15 September 2020
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The Securities and Exchange Board of India (‘SEBI’) has recently amended the SEBI (Investment Advisers) Regulations, 2013 to implement certain proposals set forth by SEBI in its Consultation Paper issued in January 2020. The key amendments include client level segregation of advisory and distribution activities, requirements relating to implementation services and certain additional compliance requirements. The amendments will come into effect from October 01, 2020.
Client Level Segregation of Advisory and Distribution Activities
• Prior to the amendments, there was no restriction on the same client receiving both advisory and distribution services from the investment adviser (‘IA’) or from group entities of the IA.
• A client can now either be: (i) an advisory client, where no distributor consideration is received from the client by the IA or its group entities; or (ii) a distribution services client where no advisory fee is collected from the client by the IA or its group entities.
• IAs who are natural persons cannot provide distribution services.
Requirements Relating to Implementation of Advice or Execution
• IAs have been permitted to provide implementation services to their advisory clients in the securities market but they cannot directly or indirectly receive any consideration including any commission or referral fees for implementation services.
• Further, IAs can provide implementation services to their advisory clients only through direct schemes/products in the securities market, i.e. products where they will not be earning a commission.
• Neither the IA nor its group entities can charge any implementation fees from the client. The client will not be under any obligation to avail implementation services from the IA.
Additional Compliance Requirements
• Every IA that is not a natural person is now required to have a principal officer, i.e. a managing director or designated director or managing partner or executive chairman of the board of the IA, who is responsible for the overall functioning of the business and operations of IAs.
• The amendments have widened the concept of “representatives” to “persons associated with investment advice”, which includes any member, partner, officer, director or employee or any sales staff of an IA (or persons of such similar status) or performing a similar function. All client-facing persons such as sales staff, service relationship managers, client relationship managers, etc., will be deemed to be persons associated with investment advice.
• The principal officer, persons associated with advice and partners of an IA are required to comply with the qualification, experience and certification requirements prescribed under the IA Regulations. Further, SEBI can now issue directions against principal officers as well persons associated with investment advice, in addition to the IA itself.
• The networth requirement for being registered as an IA has been enhanced.
Way Forward
• Wealth managers will need to restructure their model to comply with the amendments to the IA Regulations, considering they will now be required to have segregation of advisory and distribution activities at group level for the same client.
• These amendments will help protect the interests of clients. The option to avail implementation services can help the clients receive support for implementation if they need it, while the restriction on charging consideration for such services will protect them.
• We understand that SEBI will also be separately issuing a circular relating to the mandatory agreement to be entered between the IA and the client for ensuring greater transparency, fees to be charged by the IA and compliance processes for client segregation.
A more detailed overview of the amendments is set out here.
For further information, please contact:
Zia Mody, Partner, AZB & Partners
zia.mody@azbpartners.com
