The much awaited and anticipated amendments to Research Analyst Regulations are finally out.
The amendments are in line with the consultation paper and SEBI board meeting minutes.
Although the amendments are applicable with immediate effect, specific details about certain amendments are not mentioned yet.
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 a research analyst
Q: Who is a research analyst (RA)?
A: This is a basic question but SEBI has amended the definition of research analyst.
As per the amendments, “research analyst” means a person who, for consideration, is engaged in the business of providing research services. Consideration includes non-cash benefit as well.
So, any person who is receiving any form of consideration, directly or indirectly, whether from the client or otherwise, for providing research services will be considered as a research analyst.
All partnership firms, LLPs and companies are categorized as non-individual RAs.
Q: What are the activities an RA can be involved in or services an RA can provide?
A: SEBI has added a definition of “research services”.
Along with providing buy / sell / hold recommendations, price targets, issuing research reports and providing opinion on securities, including IPOs, SEBI has added two more very important activities
- recommending model portfolio; or
- providing trading calls
So, if you are intending to provide model portfolio service or provide entry – exit calls for a short duration, you have to get registered as a Research Analyst.
Q: How much fees can a RA charge?
A: The details about limits on fees charged by RAs were specified in the consultation paper. However, there aren’t any details about the same in the amended regulations. We will have to wait for further details from SEBI.
#2- Research Analyst and other activities.
Q: Can a RA register as an Investment Adviser as well?
A: A company or LLP, registered as a Research Analyst, was allowed to have an Investment Adviser license. Now, with the amended regulations, an individual or partnership firm can also register as 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 to ensure that the business activities as research analyst are clearly segregated.
Q: Can an individual in employment also be a research analyst?
A: SEBI has introduced the concept of “part-time research analyst”.
“Part-time research analyst” means an individual or a partnership firm who, for a consideration, is engaged in the business of providing research services 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
- does not involve handling or managing of money or funds of client or person; or
- 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 RA services.
Yes, you can continue your employment and also be a part-time research analyst. However, you will have to submit an NOC from your employer at the time of application as a part-time RA or the NOC from a new employer in case of change in employment.
Q: Are there any exemptions from compliance requirements for part-time RAs?
A: As a part-time RA, you will have to comply with all the application compliance requirements as that of full-time RA. There are no exemptions.
In fact, as a part-time RA, 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 RA. The process for the transition to full-time RA or non-individual RA is not specified by SEBI.
Q: Can I distribute mutual funds along with my Research Analyst services?
A: Similar to Investment Advisers, an individual RA cannot provide distribution services.
If any family member (spouse, parents and children) of an individual RA is providing distribution services to a client, the individual RA cannot provide research services to that same client.
Similarly, a client of an individual RA cannot avail distribution services provided by the family member of RA. SEBI sees this as a conflict of interest.
Similarly, in case of non-individual RAs, the same client cannot be offered both research and distribution services within the entity or the group of the non-individual RA.
Group for non – individual RA means holding company, subsidiary company, associate entity or any entity which has a controlling interest or is subject to the controlling interest of a non-individual RA.
#3 – Eligibility criteria to apply for a research analyst license
Q: I am a graduate and do not have experience in research services. Can I apply for a RA license?
A: SEBI has amended requirements for qualification of a research analyst.
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.
There is no requirement of experience. 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 XV certification still remains.
Q: I have employees working for me. Do they need to fulfill the qualification requirements?
A: SEBI has introduced one more concept of “persons associated with research services (PARS)”.
PARS means any member, partner, officer, director or employee or any other staff of such research analyst or entity who is engaged in providing research services to the clients or other persons or group of persons or general public.
All client and public facing persons including RMs, client relationship managers will also be PARS.
So, if your employees are PARS, they will have to fulfill the qualification requirement of having a graduate degree in any field and NISM certification requirements as well.
This requirement is applicable for individuals as well as non-individual RAs.
Q: Do all the directors of a company or partners of LLP need to fulfill the qualification and certification requirements?
A: SEBI has added a definition of principal officer (PO). A principal officer is required only in case of non-individual RAs.
