Sebi fathers new profession of investment advisors

They are Sebi’s new babies, but the rules on how they must breathe are so tough that a paradox envelops them.The predatory variety like banks will (or may) stop fooling around with our money, but the “kirana” investment advisor will simply go back to being a sales agent.


Rohit Bansal | January 25, 2013

Remember the sultry voice from your Citibank or Standard Chartered relationship manager asking for a meeting to suggest investment A or property B? Especially if you had just deposited a big cheque?

Earlier this week, Securities and Exchange Board of India notified the SEBI (Investment Advisers) Regulations, 2013, expected to instill the fear of God into the implicit conflict of interest driving your banker’s sweet seduction.

Enter, India’s giant step in creating a new class of professionals called “Investment Advisors.”

The rules were badly needed because the lady (sure, could be a guy too!) who was doling out investment advice (and getting paid by ordinary purchasers like you and me) was also getting fat commissions from the producer of what we were buying.

So, good that Sebi has finally bit the bullet and created a formal class of investment advisors who are, by implication, banned from taking any cuts from producers.

Put in another way, those who want to be called investment advisors will be required to bat only for us, and thus, by implication, be paid only by us.

But as Dhirendra Kumar, the noted Value Research mutual fund expert painstakingly pointed out to me, the norms are so stringent that the small fish will simply flunk the test. A likely option is that they’ll resort to being sales agents working for “the other side.”

But don’t believe Kumar or me. Put yourself into the diving shoes of this new professional class Sebi is attempting to define. Please take this tutorial for dummies:

“Investment advice” has been defined as advice relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products, whether written, oral or through any other means of communication for the benefit of the client and shall include financial planning:

Provided that investment advice given through newspaper, magazines, any electronic or broadcasting or telecommunications medium, which is widely available to the public shall not be considered as investment advice for the purpose of these regulations.

“Investment adviser” has been defined as any person, who for consideration, is engaged in the business of providing investment advice to clients or other persons or group of persons and includes any person who holds out herself as an investment adviser, by whatever name called.

The new regulation enshrines that effective July 20, 2013 (i.e. six months from the notification of January 19, 2013) no person shall act as an investment adviser or hold itself out as an investment adviser unless she has obtained a certificate of registration from the Board under the new regulations.

The only exceptions to this requirement are:
(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;
(b) Any insurance agent or insurance broker who offers investment advice solely in insurance products and is registered with Insurance Regulatory and Development Authority for such activity;
(c) Any pension advisor who offers investment advice solely on pension products and is registered with Pension Fund Regulatory and Development Authority for such activity;
(d) Any distributor of mutual funds, who is a member of a self regulatory organisation recognised by the Board or is registered with an association of asset management companies of mutual funds, providing any investment advice to its clients incidental to its primary activity;
(e) Any advocate, solicitor or law firm, who provides investment advice to their clients, incidental to their legal practice;
(f) Any member of Institute of Chartered Accountants of India, Institute of Company Secretaries of India, Institute of Cost and Works Accountants of India, Actuarial Society of India or any other professional body as may be specified by the Board, who provides investment advice to their clients, incidental to his professional service;
(g) Any stock broker or sub-broker registered under SEBI (Stock Broker and Sub- Broker) Regulations, 1992, portfolio manager registered under SEBI (Portfolio Managers) Regulations, 1993 or merchant banker registered under SEBI (Merchant Bankers) Regulations, 1992, who provides any investment advice to its clients incidental to their primary activity.

Even these intermediaries are expected to comply with some general obligation(s) and responsibilities, viz:
(1) act in a fiduciary capacity towards its clients and shall disclose all conflicts of interests as and when they arise.
(2) not receive any consideration by way of remuneration or compensation or in any other form from any person other than the client being advised, in respect of the underlying products or securities for which advice is provided.
(3) maintain an arms-length relationship between its activities as an investment adviser and other activities.
(4) and if also engaged in activities other than investment advisory services shall ensure that its investment advisory services are clearly segregated from all its other activities, in the manner as prescribed hereunder.
(5) ensure that in case of any conflict of interest of the investment advisory activities with other activities, such conflict of interest shall be disclosed to the client.
(6) not divulge any confidential information about its client, which has come to its knowledge, without taking prior permission of its clients, except where such disclosures are required to be made in compliance with any law for the time being in force.
(7) not enter into transactions on its own account which is contrary to its advice given to clients for a period of fifteen days from the day of such advice.
Provided that during the period of such fifteen days, if the investment adviser is of the opinion that the situation has changed, then she may enter into such a transaction on her own account after giving such revised assessment to the client at least 24 hours in advance of entering into such transaction.
(8) follow Know Your Client procedure as specified by SEBI from time to time.
(9) abide by Code of Conduct as specified.
(10) not act on its own account, knowingly to sell securities or investment products to or purchase securities or investment product from a client.
(11) in case of change in control of the investment adviser, take prior approval from SEBI.
(12) furnish to SEBI information and reports as may be specified from time to time.
(13) ensure that her representatives and partners, as applicable, comply with the certification and qualification requirements at all times.

