guidelines for investment advisors

SEBI circular dated 23rd September, 2020 on the subject.

  1. Securities and Exchange Board of India (SEBI), after considering the inputs from public consultation, reviewed the framework for regulation of Investment Advisers (IA) and notified Securities and Exchange Board of India (Investment Advisers) (Amendment) Regulations, 2020 (hereinafter referred as “amended IA Regulations”) on July 03, 2020. These amendments shall come into force on September 30, 2020.
  2. In addition to the above, Investment Advisers shall ensure compliance with the following guidelines:
    (i) Client Level Segregation of Advisory and Distribution Activities
    To ensure client level segregation at Investment Adviser’s group/family1
    level, as per Regulation 22 (5) of amended IA Regulations, following compliance and monitoring process shall be adopted:
    a. Existing clients, who wish to take advisory services, will not be eligible for availing distribution services within the group/family of IA. Similarly, existing clients who wish to take distribution services will not be eligible for availing advisory services within the group/family of IA.
    b. A new client will be eligible to avail either advisory or distribution services within the group/family of IA. However, the option to avail either advisory services or distribution services shall be made available to such client at the time of on boarding.
    c. Client under these guidelines shall include individual client or non-individual client.
    d. The client shall have discretion to continue holding assets prior to the
    applicability of this segregation under the existing advisory/distribution

“Group” and “family of an individual investment adviser” shall be as per Regulation 22 (3) (iii) and Regulation 2(gc) respectively of the amended IA regulations arrangement. However, the client shall not be forced to liquidate/switch such existing holdings.
e. PAN of each client shall be the control record for identification and client level segregation.
f. In case of an individual client, “family of client” shall be reckoned as a single client and PAN of all members in “family of client” would jointly and severally be the control record. However, the same is not applicable for non-individual clients.
g. The dependent family members shall be those members whose assets on
which investment advisory is sought/provided, originate from income of a
single entity i.e. earning individual client in the family. The client shall provide an annual declaration or periodic updation as the case maybe in respect of such dependent family members.
h. IA shall, wherever available, advice direct plans (non-commission based) of products only.
i. The investment adviser shall maintain on record an annual certificate from an auditor (in case of individual IA) and its statutory auditor (in case of a nonindividual IA) confirming compliance with the client level segregation requirements as specified in Regulation 22 of amended IA Regulations. Such annual certificate shall be obtained within 6 months of the end of the financial year and form part of compliance audit, in terms of Regulation 19(3) of the amended IA Regulations.
(ii) Agreement between IA and the client
a. Regulation 19 (1) (d) of the amended IA Regulations provides that IA shall
enter into an investment advisory agreement with its clients. The said agreement shall mandatorily cover the terms and conditions provided in
Annexure-A.
b. IA can include additional terms and conditions in the agreement without
diluting the provisions of SEBI (Investment Advisers) Regulations, 2013 and
amendments thereto as well as circulars issued thereunder.
c. IA shall ensure that neither any investment advice is rendered nor any fee is charged until the client has signed the aforesaid agreement and provided copy of signed agreement to the client.
d. IA shall enter into investment advisory agreement with its clients including existing clients latest by April 01, 2021 and submit a report, confirming the same to SEBI latest by June 30, 2021.


“Family of client” and “AUA” shall be as per as per Regulation 2 (gb) and Regulation 2(aa) respectively of the
amended IA regulations

