Background
On June 15, 2023, Securities and Exchange Board of India [“SEBI”] had released— (i) Master Circular for Investment Advisers; and (ii) Master Circular for Research Analysts.
The Master Circulars serve as comprehensive compilations of all directions issued by SEBI pertaining to Investment Advisers [“IAs”] and Research Analysts [“RAs“]. SEBI’s Master Circulars for IAs and RAs aim to provide easy access to relevant guidelines and promote compliance among IAs and RAs.
The Master Circular for IAs includes guidelines for IAs, measures to strengthen their conduct, and a framework for their administration and supervision. The Master Circular for RAs includes guidelines for Proxy Advisers, and mechanism for grievance resolution between listed entities and Proxy Advisers. Both the Master Circulars include some common guidelines like general conflict of interest guidelines, Anti-Money Laundering [“AML”] standards and Combating the Financing of Terrorism [“CFT”] guidelines, Advertisement guidelines, etc.
Key Guidelines
I. General Guidelines for IAs: The IAs are required to ensure client level segregation of Advisory and Distribution services. The guidelines also include qualification and certification criteria for IAs, directions pertaining to the agreement between the client and IA, the fee to be charged, maintenance of records, risk profiling of clients, etc.
II. Strengthening conduct of IAs: IAs are prohibited from offering advice on a free-trial basis and accepting part payments. The advisory fee can be accepted only through banking channels; cash deposits are not allowed. Advice can only be provided after completing risk profiling of clients and obtaining their consent on completed risk profile.
III. Guidelines for Proxy Advisers: Proxy Advisers (“PAs”) are required to frame voting recommendation policies and review them annually. They must disclose their research methodology to clients, alert them in case of factual errors in the report and ensure that adequate time is available for clients to make an informed decision. The report must be shared with the clients and the company at the same time.
IV. Grievance Resolution: The listed entity can approach SEBI for grievance against registered PAs. SEBI will examine the non-compliance by PAs.
V. Investor Complaints: IAs/RAs are required to display the contact details of their Compliance Officers in their offices. Investors can also lodge their grievances on SEBI Complaints Redress System (SCORES) platform.
VI. Conflict of Interest: IAs and RAs shall adopt internal procedures and code of conduct to identify and avoid actual or potential conflict of interest. They must disclose to the clients about any conflict of interest.
VII. Outsourcing: IAs and RAs shall not outsource their core business activity and compliance functions. They shall report any suspicious transactions by third parties to the Financial Intelligence Unit [“FIU”].
VIII. Advertisement Code: IAs, RAs and any investment/research/consultancy agency associated with them shall obtain prior approval of a SEBI-recognized supervisory body before issuing any advertisement. The advertisement shall neither use SEBI’s logo, nor shall it contain any false, biased, misleading, or deceptive statements/claims/assumptions/projections.
Analysis
The qualification and certification criteria for IAs are set high to ensure that only experts in the field can render investment advisory. The certification needs to be renewed every three years by clearing certification examination. Earlier, the certification was renewed by credit points accumulated based on number of years of experience. The new framework mandates the IAsto clear the certification exam each time they seek certification renewal , failing which their license can be cancelled irrespective of their years of experience in the field. The guidelines also cap the maximum fee that can be charged by the IAs for their services. This may have the effect of preventing qualified advisers from entering the profession for lack of incentives.
The guidelines for PAs require them to alert the clients about any factual errors and impending material revisions in their reports within 24 hours. The material revisions must be communicated to the clients within 72 hours ensuring that adequate time is available to them for taking an informed decision. The guidelines distinguish between the terms “alert” and “communicate”, although there is no clarification on the specific differences between the two. It remains unclear whether “communicate” entails issuing new report or an addendum. Moreover, there is no yardstick outlines to decide what constitutes “adequate” time. Despite their best efforts, the PAs might be exposed to regulatory action.
With respect to guidelines relating to the disclosure of conflict of interest, it is a welcome step and shall promote transparency. The requirement to promptly disclose such conflicts to the clients would help them to make informed decisions regarding availing the services of IAs/RAs.
The AML/CFT guidelines require IAs/RAs to do client due diligence and report any suspicious profile to FIU. These directions are in consonance with Prevention of Money Laundering Act [‘PMLA’] and uphold India’s international commitments.
The advertisement guidelines aim to prevent fraudulent and misleading advertisements by IAs and RAs. However, there are some concerns that need to be addressed. According to BSE Administration and Supervision Limited (BASL), “advertisement” also includes internal communications by IAs/RAs with registered clients that may influence investment decisions. Compliance with this guideline may be practically onerous for IAs/RAs.
Conclusion
SEBI’s Master Circulars for IAs and RAs is a welcome step. In the past few months, numerous circulars were issued that brought frequent changes pertaining to the regulatory framework for IAs and RAs. This had created uncertainty and difficulty in compliance. The Mater Circulars have consolidated all the applicable circulars, directions and guidelines relating to IAs/RAs. This will provide IAs/RAs, a one-stop access to all the regulatory guidelines in force.
