On September 23, 2020 vide circular no. SEBI/HO/IMD/DF1/CIR/P/2020/182 (“Circular”), Securities and Exchange Board of India (“SEBI”) has issued guidelines for investment advisors (“IAs”) to be followed in compliance of certain provisions of the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 (“IA Regulations”) as amended by the Securities and Exchange Board of India (Investment Advisers) (Amendment) Regulations, 2020 (“amended IA Regulations”).
Earlier, on July 3, 2020, SEBI had issued the amended IA Regulations which amends the IA Regulations.
The Circular contains guidelines pertaining to the various provisions of the IA Regulations, which are summarized as under:
(i) A monitoring process to ensure client level segregation at the IA’s group/ family level as per Regulation 22(5) of the IA Regulations has been laid down.
(ii) IAs shall enter into an investment advisory agreement with each of their clients, including existing clients, latest by April 01, 2021 and submit a report, confirming the same to SEBI latest by June 30, 2021. The Circular provides the mandatory terms and conditions for the said agreement in Annexure-A to the Circular.
(iii) Regulation 15A of the IA Regulations provide that the IAs shall be entitled to charge fees from a client in the manner as specified by SEBI. The Circular provides for the following two modes and lays down the general conditions under the two modes:
a. Assets under Advice (AUA) mode.
b. Fixed fee mode.
(iv) The minimum qualification and certification requirements for IAs is specified under Regulation 7 of the IA Regulations. 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 IA Regulations. The Circular clarified that, such IAs shall always hold NISM accredited certifications and comply with other conditions as specified under Regulation 7 (2) of the IA Regulations.
(v) An individual IA is required to apply for registration as a non-individual IA on or before reaching 150 clients as per Regulation 13 (e) of the IA Regulations. The Circular clarifies that once the number of clients for the IA reaches 150, the IA is required to stop on-boarding new clients till registration as a non-individual investor is granted. Individual IAs having more than 150 clients on September 30, 2020 shall not on-board fresh clients and such individual IA shall apply for registration as a non-individual IA latest by April 1, 2021. However, these IAs shall continue to service their existing clients. Further, the existing individual IAs having more than 150 clients as on September 30, 2020 shall report their number of clients to SEBI in the format provided under the Circular.
(vi) Regulation 19(1) of the IA Regulations provide for the maintenance of records pertaining to the IA activities. The Circular lays down that the records be maintained for a period of five years beginning from the first interaction with the client. The form of maintaining records is also provided as under:
a. Physical record written and signed by client;
b. Telephone recording;
c. Email from registered email id;
d. Record of SMS messages; and
e. Any other legally verifiable record.
(vii) Regulation 19(3) of the IA Regulations provide for an annual audit in respect of the compliance of the IA Regulations by the IAs. The Circular provides that the audit shall be completed within six months from the end of each financial year. The adverse findings of the audit, if any, along with action taken thereof duly approved by the IA shall be reported to the SEBI office (according to the registered address of the 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) Regulation 16 and 17 of the IA Regulations mandate risk profiling and suitability for all categories of clients. The Circular provides specific guidelines pertaining to non-individual clients.
(ix) 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:
a. Complete name of IA as registered with SEBI;
b. Type of Registration-Individual, Non-Individual;
c. Registration number, validity of registration;
d. Complete address with telephone number;
e. Contact details of the Principal Officer- contact no, email id etc.; and
f. Corresponding SEBI regional/local office address.
IAs are required to ensure compliance with measures stated above at clause (i), (ii) and (iii) latest by April 01, 2021. Compliance with measures referred above at clause (vi), (viii) and (ix) shall be ensured latest by January 01, 2021. Further timelines have been specified under clause (iv), (v) and (vii).
This update has been contributed by Anurag Prasad (Associate).
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