Highlights of SEBI consultation paper on Investment Advisers Regulations

In an earlier post I had mentioned that SEBI is relooking at SEBI (Investment Advisers) Regulations. To read the post, click here.

If you have been following SEBI’s trail, you would observe that the guiding principle of SEBI behind Investment Advisers (IA) regulation is to avoid “any conflict of interest” and solve the “agency problem”.

SEBI has now made it clear. The adviser has to serve the client and should be compensated by the client only.

It brought out the IA regulations to cover this ground. Now, it plans to further strengthen the regulation.

On October 7, 2016 SEBI issued the consultation paper on the same asking for comments and feedback from the public. Click here to download the paper.

Here is the summary of this paper:

Who are exempted from the purview of IA regulations?

1. Merchant bankers registered with SEBI can render corporate advisory services, etc.,
2. Persons providing advice only on insurance products regulated by IRDA,
3. Pension products regulated by PFRDA.

What is the intention of SEBI with the revisions it is seeking?

SEBI wants to make it clear that you are either an IA or a distributor but not both. This applies specially to individuals.

Briefly

1. SEBI is relooking at the exemptions provided to mutual fund distributors, stock brokers, portfolio managers and such other persons / entity who provide investment advice whether it is incidental to primary activity or not.
2. Mutual fund advisers who wish to convert to fee based model have to get registered with SEBI as IA.
3. Research analysts who provide investment advice have to comply with Chapter III of IA regulations.
4. More disclosures as expected from IA including “Rights and Obligations” document and display of information on website.

What is not clear?

1. SEBI still has not clearly mentioned about segregation of advisory and distribution activities by an individual. Can an individual become an IA and form a company for distribution activities in which he is a director or a shareholder?
   

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2. The words specified in point 4.1.4.d read mutual fund distributors who opt for fee based model can receive consideration from the client “only in respect of mutual fund products”. Does this mean that such mutual fund distributors can only advise on mutual funds or are allowed to do financial planning as well and charge fees for the same?
   

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3. There are research analysts and research entities which provide buy / sell / hold recommendations on individual stocks and / or mutual funds, in the form of a detailed report. Such reports are sent to all those who pay to get these reports on a periodic basis. SEBI has proposed that such entities should comply with Chapter III of IA regulations. Research reports are not based on any particular client’s needs and risk taking ability. Such entities should not fall under IA regulations as there is no “one –to-one service” provided by such research entities. In this case, SEBI’s proposal is not clear and does not seem to be practical.
   

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4. SEBI has proposed to remove exemptions for stock brokers and portfolio managers. Both the entities are regulated by SEBI under their respective regulations. Such entities also have a registration number. SEBI has not made clear the purpose of having various regulations applicable to such entities.
   

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5. SEBI has proposed segregation of investment advisory and distribution activities through separate subsidiary. SEBI has made clear that Robo Advisory will come under the purview of IA regulations. However, what is not clear is how will entities with advice and distribution combined and offering a “one-stop-solution” be allowed?
   

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6. There are advisers who are also insurance agents and get commissions on selling Insurance products. SEBI has not made it clear whether IAs will be allowed to sell Insurance and NPS too.
   

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SEBI needs to think more practically about the way business is done. It would be great if IAs are allowed to offer commission free products as there is no inherent case of conflict of interest, one of the guiding principles of this entire regulation.

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What do you think of SEBI’s moves? Do you have any views or suggestions? Forward your suggestions and queries to me at krut@cskruti.com. I am going to forward my suggestions to SEBI and will add your suggestions too. The paper is open for public comments till November 4, 2016.