Finally!
Yes, finally, the long awaited amendments to SEBI (Investment Advisers) Regulations, 2013 are official.
SEBI (Investment Advisers) (Amendment) Regulations, 2020 are published in Official Gazette on July 3, 2020.
The amendments and requirements in these new regulations will be effective from October 1, 2020.
So, what is different in these Amendment Regulations as compared to the fourth consultation paper issued by SEBI in January 2020?
One of the biggest change is that partnership firms will be treated as non-individuals and hence have to comply with the regulatory requirements accordingly.
Let’s take a look.
Click here to read my perspective on SEBI’s 4th consultation paper on IA regulations.
Here is the summary of the new amendments in the regulations:
- Enhanced qualification requirements
- Enhanced net-worth requirements
- The compliance requirements are given for individual and non-individual investment advisers. Partnership firms are considered as non-individual investment advisers.
- All non-individual IAs need to have a ‘principal officer’ who fulfills the qualification requirements
- Persons associated with advice also need to fulfill certain qualification requirements
- Individual IAs with more than 150 clients in total need to apply for registration as non-individual.
- Client Agreement has now become mandatory.
- There should be client level segregation for advisory and distribution activities
- Individual IA cannot provide distribution services but can provide execution or implementation services.
- Any IA can provide implementation services to its advisory clients only through direct schemes / products in the securities market.
- No fees can be charged or received for implementation services.
- Compliance Audit report to be submitted to SEBI.
I am using a few questions that you have raised and answers to them to help you get a perspective.
#1 – When are the new changes effective?
The new regulations will be effective on the 90th day from the date of their publication in the Official Gazette. Since the regulations are published in Official Gazette on July 3, 2020, the effective date for the changes is October 1, 2020.
#2 – What will happen to the pending or the new applications made before the effective date of the new regulations?
There is no clarity regarding the status of new / pending applications at SEBI before September 30, 2020. From plain reading of the regulations and since the new requirements are effective from October 1, 2020, SEBI may process the applications under the old requirements. However, best is to confirm with SEBI officers.
#3 – What are the enhanced qualification requirements?
SEBI has mandated minimum 5 years of experience in activities relating to advice in financial products or securities or fund or asset or portfolio management along with the earlier qualification requirements.
So the new qualification requirements are professional qualification / post-graduation plus 5 years of relevant experience plus NISM certification.
#4 – To whom are the enhanced qualification requirements applicable to?
SEBI has introduced the concept of “Principal Officer” and “Persons associated with investment advice”.
All non-individual investment advisers need to designate a person who is responsible for the overall function of the business and operations as Principal officer. The principal officer can be managing director or designated director or managing partner or executive chairman of the board or head of Investment Advisers department.
Principal officer has to fulfill the qualification requirements as mentioned in question 3 above.
Click here to read my post on enhanced qualification requirements.
All client-facing persons including sales staff, relationship managers and employees who are engaged in providing investment advisory services to the clients of the investment adviser are “persons associated with investment advice”.
Such persons need to have professional qualification / post-graduation plus 2 years of relevant experience plus NISM certification.
So, all existing investment advisers have to comply with such qualification and experience requirements within three years.
However, it is also mentioned some class of existing individual investment advisors will be exempted from the requirements. We have to wait for SEBI to clarify the same.
#5 – Can individual investment advisers employ persons associated with investment advice?
Yes, individuals can have a proprietorship and employ persons associated with investment advice. It will be the responsibility of individual IA to ensure that such persons fulfill the qualification and certification requirements.
#6 – What are the enhanced net worth requirements?
Just to reiterate that partnership firms will be considered as non-individual entity and hence the net worth requirement for them is same as for companies / LLPs.
SEBI has amended the definition of net worth. As per the new definition, non-individuals also have to ensure that the net worth of 50 lacs to be in addition to the net worth requirement for other services offered by the advisers in accordance with the applicable rules and regulations.
E.g. If you are registered as a PMS as well as an Investment adviser, you net-worth should be Rs. 5.50 crores. i.e. Rs. 5 crores for PMS and Rs. 50 lakhs for IA.
