With SEBI pushing for the Investment Advisers certification, many have opted for it. After all, it is better to be on the right side of the regulator and build an honest, future oriented practice.
The point that is missed out is that taking a license is not enough. There is much more to the regulations.
It is time that Investment Advisers take the SEBI regulation seriously, especially with the expectation of proposed amendments to the regulation.
Going by SEBI’s orders issued recently, it can come after you and even ban you for not complying with the regulation.
One of the recent cases is that of CapitalVia Global Research Limited (CapitalVia).
On November 11, 2016, SEBI issued an order against CapitalVia for non-compliance of various provisions of SEBI (Investment Advisers) Regulations, 2013.
To give you a background, CapitalVia is a research company and provides recommendations to “traders” on equity, derivatives and commodities. The products are listed on its website. It also has its own trading platform.
SEBI received a complaint that “CapitalVia charged a fee of Rs. 25,00,000/- for their services rendered wherein they promised an assured return of 10%.”
As per the report, SEBI received approximately 240 complaints from clients of CapitalVia on SCORES (the online complaint platform monitored by SEBI).
SEBI sprung into action and conducted audit of the books and records of CapitalVia due to complaints received by the clients of CapitalVia. On inspection, SEBI observed that the company did not comply with various provisions of the Investment Advisers Regulations.
The non-compliance is grave in nature and now the company and its Directors are not allowed to carry on any fresh investment advisory business till further directions are issued by SEBI.
Click here to download the order.
This is just one case that shows how serious SEBI is towards investor protection.
In this post I will take you through the case and help you see all the non-compliance by CapitalVia. This is exactly as pointed out by SEBI. We will also cover what SEBI expects from the Investment Advisers.
CASE STUDY : CAPITALVIA GLOBAL RESEARCH LIMITED
#1 – Non-compliance of KYC procedures specified by SEBI
As per Regulation no. 15(8): An investment adviser shall follow Know Your Client procedure as specified by the Board from time to time.
As per Regulation 19 (1): An Investment Adviser has to maintain KYC records of the clients.
SEBI observed that the company was not maintaining KYC records of its clients. In fact, the company also accepted that they were not even aware of the KYC procedures as specified by SEBI.
#2 – Non compliance of conducting risk profiling of a client
As per Regulation 16: Risk profiling and risk assessment of a client should be done before advising a client. The risk profiling questionnaire should have all the questions as required by the regulation and the risk profile should be communicated to the client.
SEBI observed that risk profiling and risk assessment was not properly done by the company before selling a product to the client.
The risk profiling questionnaire used by the company was not complete with respect to the information sought from a client. Some of the questions were left unanswered by the clients. The company also did not communicate the risk profile to the client.
#3 – Non compliance with respect to suitability of the advice
As per Regulation no. 17(a): All investments on which investment advice is provided should be appropriate to the risk profile of the client.
As per Regulation no. 17(b): There should be a documented process for selecting investments based on client’s investment objectives and financial situation.
As per Regulation no. 17(d): It has a reasonable basis for believing that a recommendation or transaction entered into:
- meets the client’s investment objectives;
- is such that the client is able to bear any related investment risks consistent with its investment objectives and risk tolerance;
- is such that the client has the necessary experience and knowledge to understand the risks involved in the transaction.
As per Regulation no. 17 (e): Whenever a recommendation is given to a client to purchase of a particular complex financial product, such recommendation or advice is based upon a reasonable assessment that the structure and risk reward profile of financial product is consistent with clients experience, knowledge, investment objectives, risk appetite and capacity for absorbing loss.
SEBI observed that CapitalVia did not have a documented process for selecting investments for its clients.
It gave advice to the client irrespective of the risk profile of the client (which in any case was not done properly) and suitability of the product to the clients financial objectives.
#4 – Non-compliance related to disclosures to the client
The Investment Adviser has to disclose information to the client as mentioned in Regulation 18.
As per Clause 5 of code of conduct : An investment adviser shall make adequate disclosures of relevant material information while dealing with its clients.
SEBI observed that the company was not disclosing all the required information while soliciting clients. It also observed that the information was inadequate for the client to take any decision for availing the services of CapitalVia.
CapitalVia was soliciting clients from various websites. However, it was not disclosing relevant material information about itself, its business, the terms and conditions for giving advice, etc as required under the regulation on such websites.
#5 – Non-compliance related to segregation of activities
As per Regulation 22 : all investment advisers which are banks, NBFCs and body corporate providing distribution or execution services to their clients shall keep their investment advisory services segregated from such activities.
The investment adviser shall maintain arms-length relationship between its activities as investment adviser and distribution or execution services.
SEBI observed that CapitalVia was executing transactions on behalf of clients and it failed to segregate its execution activities from advisory activities. The company also did not maintain an arms-length relationship between its activities.
#6 – Failure to act in fiduciary capacity and responsibility
As per SEBI Regulations, an Investment Adviser shall act in fiduciary capacity towards its clients and should abide by the code of conduct.
As per Clause 2 of the code of conduct: “an investment adviser shall act with due skill, care and diligence in the best interests of its clients and shall ensure that its advice is offered after thorough analysis and taking into account available alternatives”.
As per Clause 4 of the code of conduct: “an investment adviser shall seek from its clients, information about their financial situation, investment experience and investment objectives relevant to the services to be provided and maintain confidentiality of such information”.
SEBI observed that CapitalVia had put the responsibility on the client to decide whether the investment advice was suitable to his / her financial needs or not. As per SEBI, CapitalVia did not act in fiduciary capacity towards its clients.
