The Securities and Exchange Board of India (‘‘SEBI’’) has issued the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 to regulate unregistered investment advisors. Prior to the issuance of the regulations, SEBI had in 2007 and 2011 issued a consultative paper and a concept paper on regulating investment advisors. These regulations are applicable to Investment Advisors from 21st April, 2013.

Who are Investment Advisers?

“Investment Adviser” means 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 himself as an investment adviser, by whatever name called;

“Investment Advice” means advise relating to investing in, purchasing, selling or otherwise dealing in securities or investment products, and advice on investment portfolio containing securities or investment products and shall include financial planning. However, investment advice given through newspapers, magazines or any other broadcasting or electronic medium, which is widely available to the public shall not be considered as investment advice for the purpose of these regulations.

“Financial Planning” shall include analysis of clients’ current financial situation, identification of their financial goals, and developing and recommending financial strategies to realise such goals;

Why Registration?

No person shall act as an investment adviser or hold itself out as an investment adviser unless he has obtained a certificate of registration from the SEBI.

A person acting as an investment adviser immediately before the commencement of these regulations may continue to do so for a period of six months from such commencement or, if it has made an application for a certificate under sub-regulation (2) within the said period of six months, till the disposal of such application.

Exemption from registration

Following specific persons are exempted from registration, subject to fulfilment of conditions mentioned in the regulations.

1. 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.

2. Insurance Brokers and Insurance Agents offering advice in the insurance products,

3. Pension advisors offering advice in the pension products,

4. Any distributor of mutual funds who is a member of a self-regulatory organisation recognised by SEBI,

5. Advocates, solicitor or law firm,

6. Members 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 professional body as may be specified by SEBI,

7. Any SEBI Registered Stock Broker or sub-brokers, Portfolio Managers, Merchant Bankers, Fund manager of an entity registered with SEBI,

8. Person who provides investment advice exclusively to clients based out of India. However, services to NRI or POI are within the purview of these regulations.

9. Representative and partner of an investment adviser which is registered under these regulations.

10. Any other person as may be specified

Note: Existing portfolio manager offering only investment advisory services to apply for registration under these regulations after expiry of his current certificate of registration as a portfolio manager;

Eligibility aspects

SEBI has laid down certain eligibility criteria for applicants, which needs to be complied.

Such as qualifications and certifications requirements for the Individual, Partner of Partnership firm or LLP, Representatives of the body corporate, Capital Adequacy criteria, Fit and Proper character of applicant, its representatives and partners, adequate infrastructure at applicant’s premises, etc.

An investment adviser or partners or representatives of an investment adviser shall have minimum qualifications as stipulated in the regulations at all times. They shall also have at all times certification from recognised body in this regard.

Capital Adequacy Requirements:

Investment advisers which are body corporate shall have a net worth of not less than twenty five lakh rupees whereas individuals or partnership firms shall have net tangible assets of value not less than rupees one lakh:

General Obligations and Responsibilities

1. Investment advisers shall act in a fiduciary capacity towards its clients and shall disclose all conflicts of interests as and when they arise

2. An investment adviser shall 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. An investment adviser shall maintain an arms'-length relationship between its activities as an investment adviser and other activities

4. An investment adviser which is also engaged in activities other than investment advisory services shall ensure that its investment advisory services are clearly segregated from all its other activities

5. An investment adviser shall 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. An investment adviser shall not divulge any confidential information about its clients without taking prior permission of its clients except for compliance of any law

7. 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 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 it may enter into such a transaction on its own account after giving such revised assessment to the client at least 24 hours in advance of entering into such transaction

8. An investment advisor shall follow Know Your Client procedure as specified by SEBI from time to time

9. An investment adviser shall abide by Code of Conduct as specified

10. An investment adviser shall not act on its own account, knowingly to sell securities or investment products
    to or purchase securities or investment product from a client

11. Prior approval of SEBI is required in case of change in control

12.  Furnishing of information and reports to SEBI as may be required

13. To ensure that its representatives and partners, comply with the certification and qualification requirements as laid down in these regulations.

Other Requirements

Requirement of Risk Profiling of clients

1. The investment adviser should create risk profiling of clients based on various specified information obtained from the client

2. Set up and adhere to process of assessing the risk a client can take

3. If tools are used for risk profiling, it should be ensured that the tools used are fit for the purpose

4. Risk profile is communicated to the clients after risk profiling is done

Requirement of Suitability Study

1. Investment advices given to the client should be appropriate to the risk profile of the client

2. Documented process should be in place for selecting investments based on client’s investment objectives and financial situation

3. It has a reasonable basis for believing that a recommendation or transaction entered into:

1. meets the client’s investment objectives;

2. is such that the client is able to bear any related investment risks consistent with its investment objectives and risk tolerance;

3. is such that the client has the necessary experience and knowledge to understand the risks involved in the transaction.

4. 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

Appointment of compliance officer

An investment adviser which is a body corporate or a partnership firm shall appoint a compliance officer who shall be responsible for monitoring the compliance by the investment adviser in respect of the requirements of the Act, regulations, notifications, guidelines, instructions issued by SEBI.

Redressal of Client Grievances

An investment adviser shall redress client grievances promptly and there should be adequate procedure for expeditious grievance redressal.

Disclosures to be made to clients

The following important disclosures need to be made to the clients.

1. An investment adviser shall disclose to a prospective client, 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. Disclose any consideration received or receivable on account of distribution or execution services from any of its associates or subsidiaries in respect of products or securities for which investment advice is provided to client

3. While recommending services of any stock broker, disclose any consideration received or receivable from such intermediary

4. Disclose the holding or position in financial product which is subject matter of advice

5. An investment adviser shall disclose to the client 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. An investment adviser shall, while making an investment advice, make adequate disclosure to the client of all material facts relating to the key features of the products or securities, particularly, performance track record.

7. An investment adviser shall draw the client’s attention to the warnings, disclaimers in documents, advertising materials relating to an investment product which it is recommending to the client.

Maintenance of records

An investment adviser shall maintain the following records

1. Know Your Client records of the client;

2. Risk profiling and risk assessment of the client;

3. Suitability assessment of the advice being provided;

4. Copies of agreements with clients, if any;

5. Investment advice provided, whether written or oral;

6. Rationale for arriving at investment advice, duly signed and dated;

7. 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.

The records are to be preserved for a minimum period of five years.

An investment adviser shall 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.

Segregation of execution services

Investment advisers which are banks, NBFCs and body corporate providing distribution or execution services to their clients shall keep their investment advisory services segregated from such activities:

Provided that such distribution or execution services can only be offered subject to the following:

1. The client shall not be under any obligation to avail the distribution or execution services offered by the investment adviser.

2. The investment adviser shall maintain arm’s length relationship between its activities as investment adviser and distribution or execution services.

3. 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.