However, the net worth includes the words “aggregate value of paid up share capital” which is applicable only for companies. For LLPs and partnership firms, it will be the aggregate value of capital contribution by the partners”.
All the existing investment advisers have to fulfill the requirements within the next 3 years.
#7 – What are the restrictions for individual IAs to provide distribution services?
First of all, let me clarify that individual IAs cannot provide distribution services. Distribution services include distribution of mutual funds, stocks, insurance products or any such investment products where IA or its family member gets commission / brokerage or any other compensation.
If any family member (spouse, parents and children) of individual IA is providing distribution services to a client, individual IA cannot provide advisory services to that client.
Similarly, an advisory client of an individual IA cannot avail distribution services provided by the family member of IA.
SEBI sees this as a conflict of interest.
#8 – Can an individual IA provide implementation service if he / she is not getting any compensation?
Yes, an individual IA can provide implementation service if he / she is not getting any compensation. Compensation includes referral fee too.
Investment adviser can provide implementation services to its advisory clients only through direct schemes / products in the securities market.
So, individuals providing execution services in direct plans of mutual funds can continue to do so provided they are not getting any compensation, in any manner, for this execution service.
#9 – Is any format specified for the client agreement?
Although the client agreement has become mandatory, the format of the agreement or the terms and conditions of the agreement will be specified by SEBI through a separate circular.
SEBI has indicated terms and conditions of the client agreement in the fourth consultation paper.
#10 – What are the restrictions for providing distribution services for non-individual IAs?
Directions for providing distribution services are not clearly given in the amendment regulations.
On one hand SEBI has mentioned that non-individual investment advisors can provide distribution services provided the advisory services are provided through separately identifiable department of division.
On the other hand SEBI says that all non-individual investment adviser should have client level segregation at group level for investment advisory and distribution services.
In my view, it simply means that the same client cannot be offered both advisory and distribution services within the group of the non-individual IA.
Group for non – individual IA 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 IA.
However non-individual IAs can provide implementation services to advisory clients through direct schemes/products in the securities market provided no consideration is received for such execution.
SEBI will soon introduce guidelines by way of a separate circular for compliance and monitoring process for client segregation at group or family level.
#11- What about fees to be charged by an IA? Has the same been covered in regulations?
Although the consultation paper had details about manner in which fees can be charged and capping of fees, the amendment regulations do not have such details.
SEBI is going to specify the manner of fees to be charged through a separate circular.
Note that SEBI has introduced the definition of “assets under advice (AUA)” –
“Assets under advice” shall mean the aggregate net asset value of securities and investment products for which the investment adviser has rendered investment advice irrespective of whether the implementation services are provided by investment adviser or concluded by the client directly or through other service providers.
This definition will be important from the point of view of charging fee as a percentage of AUA. Unlike securities, the definition of investment products is not provided by SEBI.
As per U.S. Securities and Exchange Commission (SEC), Investment Products include bonds or fixed income products, fixed deposits, commodities, insurance products, mutual funds, ETFs, derivatives, private investment funds, REITs, retirement saving products, stocks and structured notes. Click here to read more.
#12 – Can an individual investment adviser refer clients to other intermediary or registered IA and receive referral fee?
In my view, as long as no investment advice is provided to the client, individual IA can refer clients to other intermediary and receive a referral fee.
#13 – What will be the trigger event for an individual IA to apply as a corporate license?
Any individual IA whose “total” number of clients exceed 150, need to apply license as a non-individual.
Now, “total” clients is not defined by SEBI. Also, the time period also is not specified.
In my view, this total will include active clients across all services offered by IA. So, as soon as the total number of clients exceed 150, IA should apply for registration as a non-individual. Remember that non-individual includes partnership firm too.
Having said that, SEBI is expected to further clarify on the definition of ‘total’ clients.
#14 – Does IA need to submit the annual compliance report?
Yes, all IAs need to get compliance audit done and submit the report to SEBI. SEBI has not specified any format of the report. However, SEBI will issue clarification regarding submission of report in due course.
To read more about annual compliance audit for IA, please click here.