PO is the one who is responsible for the overall function of the business and operations of non-individual research analysts.
If the non-individual entity is solely involved in research services or is also involved in investment advisory services, then the PO has to be a director or managing partner.
If the non-individual entity is involved in other services, the business or unit head, who is at a managerial level, should be designated as the PO.
The PO needs to fulfill the qualification and certification requirements. Also, any director / partner associated with research services, also needs to fulfill the qualification and certification requirements.
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 RAASB (the BSE Ltd). More details are expected to be provided in a circular by SEBI.
Q: Do we need to appoint the Compliance Officer at the time application?
All companies and LLPs registered as a research analyst are required to appoint a compliance officer. Now, even a partnership firm, being a non-individual RA, will be required to appoint a compliance officer.
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 RA can appoint an independent professional, who is a Company Secretary or a Chartered Accountant or a Cost Accountant in practice, to assist the RA 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 RAASB 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 RA where she is appointed?
- Can the independent professional also be the compliance officer for any other RIA or RA?
- How should SEBI / RAASB be informed about the appointment or change in the compliance officer?
- Do the new applicant have to decide about the compliance officer at the time of application or once the application is approved?
#5 – Additional compliance requirements with respect to clients.
Q: Is there a limit on how many clients an individual RA can service?
A: No, there is no limit on the number of clients serviced by an individual or a non-individual RA.
However, as mentioned above, part-time RAs have a limit of 75 clients.
Q: Do I have to obtain KYC documents from clients?
A: Yes, all RAs need to obtain KYC documents from their “fee-paying” clients and keep them in their records.
All RAs also need to have a register containing a list of the clients along with the client’s PAN, the date and nature of the research service, details of the products / securities for which research service was provided and fee / consideration, if any charged/received for such research service.
Q: Do I need to sign an agreement with the clients?
A: SEBI has not specified the requirement of agreement but has mentioned to disclose to the clients the terms and conditions (in my view, similar to an agreement) on which the research services are provided. You also have to take consent of the clients on such terms and conditions in such manner as may be specified by SEBI. The terms and conditions will also be specified by SEBI in a circular.
You will have to keep records of the terms and conditions of research services disclosed to the clients and the consent of the client obtained thereon.
Q: I may give trading calls on a video call. Do I need to maintain records of the same as well?
A: Yes, you have to maintain records of all communication including emails, call recordings etc. with all clients including prospective clients.
—-
Other compliance requirements:
#1 – Website: All research analysts have to maintain a functional website containing such details as may be specified by SEBI.
#2 – Use of Artificial Intelligence tools – If any research analyst is using AI tools to provide research services, the RA has to give a disclosure about the extent of use of AI tools to clients.
#3 – Model portfolio services – The consultation paper mentioned the compliance requirements for providing model portfolio services in detail. However, the regulations do not mention such. More details are awaited from SEBI.
———–
SEBI has not made any changes in the application and registration fee for RAs.
As SEBI issues further clarifications, they will throw light on some of the aspects too.
But it is quite clear as to what a Research Analyst license from SEBI now involves. The important point is the additional compliance that needs to be taken care of. You can expect periodic reporting to also be more extensive.
If you have any queries or are looking for assistance in application or compliance support for your RA practice, you can write to me at kruti@cskruti.com
what about the existing RAs who have already received the certificate based on previous qualification requirements such as:
a graduate in any discipline with an experience of at least five years in activities relating to financial products or markets or securities or fund or asset or portfolio management.
I believe these changes don’t affect them.
Hi, yes, SEBI may issue a clarification (circular) for existing RAs giving them time to fulfill the changed qualification requirements.
Can a mutual fund distributor become a Part Time Research Analyst ?
No, a part-time RA cannot get involved in any other business activity which is related to securities (including mutual funds).
Can a full time RA be involved in distribution of Mutual funds. If not then can a person apply for non individual RA if he is into distribution of Mutual fund
In my view, an individual RA as well as the principal officer of a non-individual RA cannot be involved in distribution services.