It is official! SEBI makes no amends to RIAs!

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My upcoming webinar on April 10, 2021 on compliance requirements of Investment Advisers – Click here to register. 

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Don’t get carried away by the tricky title. All I meant to say was that SEBI has hardly heard RIAs while finalising the amendments to the regulations.

The much awaited and anticipated guidelines on amendments to Investment Advisers regulations are finally out. SEBI has gone ahead with much of what was already mentioned in the consultation paper and board minutes.

So yes, SEBI has imposed more restrictions on the RIAs with the increased compliance requirements.

The lines are drawn and dates are announced. Over to you RIAs.

Here’s how you can prepare for the battle.

#1 – Client level segregation:

Q: Does it apply to existing clients or new clients?

A: It applied to both. Existing as well new clients have to decide whether they want to take advisory services or distribution services from a RIA.

However, RIA has to give the option to new clients at the time of on-boarding the client.

Q: What will happen to existing investments if the client decides to opt for either advisory / distribution services?

A: The client can continue to hold assets under the advisory / distribution model and cannot be forced by RIAs to liquidate / switch the existing holdings.

Q: Can the individual client opt for advisory services and the family opt for distribution service?

A: No, SEBI has specifically mentioned that client level segregation will be at PAN level and family of client will be counted as one client.

As defined under amended RIA regulations, “family of client” includes individual client, dependent spouse, dependent children and dependent parents. SEBI has clarified that dependent family members will be those members whose assets originate from the income of the earning member.

Further, the client also has to give annual / periodic declaration of the dependent family members to the RIA.

This means that RIAs will now have to add this as a part of the onboarding process or as an annexure in the client agreement.

#2 – Client agreement

Q: Can there be an electronic agreement?

A: All RIAs need to have client agreement and the same has to be kept on record. SEBI has given guidance on the clauses, the terms and conditions to be mentioned in the client agreement or the engagement letter.

RIAs need to get the agreement signed by the client before taking fee from and rendering investment advice to the client.  The signed copy of the agreement needs to be given to the client.

This means that RIAs cannot have a “check box / tick box” on their website for terms and conditions. However, RIAs can have an electronic agreement which can be digitally signed.

#3 – Fees 

Q: Can RIAs charge fees as a percentage of profit or performance based fee?

A: SEBI has clarified that RIAs can charge fee only under two modes

1. Fee on assets under advice (AUA) – maximum fee that can be charged is 2.5 % of AUA  per client per annum.
2. Fixed fee  – maximum fee that can be charged is Rs. 1.25 lakhs per client per annum

By specifically mentioning about the modes of charging of fees, SEBI has clearly indicated that an RIA cannot charge performance fees.

Q: Can an RIA charge fee through different modes of fees for different clients?

A: SEBI has not mandated the RIA to choose one mode of charging fee for all its clients. Hence different clients can be charged fee through either of the modes.

However, SEBI has specifically mentioned that the family of a client will be counted as one client. If the RIA is charging fee under the AUA mode, the assets of the family of client will be considered and accordingly fee need to be charged.

“Family of client” is already defined above.

Q: Can a RIA charge fees in advance?

A: If agreed by the client, IA may charge fees in advance. However, such advance cannot exceed fees for 2 quarters.

This applies to fixed fee as well as AUA based fee.

The quarterly fee will not apply to one-time services, like making a financial plan, but will suit the AUA fee charging mode.

Q: What can be included under Assets under advice?

A: SEBI has defined AUA under the amendment regulations. AUA means 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.

However, in the guidelines, SEBI has mentioned that RIA needs to have supporting documents like demat statements, unit statements, etc, to demonstrate AUA.

SEBI has also clarified that AUA held by the client under any pre-existing distribution arrangement with any entity will not be counted under AUA by the RIA.

This means that a client should not be charged twice i.e fees as well commissions by any entity for the same assets.

Q: When can the mode of payment be changed?

A: RIA can change the mode of charging fee only after 12 months of on boarding/last change of mode.

#4 – Qualification and certification requirement

Q: When will the enhanced qualification and certification requirement be applicable?

A: It is already mentioned in amendment regulations that all existing RIAs and persons associated with investment advice will have 3 years’ time to fulfill the qualification requirement. The good news is that the new guidelines have exempted existing individual RIAs above 50 years of age as on September 30, 2020 from complying with enhanced qualification requirements.

However the certification requirement of NISM certification has to be fulfilled immediately by all existing RIAs as well as by persons associated with investment advice.

All the new applicants have to fulfill the qualification and certification requirements before making the application to SEBI.

#5 – Transition from individual to non-individual RIA

Q: What is the criteria for counting 150 clients?