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SEBI has not made any changes in the application and registration fee for investment advisers.
The SEBI (Investment Advisers) (Amendment) Regulations, 2020 are more or less in line with the fourth consultation paper issued by SEBI.
However, we need to await further clarifications by SEBI on various aspects of the business of RIAs.
If you have any queries, you can write to me at kruti@cskruti.com
5-Years Mandatory required in financial advisory, so what type of experience will count?
1. Teaching About Stock Market for 5-Years with Fees.
2. Teaching About Stock Market for 5-Years without Fees.
3. Giving Advisory services for Fees.
4. Giving Advisory services for without Fees.
5. Working for any existing broking company or advisory firm for 5-Years.
Or any other experience may also count.
Hi. Minimum 5 years of experience related to working in a company which provides investment advisory services or portfolio management or fund management or having your own mutual fund distribution practice will be considered by SEBI. Hope this helps.
Good Afternoon Mam.
I have been providing investment advice to some of my clients since last 2 years and have 5 years of work experience as well in sales of financial products as well. As per new regulations, 2 year PG is mandatory so i will be enrolling for the same.
Untill my PG is completed, can i still provide Investment Advice to my clients on yearly fee basis, while still being unregistered with Sebi Investment Advisers Regulations
Hi Madhu. In my view, you cannot provide investment advisory services unless you are registered with SEBI.
Thanks for the clarification
Dear Madam,
Your articles are a great help always. One quick question..
1. What if someone, who is a graduate and is already engaged in Mutual Funds and securities, let’s say for last 3 years starting from Jan 2018. What if he now pursue 2 years of PG in Finance as per the criteria while keep continuing his Mutual Fund work as a distributor, will both experience and PG will counted for next 2 years?
will he be eligible to apply as per criteria in 2023??
Hi Ishan, in my view, such person will be eligible in 2023. However, best is to confirm with SEBI’s regional office near you.
Good post. Does a Corporate RIA who is advising clients on which insurance products to buy, eligible for receiving commission on those insurance products? If yes, then can the RIA charge advisory fee on investment products and collect commission on insurance product?
Does the corporate RIA also have to be registered with IRDAI as a corporate agent?
Thanks. In my view, the segregation requirements also apply to insurance products. To receive commissions on insurance products you need to get registered as agent with IRDA.
Thanks for the explanation provided in your RIA article. Have a few queries –
1) Is there any specified format for Business Plan for non individual applicant?
2) What all points are to be covered in Business Plan?
3) Are there any specified formats for the various declarations to be given?
Hi Saurabh. There are no formats for business plan and declarations. You can refer to my article on business plan.
Hi , I’m an engineer with post Graduate degree, and I have 5+ year experience but not in the fields mentioned in the list I’ve been doing my own investments since last 5-6 years and managing my family’s investments as well. I would like to apply for RIA license in future. Can you please advise if I’m eligible for this, and if not, what do I need to do to become eligible for RIA license.
Hi Rohit, you will need 5 work of working experience along with experience certificate and salary slips before you make an application to SEBI.
Hi Kruti, Thanks a lot for details on new RIA regulation.
I am fulfilling all criteria like NISM exams, 5 years experience in advisory except PG degree in finance.
I have completed 1 year Advanced Diploma in Business Administration from Wellinger Management Institute (Distance Learning). If i complete one more year they will give me PG Diploma. Will this fulfill education criteria ?
Hi Sandeep, if the Welingkar Institute is recognised by the Central or State Government then you can complete 2 year PG Diploma to fulfill the education qualification requirement.
Hi kruti , you shared very good insights on the New Rules of SEBI for RIAs / MFDs , i have some Queries – As an MFD
1 – if i am offering in Mfs , Stocks , all types of Insurance , Fds etc , Now Will i have the freedom of taking Fees for Guiding Clients for the Right Insurance , Or for Reviewing their Insurance portfolios
2 – Will it be acceptable if i am teaching Client about something and charge fees for some Courses
3 – Will i be take Registration fees / Subscription fees for My Closed FB groupts or anyother Channel
4 –
Hi. Based on the minimum information provided by you, here is my response:
1. Are you registered as an IRDA agent? If no, then it will not be allowed unless registered with SEBI.
2. Yes, teaching is allowed
3. Fees for?
Hi Kruti,
Whether chartered accountant who have been working in Bank/NBFC in Corporate Finance department and have 5+ years will meet the experience requirement as required for registering with SEBI as Investment Advisor
Hi Rahul, the 5 plus years experience need to be in activities relating to advice in financial products or securities or fund or asset or portfolio management.