#7 – Failure to maintain records
Regulation 19: an investment adviser shall maintain the following records –
- Know Your Client records of the client;
- Risk profiling and risk assessment of the client;
- Suitability assessment of the advice being provided;
- Copies of agreements with clients, if any;
- Investment advice provided, whether written or oral;
- Rationale for arriving at investment advice, duly signed and dated;
- A register or record containing list of the clients, the date of advice, nature of the advice, the products/securities in which advice was rendered and fee, if any charged for such advice.
SEBI observed that CapitalVia did not maintain the records for KYC records, risk profiling and rationale for arriving at investment advice as required under the regulations. The company did not have any agreements with the clients. Even if the clients accepted the terms of use on the website, SEBI was of the view that it doesn’t qualify as the agreements with clients.
#8 – Unreasonable fees charged to clients
As per Clause 6 of code of conduct : an investment adviser advising a client may charge fees, subject to any ceiling as may be specified by the Board, if any. The investment adviser shall ensure that fees charged to the clients is fair and reasonable.
SEBI observed that CapitalVia was charging huge fees to the client which were not reasonable. In one of the cases, it charged fees as high as Rs. 34 lacs for which it had no justification. Hence as per SEBI, CapitalVia failed to comply with clause 6 of the Code of Conduct.
#9 – Disclosure of factually incorrect information on the website
As per Clause 1 of the code of conduct: an investment adviser shall act honestly, fairly and in the best interests of its clients and in the integrity of the market.
SEBI observed that CapitalVia displayed factually incorrect information with respect to number of client, number of employees and the offices in other countries. Hence, CapitalVia failed to comply with Clause 1 of Code of Conduct.
#10 – Non-compliance with respect to qualification and certification requirements
Regulation 7(2): An individual registered as an investment adviser and partners and representatives of investment advisers registered under these regulations offering investment advice shall have, at all times, a certification on financial planning or fund or asset or portfolio management or investment advisory services.
- from NISM; or
- from any other organization or institution including Financial Planning Standards Board India or any recognized stock exchange in India provided that such certification is accredited by NISM.
Provided that the existing investment advisers seeking registration under these regulations shall ensure that their partners and representatives obtain such certification within two years from the date of commencement of these regulations.
SEBI observed that the representatives of CapitalVia did not comply with the certification requirements under the regulation.
#11 – Non-compliance with conditions of certificate of Registration
As per Regulation 13(c): the investment adviser, not being an individual, shall include the words ‘investment adviser’ in its name:
Provided that if the investment advisory service is being provided by a separately identifiable department or division or a subsidiary, then such separately identifiable department or division or subsidiary shall include the words ‘investment adviser’ in its name.
SEBI observed that CapitalVia did not include the words “investment adviser” in its communications with the client nor in its name.
WHAT SEBI EXPECTED THEM TO DO?
SEBI expected them to follow the regulations in letter and spirit.
An intermediary is expected to protect the interest of investors and work in the best interest of the investor. Intermediaries should conduct their business in true and fair manner.
Here are the details on how SEBI wants Investment Advisers to comply with the regulations:
#1. The Investment Advisers should be aware of and follow the KYC requirements. The Investment Adviser should keep all the required documents related to KYC of its clients. Recently, SEBI has also issued a circular where the KYC documents are required to be uploaded on the Central KYC portal.
#2. The risk profiling procedure should be followed before providing advice to a client. An investment adviser should take all the information from the client to know the risk profile of the client. The risk profile should be communicated to the client and proper records of the risk profiling should be maintained.
#3. An investment adviser should ensure that the advice provided to the client is suitable to the client as per his financial situation and risk profile. It should have a documented process on how the investments are selected for a client. It should have reasonable basis to believe that the investment product is suitable to the client.
#4. All the material informed as required under the regulations should be disclosed to the client, in writing. Click here to know the details of the disclosure to be made to the client.
#5. In case of a corporate investment adviser, there should be proper segregation between the investment advisory activities and the execution or distribution activities. There should be arms length relationship between the two activities.
#6. Certain records are to be maintained as per the regulations which include KYC documents of the clients, agreements with the clients, rationale to arrive at the investment advice which is signed and dated, etc. Investment advisers should maintain all such records of all the clients.
#7. Investment Advisers should have reasonable basis to charge fees to their clients and should be able to justify the same. The fees should be consistent for a particular type of clients. If the investment adviser charges percentage based fees, single or slab-based, it is recommended to specify the same to the client, in advance.
#8. An individual investment adviser or the employees or representatives of the investment adviser should comply with qualification and certification requirements as per the regulations at all times. The certifications of the employees should be valid at all times and care should be taken to renewed such certifications in advance.
#9. All individual investment advisers are required to use the words “Investment Adviser” in the communication with the clients. All the non-individual investment advisers are required to use the words “investment adviser” in their name or in the name of the department or division. If the investment adviser has a subsidiary doing the business of investment advisory, the words should be included in the name of the subsidiary. e.g. ABC Investment Advisers Pvt. Ltd.
I have come across cases where many individual investment advisers are not following the regulations completely. I know your intent is right but that is not enough. SEBI needs you to follow the regulations in letter and spirit too.
Read more : How to get prepared for IA annual compliance audit?
So, as an Investment Adviser, you better take charge. Else SEBI is going to knock at your doors!
If you need any guidance on the ongoing compliance of the regulation, or audit under the regulations, you can get in touch with me at kruti@cskruti.com.