After all the excitement post public discussions and SEBI board meeting minutes, Investment Advisers were eagerly looking forward to the revised regulations that would make lives a bit easier and provide more flexibility to the practice.
Mid December 2024 – nothing. It was assumed that nothing would happen till January 2025. But, surprise!
Although the amendments, in line with the consultation paper and board meeting minutes, are applicable with immediate effect, specific details about certain amendments are awaited.
Expect a detailed circular from SEBI on the specific restrictions or terms and conditions for such amendments (the same practice is followed by SEBI in the past).
In any case, let’s take stock of what the amended regulations are:
#1 – Scope of activities for an investment adviser
Q: Can an Investment Adviser provide advice on insurance products?
A: SEBI has added a definition of “investment advice” and removed the words investment products from the definition.
So, an Investment Adviser is the one who provides investment advice on securities i.e. stocks, bonds, mutual funds, debentures, derivatives and other SEBI regulated products.
This does not stop an Investment Adviser from providing advice on investment products outside the purview of SEBI. If an investment adviser wants to provide advisory services in respect of products or services which are outside the purview of the Board, she has to disclose to the client that such products or services are outside the regulatory purview of SEBI and no recourse will be available to such clients from SEBI for any grievance arising from such advice or services.
So, yes insurance, foreign stocks, unlisted securities, real estate, etc. may not be taboo.
The words “Financial Planning” are retained in the definition of investment advice. So, what happens to those who are only financial planners and not providing investment advice? Do they still need to get registered with SEBI is what SEBI needs to clarify.
Q: When does an individual IA need to move to a non-individual IA category?
A: An individual investment adviser has to apply for a non-individual RIA license when the number of clients exceeds three hundred (300) at any point of time or the fee collected during the financial year exceeds three crore rupees (Rs. 3 crores), whichever is earlier. Of course, it excludes GST.
#2- Investment Adviser and other activities.
Q: Can an IA also register as a Research Analyst?
A: Yes, a company or a LLP, who is an Investment Adviser, was allowed to have a Research Analyst license. Now, with the amended regulations, an individual or partnership firm can register for both – investment adviser as well as research analyst.
However, there will be terms and conditions to be fulfilled – to be specified by SEBI.
In my view, SEBI will ask such individuals and partnerships to maintain arms length
relationship between both the activities as well as ensure that the business activities are clearly segregated.
Q: Can an individual in employment also be an investment adviser?
A: SEBI has introduced the concept of “part-time investment adviser”.
“Part-time investment adviser” means an individual or a partnership firm who, for a consideration, is engaged in the business of providing investment advice and is also engaged in any other business activity or employment.
“Other business activity or employment” means such activity or employment which is not related to securities and:
- it does not involve handling or managing of money or funds of client or person; OR
- it is not related to providing advice or recommendation to any client or person in respect of any products or assets for investment purposes;
So, other business activity or employment should not have any conflict with the IA services.
Yes, you can continue your employment and also be a part-time investment adviser. However, you will have to submit an NOC from your employer at the time of application as a part-time IA or the NOC from a new employer in case of change in employment.
Q: Are there any exemptions from compliance requirements for part-time IAs?
A: As a part-time IA, you will have to comply with all the application compliance requirements as that of full-time IA. There are no exemptions.
In fact, as a part-time IA, you can service not more than 75 clients in total at any given point in time.
My view is, if the number of clients exceeds, you have to convert to a full-time IA. The process for the transition to full-time IA or non-individual IA is not specified by SEBI.
Q: Can an investment adviser provide trading calls or model portfolio service?
A: Providing trading calls will not be considered as investment advice unless they are personalized or investor specific. A person or entity providing such services will have to get registered as a Research Analyst. The same will be the case for providing model portfolio services. Refer to the amendments in the RA regulations here.
#3 – Eligibility criteria to apply for an investment adviser license
Q: I am a graduate and do not have experience in investment advisory services. Can I apply for an IA license?
A: SEBI has amended requirements for qualification of an investment adviser.
Now even a graduate in specified fields can apply. So if you have a professional qualification or a graduate or post graduate degree in finance, accountancy, business management, commerce, economics, capital market, banking, insurance, actuarial science or other financial services can make an application to SEBI.
So, the requirement of experience has been done away with. The degree has to be from a university or institution recognized by the Central Government or any State Government or a recognised foreign university or institution or association.
The requirement for completion of NISM Series XA and XB certification still remains.
Henceforth, a certification as Certified Financial Planner (CFP) from Financial Planning Standards Board of India, will not be accepted for fulfilling the certification requirements, in my view.
Q: Who can be the Principal Officer (PO) for a non-individual RIA?
A: All non-individual IAs need to have a principal officer. PO is the one who is responsible for the overall function of the business and operations of non-individual RIA.
The qualification requirements for a PO are also reduced where the experience requirement is not mandatory.
Q: Is there any change in the net worth requirements?
A: Yes, SEBI has removed the requirement of net worth and replaced it with the requirement of deposits.
The deposit has to be maintained with a scheduled bank, marked as lien in favour of IAASB (i.e. BSE Ltd).
SEBI is likely to provide more details in a circular.
Q: Who can be a Compliance Officer?
A: The existing regulations had mandated all the non-individual IAs to appoint a compliance officer inhouse. In fact, the new applicants need to provide the compliance officer details at the time of application itself.
Now, SEBI has made an interesting amendment to the requirements.
The good news, it is not mandatory to have an in-house compliance officer.
Instead, the non-individual RIA can appoint an independent professional, who is a Company Secretary or a Chartered Accountant or a Cost Accountant in practice, to assist the RIA comply with the regulations.
However, in such a case, the principal officer will be responsible for monitoring and ensuring the compliance of the regulations. He has to submit an undertaking to SEBI or IAASB to that effect.
This reason for the PO being responsible could be that the compliance functions cannot be outsourced. The independent professional is outside the organisation and cannot be held accountable by SEBI.
The independent professionals need to complete the relevant certification from NISM, as may be specified by SEBI.
There are a few points which will need to be clarified by SEBI:
- Can the independent professional also conduct the annual compliance audit for the same RIA where she is appointed?
- Can the independent professional also be the compliance officer for any other RIA or RA?
- How should SEBI / IAASB be informed about the appointment or change in the compliance officer?
- What if the new applicant has not decided about the compliance officer and may appoint an independent professional once the application is approved?
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Other compliance requirements:
#1 – Website: All RIAs have to maintain a functional website containing such details as may be specified by SEBI. So, if you don’t have one, time to get it now.
#2 – Use of Artificial Intelligence tools – If any IA is using AI tools to provide the services, the IA has to give a disclosure about the extent of use of AI tools to clients.
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SEBI has not made any changes in the application and registration fee for RIAs.
Further clarifications from SEBI will throw more light on several of the above aspects.
If you have any queries or are looking for assistance in application or compliance support for your IA practice, you can write to me at kruti@cskruti.com.
Is a B.Tech graduate eligible for RIA registration? For Persons Associated with Investment Advice (PAIA), the requirement is a graduate degree in any field. However, for Registered Investment Advisors (RIA), specific fields are mentioned. Previously, the qualifications for both RIA and PAIA were the same. Could you please clarify this discrepancy?
In my view, as per the new amendments, B.Tech graduate will not be eligible for RIA registration. To fulfill the qualification requirements one needs to have a professional qualification or a graduate degree or a PG degree / diploma in specified fields.