Respected Mam,
Am I eligible for IA ?
I am having NISM XA & XB certification along with MBA(FINANCE)(DISTANCE LEARNING) and mcom degree.
Also I am pursuing CA FINALS and cleared single group.
I am having 5 years of experience in advising financial products n assets along with tax planning as I was serving as an intern in a CA firm under a Chartered accountant.
Also I am registered with IRDA as an agent of LIC from last 4 years.
PLEASE SUGGEST
Hi Anand, your experience certificate should clearly state that you have experience in activities relating to advice in financial products or securities or fund or asset or portfolio management. Then you are eligible.
Hi Kruti,
Can you please throw some light on the timelines for approvals for RIA (Non Individual)?
Also what are the requirement for the principal officer in this regards about examinations etc?
What can be the time required for completing this for the principal officer perspective?
Thanks
Sushil
Hi Sushil, I would request you to go through my article for timelines – https://cskruti.com/it-is-official-sebi-makes-no-amends-to-rias/
Principal officer needs professional qualification / Post graduation plus experience plus NISM certification.
Kruti, this is a very helpful article. Thank you so much for sharing these. One question – Can the Principal Officers at a company also hold positions at other organizations (like board role at a company or a partner in an LLP)?
Thanks for your feedback Niha. Yes, in fact, the definition of the Principal officer itself means the managing director or designated director or managing partner or executive chairman of the board or equivalent management body.
Dear kruti,
At the outset I would like to appreciate all the blogs and articles you have written on the captioned topic. I really like the lucid language and the way in which you manage to simplify the most complex of regulations issued by SEBI.
I am keen on applying for RIA registration with SEBI. I would really appreciate your help on the following points :
1. I am a chartered accountant with 10+ years of experience in the banking sector and other sectors (in the finance/risk/audit) department.
Will this be enough for complying with SEBI experience requirement.
2. The new regulations released by SEBI mandate corporotisation after reaching 150 clients.
Will one time clients (one who just takes a financial plan and leaves, to whowm I am not going to provide any continuing service) will also be counted in this 150?
3. Post corporotisation, the registration fee of INR 5L is one time ?
4.I have cleared NISM XA level 1 exam. In the process of appearing for level 2 shortly. However is it possible for me to act as a financial planner and/or investment advisor (along with implementation services) if I additionally also clear the CFP exam without registering with SEBI.
5. What kind of assistance/services can you provide for making process of registration with SEBI hassle free and smooth. I am keen to work along side you for processing by SEBI registration.
Regards
Investopert
Hi
1. You need experience in activities relating to advice in financial products or securities or fund or asset or portfolio management.
2. In my view it is active clients as on a particular date.
3. Fee to be paid every 5 years
4. No
5. I provide end to end assistance in making an application to SEBI. You can write to me at kruti@cskruti.com for more details.
Hi Kruti,
Thanks for the detailed post!
In the case of an equity portfolio, can an advisor help the client do the required trades after getting an agreement for implementation service signed by the client (with ZERO additional consideration apart from the advisory fee that is being charged)?
In that case, will a PoA type agreement suffice, or any other agreement is needed?
Hi Vinay, there is a declaration to be given by the investment adviser that he has not taken any POA or authorisation from the client for implementation of advice. The advisor should not function like a portfolio manager.
I had one query that individual research analyst exempt from this registration as per new norms or same things apply to RA’s
The new regulations are currently applicable to investment advisers only. I hope I have understood you question correctly.
I am an engineer doing CFA with 0 workex in securities. Since I want to register as an RIA will it be possible to fulfill RIA workex requirements of 5 years by registering first as a research analyst, wait out the 5 years and then apply as RIA? Will the RA license be considered as 5 year workex?
