • A non-individual shall have client level segregation at the group level for investment advisory and distribution services
• Implementation of Advice or Execution: Investment advisors may provide implementation services to their advisory clients in the securities market, provided that no consideration, including commission or referral fees, is received directly or indirectly.
• Maintenance of Records: An investment adviser shall maintain records, including:
  • Know Your Client records of the client
  • Risk profiling and risk assessment of the client
  • Suitability assessment of the advice being provided
  • Copies of agreements with clients
  • Investment advice provided, whether written or oral
• Appointment of Compliance Officer: A non-individual investment adviser shall appoint a compliance officer or an independent professional to monitor compliance with SEBI regulations.
• Code of Conduct for Investment Advisers: The code of conduct for investment advisers includes principles such as:
  • Honesty and Fairness: Acting honestly, fairly, and in the best interests of clients
  • Diligence: Acting with due skill, care, and diligence in the best interests of clients
  • Capabilities: Having and employing appropriate resources and procedures
  • Confidentiality: Maintaining the confidentiality of client information
  • Fair and Reasonable Charges: Charging fees that are fair and reasonable
  • Compliance: Complying with all regulatory requirements applicable to the conduct of business activities

SEBI (Investment Advisers) Regulations, 2013 (Part 3)

• Introduction: The SEBI (Investment Advisers) Regulations, 2013, aim to regulate investment advisers and protect the integrity of the market.
• Responsibility of Senior Management: The senior management of a body corporate registered as an investment adviser is responsible for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures.
• SEBI Circulars: SEBI has issued circulars to strengthen the conduct of investment advisers, including restrictions on free trials, proper risk profiling, and receiving fees through banking channels only.

Key Concepts

• Restriction on Free Trial: Investment advisers are not allowed to provide free trials to prospective clients.
• Proper Risk Profiling: Investment advisers must complete the risk profile of the client and obtain their consent before providing investment advice.
• Receiving Fees: Investment advisers can only accept fees through account payee crossed cheques, demand drafts, or direct credit into their bank account.
• Display of Complaints Status: Investment advisers must display the status of complaints on their website and mobile app.

Guidelines for Investment Advisers

• Client Level Segregation: Investment advisers must segregate advisory and distribution activities at the client level.
• Agreement between IA and Client: Investment advisers must ensure that clients sign an agreement before providing investment advice or charging fees.
• Fees: Investment advisers can charge fees in two modes: Assets under Advice (AUA) mode or Fixed Fee mode.
• Qualification and Certification: Investment advisers must meet certain qualification and certification requirements, including relevant certifications from NISM.
• Registration as Non-Individual IA: Individual investment advisers must apply for registration as non-individual investment advisers when they reach 150 clients.
• Maintenance of Records: Investment advisers must maintain records, including telephone recordings, emails, and physical documents, for a period of 5 years.
• Audit: Investment advisers must ensure that annual audits are completed within 6 months from the end of the financial year.

Operating Guidelines for Investment Advisers in IFSC

• Eligibility Conditions: Entities can apply for registration as investment advisers in IFSC if they meet certain eligibility conditions.
• Compliance Requirements: Investment advisers in IFSC must comply with certain requirements, including qualification and experience requirements.
• Conditions and Restrictions: Investment advisers in IFSC are subject to certain conditions and restrictions, including restrictions on providing investment advisory services to certain persons.

Case Study: Capvision Investment Advisor v/s SEBI

• Facts of the Case: The appellant, an investment adviser registered with SEBI, was accused of misappropriating money from a client.
• Findings of the Case: The Adjudication Officer of SEBI imposed a penalty on the appellant for violating the Code of Conduct and non-redressal of client grievance.

SEBI (Investment Advisers) Regulations, 2013 (Part 4)

• Introduction: The SEBI (Investment Advisers) Regulations, 2013, aim to regulate investment advisers and protect the interests of investors.
• Key Provisions:
  • Investment advisers must provide honest and sincere advice to clients.
  • They must not enter into transactions on their own account that are contrary to the advice given to clients.
  • They must conduct their business with proper care and diligence.
  • They must not misuse clients' funds.

Violations and Penalties

• Violations: The appellant violated provisions of the Investment Advisor Regulations by conducting business without proper care and diligence, resulting in losses to clients.
• Penalties: The penalty imposed was Rs 16 lakhs, which was later reduced to Rs 8 lakhs due to the appellant being a small investment adviser and the amount involved being relatively small.

Review Questions and Answers

• Question 1: As per the SEBI (IA) Regulations, an 'Investment Adviser' shall not enter into transactions on its own account which is contrary to its advice given to clients for a period of Thirty from the day of such advice.
• Question 2: As per SEBI (Investment Advisers) Regulations, 2013, investment advice can be given to a client After Risk Profiling of Client is done and After Ensuring Suitability of the product.
• Question 3: Risk-profiling of a client is based on All of the above options, including income, age, and liability/borrowing details.
• Question 4: Investment Advisers can accept fees by banking channel only. They cannot accept fees by way of cash.