For the purpose of the grant of certificate, Sebi will take into account all matters which are relevant to the grant of certificate of registration and in particular  —
(a) whether the applicant is an individual or a body corporate or a firm;
(b) whether in case the applicant is an individual, he is appropriately qualified and certified as specified in regulation 7;
(c) whether in case the applicant is a body corporate, all the representatives of the applicant who provide investment advice are appropriately qualified and certified as specified in regulation 7;
(d) whether in case the applicant is a firm or a limited liability partnership, all partners who are engaged in giving investment advice are qualified and certified as specified in regulation 7.
(e) whether the applicant fulfills the capital adequacy requirements as specified in regulation 8;
(f) whether the applicant, its representatives and partners, if any, are fit and proper persons based on the criteria as specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008;
(g) whether the applicant has the necessary infrastructure to effectively discharge the activities of an investment adviser;
(h) whether the applicant or any person directly or indirectly connected with the applicant has in the past been refused certificate by the Board and if so, the grounds for such refusal;
(i) whether any disciplinary action has been taken by the Board or any other regulatory authority against any person directly or indirectly connected to the applicant under the respective Act, rules or regulations made thereunder;
(j) in case a bank or an NBFC proposes to undertake investment advisory services, whether it has been permitted by Reserve Bank of India and the application is made through a subsidiary or separately identifiable department or division;
(k) in case anybody corporate, other than a Bank or NBFC, which proposes to undertake investment advisory services, whether, the application is made through a separately identifiable department or division;
(i) in case an entity incorporated outside India undertakes to provide investment advisory services under these regulations, whether, it has set up a subsidiary in India and whether such subsidiary has made the application for registration;
(m) in case a foreign citizen proposes to undertake investment advisory services, whether the applicant has set up an office in India and proposes to undertake investment advisory services through such office.

Some qualifications and certification requirements have been created. These are:
(1) An individual registered as an investment adviser under the new regulations and partners and representatives of an investment adviser registered under the regulations offering investment advice would need to have all times:
(a) A professional qualification or post-graduate degree or post graduate diploma in finance, accountancy, business management, commerce, economics, capital market, banking, insurance or actuarial science from a university or an institution recognized by the central government or any state government or a recognised foreign university or institution or association; or
(b) A graduate in any discipline with an experience of at least five years in activities relating to advice in financial products or securities or fund or asset or portfolio management.
(2) A certification on financial planning or fund or asset or portfolio management or investment advisory services:
(a) From NISM; or
(b) From any other organization or institution including Financial Planning Standards Board India or any recognized stock exchange in India provided that such certification is accredited by NISM.:

The existing investment advisers seeking registration must ensure that their partners and representatives obtain such certification within two years from the date of commencement of the new regulations.
Then there’s a capital clause:
 (1) Investment advisers which are body corporate shall have a net worth of not less than twenty five lakh rupees.
"Networth" here has been tightly defined. It means “the aggregate value of paid up share capital plus free reserves (excluding reserves created out of revaluation) reduced by the aggregate value of accumulated losses, deferred expenditure not written off, including miscellaneous expenses not written off, and capital adequacy requirement for other services offered by the advisers in accordance with the applicable rules and regulations.”
(2) Investment advisers who are individuals or partnership firms shall have net tangible assets of value not less than rupees one lakh: Provided that existing investment advisers shall comply with the capital adequacy requirement within one year from the date of commencement of the new regulations.
 The certificate would be for five years and expected to be renewed.
General responsibilities of these investment advisers will be
(a) to obtain from the client, such information as is necessary for the purpose of giving investment advice, including the following:-
(i) age;
(ii) investment objectives including time for which they wish to stay invested, the purposes of the investment ;
(iii) income details; (iv) existing investments/ assets;
(v) risk appetite/ tolerance;
(vi) liability/borrowing details.
(b) it has a process for assessing the risk a client is willing and able to take, including:
(i) assessing a client’s capacity for absorbing loss;
(ii) identifying whether client is unwilling or unable to accept the risk of loss of capital;
(iii) appropriately interpreting client responses to questions and not attributing inappropriate weight to certain answers.
(c) where tools are used for risk profiling, it should be ensured that the tools are fit for the purpose and any limitations are identified and mitigated;
(d) any questions or description in any questionnaires used to establish the risk a client is willing and able to take are fair, clear and not misleading, and should ensure that:
(i) questionnaire is not vague or use double negatives or in a complex language that the client may not understand;
(ii) questionnaire is not structured in a way that it contains leading questions.
(e) risk profile of the client is communicated to the client after risk assessment is done;
(f) information provided by clients and their risk assessment is updated periodically.