In my view, SEBI will consider RA experience. However best is to confirm with SEBI’s local / regional office.
Can a SEBI RIA also perform other activities like one can be a professor also along with IA?
What other activities? I don’t see any issue in being a professor along with RIA.
Hi, can a corporate entity be considered as “Person associated with the advice”. If a entity wish to provide a platform/website/application on boarding the various Independent Registered Investment Advisers and enable the Users/Clients to use the services of such RIAs through such platform/Website/Application.
Will they be covered under the above definition?
Hi Nikita, I would request you to go through the definition of “persons associated with investment advice”. It means any member, partner, officer, director or employee or any sales staff of an investment adviser.
Will the corporate entity give investment advice? Are you going to show that the advice given by such independent RIA belongs to the corporate entity? If yes, then the corporate entity needs to get registered as an Investment Adviser. If you need any professional help in setting up of such entity, pls write to me at kruti@cskruti.com
Hi Kruti,
Thank You for such a well explained article.
I have one Query though. If Sole proprietorship firm “A” tries to register as an RIA and one of the person associated with the Sole Proprietorship Firm fulfills all Qualifications as posted by SEBI but the sole proprietor himself doesnt own a CFP or NISM Certification will the firm be able to register itself as an RIA under the new SEBI Norms ???
Hi Alisha, SEBI treats sole proprietorship and individual as the same. Sole proprietorship firm is used only to establish a brand name to the business. The sole proprietor need to fulfill the qualification and certification requirements before applying to SEBI.
Thanks for this information and all your articles which i read enhance my knowledge and clear my doubts,
I had one query that individual research analyst exempt from this registration as per new norms or same things apply to RA’s.
I am not able to understand your query. Pls elaborate.
i am MBA in finance,for registration as Research Analyst does i need 5 years of experience and 5 lakh networth or old rules of 2014 will apply as there is no new updates for Research Analyst Registration.
There is no amendment in RA regulations. The 2014 regulations are still applicable.
Thanks for this briefing. I had one doubt, Are Chartered Accountants exempt from this registration as per new norms?
SEBI IA regulations have provided exemptions to CAs if they provide investment advice to their clients, incidental to his professional service.
Thank You
Hey Shruti! I had one more query,
Is a sub broker exempt from this registration as per new norms?
Hi Priyanka. Just to clarify, the new norms did not amend the exemptions mentioned in the regulations. As to your query, any stock broker or sub-broker, who provides any investment advice to its clients incidental to its primary activity, is exempted from registration. However, it has to comply with Chapter III of the IA regulations.
Can you please provide any explanation for Investment Advice to Clients incidental to the Professional Service. I am asking this because i am a Chartered Accountant – So i want to get clarity whether i can straight away start the RIA services considering the exemption clause.
Hi Rishab, incidental advice means advice given to a client who has come to you for CA related services. E.g. You file income tax returns for the client. If you give advice to invest in ELSS, then it is incidental advice. You cannot charge for incidental advice. Hope this helps.
Very nicely explained.
I have applied almost 6 months back and waiting for their response.
I am assuming that I doesn’t fall under new category regulations.
Hi Anand,thanks. No clarity is issued by SEBI on this yet. Pls follow up with SEBI on your application.
Great Article Mam.
I just wanted to give you a small feedback. The qualification requirement for individuals and newly included principle officer is same as Regulation of 2013. There is no change in them.
Thanks for your feedback Samarth. The qualification requirements have been changed to the effect that experience of 5 years has become mandatory for individuals and principal officers. It was not the case before if one had a professional qualification or a post graduate degree / diploma.
Hi Kruti,
It was a awesome read. I have two question regarding this segregation proviso
A) Is it possible for a Non individual RIA to provide investment advice related to one product and distribution related to other product to same client because you see if both are completely different from each other then there is no conflict of interest.
B) When we say distribution service of investment product then what is definition of investment products? Does that include p2p lending (retail loan) product also?
If you could answer both that would be a great help.