(iii) Fees
Regulation 15 A of the amended IA Regulations provide that Investment Advisers shall be entitled to charge fees from a client in the manner as specified by SEBI, accordingly Investment Advisers shall charge fees from the clients in either of the two modes:
(A) Assets under Advice (AUA) mode
a. The maximum fees that may be charged under this mode shall not exceed
2.5 percent of AUA per annum per client across all services offered by IA.
b. IA shall be required to demonstrate AUA with supporting documents like
demat statements, unit statements etc. of the client.
c. Any portion of AUA held by the client under any pre-existing distribution
arrangement with any entity shall be deducted from AUA for the purpose of
charging fee by the IA.
(B) Fixed fee mode
The maximum fees that may be charged under this mode shall not exceed INR 1,25,000 per annum per client across all services offered by IA.
General conditions under both modes
a. In case “family of client” is reckoned as a single client, the fee as referred
above shall be charged per “family of client”.
b. IA shall charge fees from a client under any one mode i.e. (A) or (B) on an
annual basis. The change of mode shall be effected only after 12 months of
on boarding/last change of mode.
c. If agreed by the client, IA may charge fees in advance. However, such
advance shall not exceed fees for 2 quarters.
d. In the event of pre-mature termination of the IA services in terms of
agreement, the client shall be refunded the fees for unexpired period.
However, IA may retain a maximum breakage fee of not greater than one
quarter fee.
(iv) Qualification and certification requirement
Regulation 7 of the amended IA Regulations specifies the minimum qualification and certification requirements for IAs. Further, in terms of second proviso of regulation 7 (1), existing individual IAs above fifty years of age (as on September 30,2020) shall not be required to comply with the qualification and experience requirements specified under Regulation 7(1)(a) and 7(1)(b) of the amended IA Regulations. However, such IAs shall hold NISM accredited certifications and comply with other conditions as specified under Regulation 7 (2) of the amended IA Regulations at all times.
(v) Registration as Non Individual Investment Advisor
a. As per Regulation 13(e) of the amended IA Regulations, an individual IA shall apply for registration as non-individual investment adviser on or before reaching 150 clients.
b. Such application for registration shall be made in FORM-A as per the
amended IA regulations, along with the requisite fee and same shall be
assessed in accordance with the provisions of SEBI(Investment Advisor)
Regulations, 2013 and amendments thereto as well as circulars issued
thereunder.
c. Once number of clients reaches 150 and till grant of registration as a nonindividual IA, Individual IA shall not on-board fresh clients. However, during the period of examination of application by SEBI, individual IA shall continue to service existing clients. In case the aforesaid IA does not get registration as non-individual IA,such IA shall continue the advisory activities as an Individual IA while ensuring that the numbers of clients does not exceed 150 in total.
d. As per Regulation 13(e) of the amended IA Regulations, existing Individual IA having more than 150 clients as on September 30, 2020 shall not on-board fresh clients and such Individual IA shall apply for registration as nonindividual IA latest by April 01, 2021. However, during the period of examination of application by SEBI, individual IA shall continue to service existing clients.
e. Existing Individual IA, having more than 150 clients on September 30, 2020, shall report their number of clients to SEBI through sebiria@sebi.gov.in, latest by October 15, 2020 in the following format:


(vi) Maintenance of record
Regulation 19 (1) of the SEBI (Investment Advisers) Regulations, 2013 provides that IA shall maintain records with respect to his activities as an investment adviser. In this regard, it is clarified that:
a. IA shall maintain records of interactions ,with all clients including prospective clients (prior to onboarding), where any conversation related to advice has taken place inter alia, in the form of:

i. Physical record written & signed by client,
ii. Telephone recording,
iii. Email from registered email id,
iv. Record of SMS messages,
v. Any other legally verifiable record.
b. Such records shall begin with first interaction with the client and shall continue till the completion of advisory services to the client.
c. IAs shall be required to maintain these records for a period of five years.
However, in case where dispute has been raised, such records shall be kept
till resolution of the dispute or if SEBI desires that specific records be
preserved, then such records shall be kept till further intimation from SEBI.
(vii) Audit
a. As per regulation 19 (3) of the amended IA Regulations, IA shall ensure that annual audit in respect of compliance of SEBI (Investment Advisers)
Regulations, 2013 and circulars issued thereunder is conducted. The audit
shall be completed within six months from the end of each financial year.
b. The adverse findings of the audit, if any, along with action taken thereof duly approved by the individual IA/management of the non-individual IA, shall be reported to respective SEBI office (based on the registered address of IA) within a period of one month from the date of the audit report but not later than October 31st of each year for the previous financial year starting with the financial year ending March 31,2021.
(viii) Risk profiling and suitability for non-individual clients
a. Regulation 16 and 17 of SEBI (Investment Adviser) Regulations, 2013
mandates risk profiling and suitability for all categories of clients.
b. In order to further enhance the risk profiling and encompass suitable factors in case of non-individual clients, IA shall use the investment policy as approved by board/management team of such non-individual clients for risk profiling and suitability analysis.
c. The discretion to share the investment policy/relevant excerpts of the policy shall lie with the non-individual client. However, IA shall have discretion not to onboard non-individual clients if they are unable to do risk profiling of the non-individual client in the absence of investment policy.
(ix) Display of details on website and in other communication channels
In order to protect the interest of investors and bring more transparency in the functioning of investment advisers, IAs shall display the following information prominently on its website, mobile app, printed or electronic materials, know your client forms, client agreements and other correspondences with the clients:

 Complete name of Investment Adviser as registered with SEBI,
 Type of Registration-Individual, Non-Individual,
 Registration number, validity of registration,
 Complete address with telephone numbers,
 Contact details of the Principal Officer –contact no, email id etc.,
 Corresponding SEBI regional/local office address.

  1. Applicability
    Client level segregation of advisory and distribution activities, agreement and fees to be charged are aligned together. IA shall ensure compliance with measures stated above at clause 2(i), 2(ii) and 2(iii) latest by April 01, 2021.
    Compliance with measures referred above at clause 2 (vi), 2(viii) and 2(ix) shall be ensured latest by January 01, 2021. Further timelines have been specified under clause 2(iv), 2(v) and 2(vii).

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