Assuming you got your IA license, but you did not start your business – no clients, no fees. The license sits as a trophy.
Question – Do SEBI RIA compliances apply to you? Do you need to get an annual compliance audit done?
If you have answered NO, let me wake you up to reality.
As soon as you get registered with SEBI, the provisions of that regulation become applicable.
Even if the business is not started, you have to start complying with the regulations from Day 1.
No exception, no exemptions.
The recent order by SEBI against Banayantree Services Limited, a SEBI registered investment adviser mentions this interesting fact.
To give you a brief background, the Banayantree Services Limited, commonly known through its brand ET Money, was registered with SEBI since January 6, 2017. The entity was also registered with AMFI as a Mutual Fund Distributor.
SEBI conducted an inspection during the year 2018-2019.
And yes, the inspection was not conducted because there were complaints against them. As mentioned in the order, the focus of inspection was to look into, inter alia the practices and systems put in place by ET Money in respect of client onboarding, internal controls, delivery of services, acceptance and redressal of investor grievances and check compliance in respect of SEBI Regulations/Directives/Circulars etc.
Here are the findings of the inspection:
#1 – Conducting compliance audit
The SEBI Officer observed that ET Money had not conducted the annual compliance audit required under Regulation 19 (3) of the IA regulations.
ET Money contested that the said audit was not conducted as they had not started their operations as Investment Adviser and accordingly no fee was charged to any client.
However, they failed to inform SEBI about suspension of its plans to start or undertake the IA activities.
SEBI order mentioned that the requirement to conduct the audit was a necessary requirement, irrespective of scale of its operations and further Regulation does not grant exemption to any entity from conducting audit on the basis of it being non-operational/entities awaiting initiation of operation after registration as an IA.
#2 – Maintenance of infrastructure
When ET Money made an application for registration as an Investment Adviser, it mentioned certain details of infrastructure in its application i.e. it had 4000 square feet of office space, 15 laptops, software for research (own software for fundamental analysis), office cars.
However, during the inspection, SEBI Officer observed that the entity did not maintain the required infrastructure as submitted during registration.
Also, ET Money did not inform SEBI about changes, if any, from the above stated information submitted to SEBI with regards to its infrastructure.
#3 – Details of representative
The SEBI Officer observed that at the time of application, ET Money had mentioned details of
Mr. Ajit Kumar as its representative with requisite qualification and NISM certification requirements under Regulation 7 of the IA regulations. However, the said representative resigned and Mr. Neeraj Fartyal, who was having requisite qualification and certification was the representative during the inspection period.
However, ET Money failed to inform SEBI about the change in the representative and did not submit the documents and certificates for the new representative.
#4 – Segregation of IA activities
The SEBI Officer observed that the entity was running a web/mobile platform with the name “ET Money” through which it provided execution services, and the same also included making recommendations to investors of direct plan(s) of mutual funds. Also, through this platform various services such as MF distribution, Insurance, Loans, digital gold, etc. were also provided.
The SEBI officer also observed that on its website www.etmoney.com, the entity mentioned SEBI IA registration number along with the AMFI Registration Number (ARN) and on its mobile app bearing name ET Money, it referred itself as SEBI registered Investment Advisor along with its registration number. As a Mutual Fund Distributor, ET Money used its Investment Advisor registration number for getting reverse feed from the AMCs for providing consolidated statements to the users of their (ET Money) app.
This was considered to be misleading the clients / users of the ET Money in terms of services (MF distribution or IA services) availing from the entity.
ET Money failed to keep segregation among its role / activities being undertaken as a registered IA and its other business activities as the same were being undertaken under a common platform thus violating Regulation 22 and various other provisions of the IA regulations.
#5 – Other Observation
ET Money claimed that they did not provide any advisory services and did not charge fees to their clients.
However, ET Money declared that the clients entered into an agreement with it for availing of services provided by it through an online platform. The clients were given recommendations of direct plans of mutual funds.
SEBI Officer mentioned that this clearly establishes that they were indulged into investment advisory services to its clients as against its claim of not commencing IA activities. It also did not undertake risk profiling of clients thus violating various provisions of the IA regulations.
What SEBI expects:
- Once you get registered with SEBI, you need to conduct the annual compliance audit irrespective of whether any business is done under the license or not. There are no exemptions and no exceptions to this requirement.
- You have to maintain the infrastructure mentioned at the time of application to SEBI.
- You have to inform SEBI with regards to changes in the representatives or any other material change in the information already submitted to SEBI. You can send an email to the SEBI Officer who processed your application along with the supporting documents.
- There should be clear segregation of the activities as an investment adviser and other activities. If you are also offering distribution services, the same should be clearly mentioned to the clients to avoid any confusion. Avoid having other business activities on the same platform / entity where the investment advisory services are provided.
This order puts out in detail as to what SEBI expects from Investment Advisers especially with regards to conducting audit and segregation of activities. The Investment Advisers who are also using MFD license to provide distribution services need to clearly segregate the activities as an adviser as well as distributor.
ET Money failed to comply with provisions regarding requirement of conducting annual audits, regarding conducting risk profile of clients, regarding segregation of services and the various clauses of Code of Conduct for Investment Advisers.
Although there were no disproportionate gains or unfair advantages made by ET Money and there were no losses suffered by the investors due to the violations, ET Money has been asked to pay a penalty of Rs. 3 lacs.
As I say, the cost of non-compliance is higher than the cost of compliance.
There are no escape routes to avoid compliance.
If you looking to get your compliance audit done, please write to me at kruti@cskruti.com