Thank you for the article and for this question thanks in advance.
Hi Ram, thanks for the feedback. Here is my response:
A) As per the amendment regulations, same client cannot be offered advisory and distribution services. So even if a non-individual is providing different products to the same client, it will not be allowed by SEBI as it will still be getting commissions from the same client.
B) As mentioned in my article, definition of investment product is not given by SEBI. Going by the general definition of investment products available on the web, if the investment in p2p lending product is done for any fulfillment of goal or for earning a return, it will be included in the definition of investment products. However, more clarity is expected from SEBI in this regard.
Thanks Kruti for your response. That was quite helpful.
Very simple and informative. Thanks Kruti!
Thanks Swati
If an exiting MF Distributor wants to become RiA, what will happen to his exiting AUM
Hi Mohit, SEBI has not given any clarification on the same yet.
Thanks Kruti, very detail & simple language
As per the news publish in Cafe ” Mutual No person can use IFA, wealth manager or similar nomenclature without registering with SEBI”
I am having a LLP, named *** Wealth Managers LLP, and in to Mutual Fund Distribution Business.
And want to remain in Distribution business only
Considering the same I have few questions related to this
1. Is this news is true?
2. If yes , is it applicable to LLP’s / Companies / Partnership Firms also who want to be in Mutual Fund Distribution Business and not want to be Advisor ?
3. If yes how much time frame SEBI has given for this change?
4. Is SEBI going to provide any clear directives on it, because in absence of which it will be tough to deal with ROC / Income Tax / GST and convince them that proposed change in name is due to SEBI directives, and not our wish to do so
Hi Yogesh, here is my response:
1. Yes
2. SEBI has not given clarity on the same. However, best is to take a conservative view and not use such terms unless you are registered with SEBI.
3. SEBI has given time till September 30, 2020.
4. In my view, no further directors will be issued by SEBI in this regard.
Hope I have solved all your queries.
Hi Kruti, appreciate explaining it in simple terms. Is it possible for an NRI (also an MBA+CFA) who has 10 years of experience as a portfolio manager of an overseas fund to obtain an Investment Adviser registration?
Hi Vivek, thank you for the feedback. Will the NRI be settling permanently in India? If not, then I doubt if SEBI will allow NRI to get registered as an individual. However, best is to confirm with SEBI’s regional / local office near you.
Thanks Kruti. The NRI will divide time between India and other jurisdictions. Assuming he comes to India to settle, in how much time is he eligible to apply and how will SEBI track whether he has permanently settled in India? Thanks
Once the NRI settles in India, he can apply as soon as he fulfills requirements of qualification, certification, net worth and other requirements of SEBI. SEBI will know through Income Tax Returns and can also ask more information apart from the one given in the application. Hope this clarifies.
If I am a director of Pvt Ltd com in MF distribution, but not involved in sales or not having corporate EUIN, can I apply for RIA under individual status?
Hi Pritesh, this is a tricky question. In my view you can apply, provided you fulfill the qualification and certification requirements. Also, SEBI may raise a query on how you will main arms length relationship between your activities as an Investment Adviser and you being a director of a MFD company.
Is it mandatory to have five year experience for new registration of individual investment adviser???
Yes Ankit. Experience should be in activities relating to advice in financial products or securities or fund or asset or portfolio management.
This is very informative. Thank you.
Thank you Jay
very well explained
Thank you Nishant
You made it simple. Appreciate it.
Thank you Melvin
Is there any need to segregate implementation services from advisory services in a body corporate investment adviser? Can a director of a body corporate provide both investment advice and then implement trades in securities for the client himself? Thank you in advance.
Hi Kavita, SEBI has mentioned segregation for distribution activities and not implementation activities for the simple reason that the investment adviser cannot receive any consideration in any manner and cannot charge any implementation fee. Also SEBI has insisted that implementation services will only be through direct schemes/products in the securities market. Mutual funds have direct plan and investment adviser can help clients implement trades. However, stocks do not have any direct plans. This still needs to be clarified by SEBI.
Good brief. Really appreciating your efforts on breaking the concept in simple terms.
Thanks Sachin