Thus the investment advisor must ensure that -
(a) All investments on which investment advice is provided is appropriate to the risk profile of the client;
(b) It has a documented process for selecting investments based on client’s investment objectives and financial situation;
(c) It understands the nature and risks of products or assets selected for clients;
(d) It has a reasonable basis for believing that a recommendation or transaction entered into:
(i) meets the client’s investment objectives;
(ii) is such that the client is able to bear any related investment risks consistent with its investment objectives and risk tolerance;
(iii) is such that the client has the necessary experience and knowledge to understand the risks involved in the transaction.
(e) Whenever a recommendation is given to a client to purchase of a particular complex financial product, such recommendation or advice is based upon a reasonable assessment that the structure and risk reward profile of financial product is consistent with clients experience, knowledge, investment objectives, risk appetite and capacity for absorbing loss.
Transparency of disclosures is pretty stringent. It includes:
(1) all material information about itself including its business, disciplinary history, the terms and conditions on which it offers advisory services, affiliations with other intermediaries and such other information as is necessary to take an informed decision on whether or not to avail its services.
(2) any consideration by way of remuneration or compensation or in any other form whatsoever, received or receivable by it or any of its associates or subsidiaries for any distribution or execution services in respect of the products or securities for which the investment advice is provided to the client.
(3) any consideration by way of remuneration or compensation or in any other form whatsoever, if any, received or receivable by the investment adviser, if the client desires to avail the services of such intermediary.
(4) the advisor’s own holding or position, if any, in the financial products or securities which are subject matter of advice.
(5) any actual or potential conflicts of interest arising from any connection to or association with any issuer of products/ securities, including any material information or facts that might compromise its objectivity or independence in the carrying on of investment advisory services.
(6) all material facts relating to the key features of the products or securities, particularly, performance track record.
(7) warnings, disclaimers in documents, advertising materials relating to an investment product which it is recommending to the client.

It wouldn’t stop there. Maintenance of records would be required including:
(a) Know Your Client records of the client;
(b) Risk profiling and risk assessment of the client;
(c) Suitability assessment of the advice being provided;
(d) Copies of agreements with clients, if any;
(e) Investment advice provided, whether written or oral;
(f)  Rationale for arriving at investment advice, duly signed and dated;
(g) A register or record containing list of the clients, the date of advice, nature of the advice, the products/securities in which advice was rendered and fee, if any charged for such advice.
(2) All records have to be maintained either in physical or electronic form and preserved for a minimum period of five years:
Provided that where records are required to be duly signed and are maintained in electronic form, such records shall be digitally signed.
(3) The investment adviser is expected to conduct yearly audit in respect of compliance with these regulations from a member of Institute of Chartered Accountants of India or Institute of Company Secretaries of India.
As a responsible corporate citizen, it is now expected that
(1) An investment adviser shall redress client grievances promptly.
(2) She shall have adequate procedure for expeditious grievance redressal.
(3) Client grievances pertaining to financial products in which investments have been made based on investment advice, shall fall within the purview of the regulator of such financial product.
(4) Any dispute between the investment adviser and the client resolved through arbitration or through Ombudsman authorized or appointed for the purpose by any regulatory authority, as applicable.
Among the big fish, investment advisers which are banks, NBFCs and body corporate providing distribution or execution services to their clients are expected to keep their investment advisory services segregated from such activities:
Provided that such distribution or execution services can only be offered subject to the following:
(a) The client shall not be under any obligation to avail the distribution or execution services offered by the investment adviser.
(b) The investment adviser shall maintain arms length relationship between its activities as investment adviser and distribution or execution services.
(c) All fees and charges paid to distribution or execution service providers by the client shall be paid directly to the service providers and not through the investment adviser.
1. Honesty and fairness
An investment adviser shall act honestly, fairly and in the best interests of its clients and in the integrity of the market.
2. Diligence
An investment adviser shall act with due skill, care and diligence in the best interests of its clients and shall ensure that its advice is offered after thorough analysis and taking into account available alternatives.
3. Capabilities
An investment adviser shall have and employ effectively appropriate resources and procedures which are needed for the efficient performance of its business activities.
4. Information about clients
An investment adviser shall seek from its clients, information about their financial situation, investment experience and investment objectives relevant to the services to be provided and maintain confidentiality of such information.
5. Information to its clients
An investment adviser shall make adequate disclosures of relevant material information while dealing with its clients.
6. Fair and reasonable charges
An investment adviser advising a client may charge fees, subject to any ceiling as may be specified by the Board, if any. The investment adviser shall ensure that fees charged to the clients is fair and reasonable.
7. Conflicts of interest
An investment adviser shall try to avoid conflicts of interest as far as possible and when they cannot be avoided, it shall ensure that appropriate disclosures are made to the clients and that the clients are fairly treated.
8. Compliance
An investment adviser including its representative(s) shall comply with all regulatory requirements applicable to the conduct of its business activities so as to promote the best interests of clients and the integrity of the market.
9. Responsibility of senior management
The senior management of a body corporate which is registered as investment adviser is mandated to bear primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures by the body corporate.
Phew! So, what's your wager on whether your “kirana” investment adviser of yesteryears will take this heat? Has a new professional called “Investment Adviser” been killed by fatherly overkill?



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