How to get ready for Investment Adviser (RIA) annual compliance audit?

Neha, my friend, met me over a coffee. She is a SEBI Registered Investment Adviser (RIA) and we were talking generally about her practice.

She said, “You know, I have completed one year of my practice and have around 40 individual clients. I am happy. But at the same time also looking out for ways to grow the practice.”

I asked her, “You are registered with SEBI. Have you got the annual compliance audit done? You must be aware that SEBI has mandated the annual audit of the compliance of SEBI (Investment Advisers) Regulations, 2013.”

“Oh yes! I know. But I am not sure how to go about it. Hey, you do this audit as a part of your practice. Can you do it for me too?” She asked me referring to my Company Secretary practice.

I said, “Yes, definitely.”

“OK, when should we do it?” she asked.

“It has to be done within 6 months from the end of a financial year. When do you want me to start?”

“Can you come down to my office next week?” she asked. “What do I have to keep ready for you? Documents or anything else?”

“Almost all your client related documents and your internal records. I will email the details to you.” I responded.

“Thank you so much, Kruti. I will look forward.”

The following is the text of the email I sent to Neha:

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“Hi Neha,

As discussed, you are keen to get your compliance audit done. Let me share the details with you.

You need to keep ready documents some of which are related to you and others related to your clients. I will also mention the regulation under which those documents need to be maintained. This way we will ensure that we cover all important aspects of the regulation.

Here we go:

DOCUMENTS RELATED TO INVESTMENT ADVISER

Here are the documents related to you:

#1 – Qualification and certification requirements 

You should ensure that you meet the qualification and certification requirements at all times. In case any certificate is due for renewal, it should be renewed in advance.

Document(s) required: Professional qualification certificates, NISM certification certificates, experience certificates. 

Since you have got your certificate only a year ago, this should not be a problem. Still better to make it a part of the audit process now.

#2 – Capital adequacy 

You should ensure that the capital adequacy requirement is fulfilled at all times, throughout the validity of certificate. For an individual, the requirement is Rs. 5 lakh. In case of a company or LLP, the same is Rs. 50 lakhs.

Document(s) required: Balance sheet, if any or net worth certificate.

#3 – Communication to SEBI 

This includes any material changes have been communicated to SEBI in writing, like hiring employees, change of communication address, etc.

Document(s) required: Copy of letters / emails to SEBI and Form A submitted to SEBI at the time of application. Form A will be the basis to check if there are any changes.

DOCUMENTS RELATED TO THE CLIENTS:

You should keep ready the following documents related to your clients:

#4 – Client correspondence 

You are required to mention words “investment adviser” in all correspondence with your clients.

Document(s) required:  Copy of letters / emails / other documents like financial plan, which are sent to clients.

#5 – Risk Profiling and assessment 

There are certain details / information you are required to obtain from the client for risk profiling of the client. You then assess the risk profile of the client.

Document(s) required: Risk profiling questionnaire risk profiling tool for all clients

#6 – Communication of Risk Profiling and consent of the client 

You need to assess the risk profile and communicate the risk profile to your client. The client has to accept and approve the risk profile arrived at.

Document(s) required: Document where the risk profiling is assessed, communicated to the client and accepted by the client. 

#7 – Process for selecting investments 

You need to have a documented process for selecting investments based on a client’s investment objectives and financial situation.

Document(s) required: Documented investment selection process

#8 – Disclosures to the client 

You need to make certain disclosures to your client, like information about yourself, disclosure of conflict of interest, etc. Click here to know more about the disclosures.

Document(s) required: Disclosure document

#9 – Know Your Client (KYC) records 

You are required to keep KYC documents of all your clients like KYC form, identity proof, address proof. You are also required to do CKYC of your clients. To know more about CKYC, click here. 

Document(s) required: KYC documents and CKYC number. 

#10 – Suitability assessment 

You are required to assess which investments are suitable for your client and the reasons thereof.

Document(s) required: suitability assessment document / financial plan

#11 – Agreements with client 

You are required to keep signed copies of the agreement with the client, specifying the terms and conditions of the service.

Document(s) required: Signed copies of the agreements with the client

#12 – Investment advice provided 

You may have provided investment advice orally or in writing. If you have provided investment advice in writing, you are required to keep the documents for the same. Generally, IAs have a documented financial plan or investment advisory report.

Document(s) required: Document in which investment advice is given, if in writing.

#13 – Rationale for providing investment advice 

You need to have a document where you have mentioned the basis of providing investment advice. That document should be signed and dated.

Document(s) required: Document for rationale for providing investment advice.

#14 – Register of clients 

You need to maintain a register which has the following details:

1. Names of clients
2. Date of advice
3. Nature of advice
4. Products / securities on which advice was given
5. Fees charged

Document(s) required: Register of clients

#15 – Grievance redressal process 

You need to have a process to redress grievance / complaints of the clients. The same should be communicated to the client as well. Clients can also complaint against you on SEBI’s SCORES platform. You need to get register on the platform so that you can check if any client has complained against you and you can resolve the complaint promptly.

Document(s) required: Grievance redressal process

#16 – Maintenance of records of interaction with the clients

You need to maintain records of interactions with all clients including prospective clients (prior to onboarding), where any conversation related to advice has taken place in form of oral or written communication.

Document(s) required: Physical record written & signed by client, telephone recording, emails, sms.

Please note that you need to maintain the documents either electronically / physically for atleast 5 years.

Apart from the documents, I would also like to know the following:

1. Whether you have entered into transactions on your own account, which are contrary to the advice given to clients for a period of fifteen days from the day of such advice.
2. Whether any confidential information of the client is disclosed without the permission of the client.
3. Whether the client level segregation compliance is applicable and followed.
4. Whether you have displayed the investor charter and the complaints table on your website.

Now an important point. You may not have all of these ready or working for you right now.

Since this is the first audit, I will focus on finding out areas where you can make improvements so that by next year there are no more gaps.

And yes, as a Company Secretary in practice, I will also give you a signed audit report and certificate that you can share with BASL / SEBI.

See you next week!”

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So, here is the broad list of documents required for SEBI compliance audit:

1. Certificates for qualification and certification requirements
2. Certificate of net worth
3. Emails / correspondence to SEBI
4. Client correspondence
5. Risk profiling questionnaire
6. Communication of risk profile and acceptance
7. Process for risk profile and suitability assessment
8. KYC documents
9. Document for suitability assessment
10. Client Agreements
11. Document for Investment Advice provided
12. Rationale for arriving at investment advice
13. Register of clients
14. Client level segregation from the auditor, if applicable.

Read more: Tick audit v/s Compliance Audit

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Neha is set to get her audit certificate. What about you? If you too want to get the compliance audit done, you can write to me at kruti@cskruti.com