A: SEBI has specified that an individual RIA having 150 clients as on September 30, 2020 has to apply for non-individual registration.

Although SEBI has not clarified “total” clients. However, one can take guidance regarding the number of clients from the new guidelines.

In my view, the active clients, at PAN level, will be considered as total clients. “Family of client” will be considered as a single client. Client includes individual as well as non-individual.

Q: What will happen to the existing clients during the application period?

A: SEBI has clearly mentioned that an individual RIA cannot onboard more than 150 clients under any circumstances. During the application period too, the individual RIA can continue to service only existing clients and cannot onboard fresh clients.

If the application for registration as a non-individual RIA is rejected, the RIA has to restrict himself to 150 clients only in order to continue his practice as an individual RIA.

Q: Is there a way to transfer the existing registration?

A: No. A fresh application has to be made to SEBI in Form A to get registered as a non-individual RIA along with the requisite fee.

An important point to be noted here is that SEBI has not enhanced fees for partnership firms although they are treated as non-individuals.

For new applicants, who have a business model of tip-provider or a robo-advisor, it is suggested to get registered as non-individual only.

#6 – Maintenance of records for advice given

SEBI has made additions for maintenance of records by RIAs.

Any conversation related to advice with all clients including prospective clients via telephone, email, SMS or other means, have to be kept on record by the RIA. Such records have to be maintained by RIA for a period of five years.

It seems that this requirement is introduced keeping in view the service provided by tip-providers.

This means that RIAs have to now record all the telephonic calls with the clients and records of all SMS sent.

In order to comply with the requirements, best is to provide all investment advice via email and documents.

#7 – Audit

Q: What are the audit requirements under the IA regulations?

A: All RIAs, individuals and non-individuals need to get compliance audit done every year from a member of the Institute of Chartered Accountants of India or Institute of Company Secretaries of India. This audit in respect of compliance with the regulations and the circulars issued by SEBI from time to time.

In the new guidelines SEBI has introduced the audit for compliance with client level segregation requirements as well. All individual RIAs need to get a certificate annually from an auditor and all non – individual RIAs need to get a certificate from its statutory auditor.

Q: What is the period of audit?

A: Although the RIA regulations mention yearly audit, the period was not defined. It is now clarified by SEBI that audit has to be done for each financial year and has to be completed within 6 months from the end of the financial year.

The annual certificate for client – level segregation also needs to be obtained within 6 months of end of the financial year.

Q: Is it required to submit the annual audit report to SEBI?

A: SEBI has mandated that the adverse findings of the audit, if any, along with action taken, approved by the individual RIA/management of the non-individual RIA, has to be reported to respective SEBI office (based on the registered address of IA) within one month from the date of the audit report but not later than October 31st of each year for the previous financial year.

The annual certificate obtained for compliance with client level segregation requirements will form a part of the audit report.

Although SEBI had issued a circular for delegation of submission of period reports to SRO, currently the reports for adverse finding of the audit has to be submitted to SEBI’s regional or local office.

#8 – Risk profiling and suitability for non-individual clients

SEBI has mentioned that IA should use the investment policy as approved by the board/management of such non-individual clients for risk profiling and suitability analysis.

In case of absence of such investment policy or unwillingness of the client to share the policy , IA has the discretion to not onboard such non-individual client.

#9 – Display of details on website and in other communication channels

SEBI has increased the requirement of displaying information in different means of client correspondence.

IAs have to now display the following information on its website, mobile app, printed or electronic materials, know your client forms, client agreements and other correspondences with the clients.

1. Complete name  as registered with SEBI
2. Type of Registration-Individual, Non-Individual
3. Registration number, validity of registration (though the validity is perpetual)
4. Complete address with telephone numbers
5. Contact details of the Principal Officer / Individual IA –contact no, email id etc.
6. Corresponding SEBI regional/local office address (based on the registered address of the IA).

Although SEBI has mentioned that the display of such information is to protect the interest of investors and bring more transparency, it is unclear how it is going to bring more transparency in the functioning of investment advisers.

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One big relief to all the existing RIAs is that SEBI has given time to comply with the new requirements. Most of them have to be complied with by the end of this financial year.

So, here is the summary of the clarifications issued by SEBI along with the date of applicability of the requirements:

The new guidelines are more or less on the lines of the last consultation paper and no further clarification is expected from SEBI now. RIAs have to now gear up for the new requirements.

These amendments will push for tie-ups or partnerships between the individual RIAs to be in the investment advisory business.  Also companies will be seen absorbing the RIAs and their businesses.

With the 150 client limit, almost all of the tip-providers and robo advisors will be registered as non-individual.

With the restriction on charging of fees and enhanced compliance requirements, only the serious ones will sustain in the market.