On January 2, 2018, SEBI issued the third consultation paper on amendments to SEBI (Investment Advisers) Regulations, 2013.
It is to be noted that SEBI has already issued two consultation papers in the past.
Click here to read the highlights of the first consultation paper.
Click here to read the highlights of the second consultation paper.
Click here to read the latest (third) consultation paper.
As per the proposals mentioned in the latest consultation paper, SEBI takes a hardened stance to “prevent the conflict of interest between ‘advising’ of investment products and ‘selling’ of investment products by the same entity/person”.
The fresh stance is in the way SEBI takes on the business set up of Investment Advisers involving associates and relatives.
SEBI has proposed that the individuals or entities who want to get registered as Investment Adviser cannot offer distribution services through their relatives / associates respectively.
Also, the role of Mutual Fund Distributors (MFDs) is only to distribute mutual funds but not advice. However, they will be responsible to ensure “appropriateness” of the mutual fund investment opted by the investor.
In its desperate need to solve the issue of conflict of interest, SEBI has asked the registered Investment Advisers to choose between advisory and distribution activity.
Any entity has to decide the same by March 31, 2019.
So, is there clarity on the role of MFDs and RIAs (Registered Investment Advisers)?
SEBI seems to have given some clarity through the latest consultation paper.
The first point of the consultation paper states:
“There should be clear segregation between the two activities of the entity i.e. providing investment advice and distribution of the investment products/ execution of investment transactions.”
SEBI has made it ample clear that there should NOT be any conflict of interest between the two activities. It is evident from the paper that one cannot get into an arrangement where either of the services is offered through relatives or associates. Apparently, some MFDs / RIAs do that to circumvent the regulation.
All good, however, the consultation paper does not take into consideration genuine cases where entities are Investment Advisers as well as Distributors of financial products or are distributing financial products through their associates by making adequate disclosures.
Also, there is no clarity on the activities of ‘Robo-Advisory’ where the investors are offered advisory as well as execution services.
This leaves a lot to be asking.
What SEBI should have proposed?
SEBI seems to be unaware of ground realities of business.
Ideally, a client wants a single touch-point relationship where she gets advice as well as execution services.
As long as the adviser offers execution in a separate entity format with adequate disclosures, it is none of SEBI’s business to go down micro-managing.
RIAs can be allowed to offer direct plans of mutual funds as well as any products where they don’t receive transaction based consideration.
It is better that SEBI should allow RIA / MFDs to offer advice as well as distribution of financial products with following conditions:
1. The applicants can receive either fees or commissions, but not both.
2. There should be proper, clear and adequate disclosures for the commissions received by the applicants.
3. SEBI can put a cap on the percentage of commissions given by the issuers of financial products. E.g. SEBI can put a cap of 0.75% commissions on mutual funds across all Asset Management Companies.
OR
3. SEBI should treat mutual fund distribution and stock-broking activities at par so that like stock-brokers, even MFDs will receive standard commissions directly from investors.
The competition will take care of the rest.
How should Investment Advisers read into the new consultation paper?
First, don’t panic.
Applicants and Investment Advisers should take into consideration all the three consultation papers issued by SEBI.
Clearly know that SEBI wants IAs to NOT offer any commission based products. You have to make a choice but in what way, is not very clear.
Can you offer direct plans of mutual funds? Or Execution is not allowed at all?
I am sure you have more questions.
Raise your doubts and form your response, if any.
Send your comments to SEBI. I am sure SEBI will see reason and issue guidelines accordingly.
The consultation paper is open for public comments till January 23, 2017.
The comments may either be forwarded by email to sebiria@sebi.gov.in or may be sent by post to the following address:
Deputy General Manager
Investment Management Department, Division of Funds I
Securities and Exchange Board of India
SEBI Bhavan, Plot No. C4-A, “G” Block,
Bandra Kurla Complex, Bandra (East), Mumbai – 400 051
If you are looking to register as an Investment Adviser and need professional help, you can write to me at kruti@cskruti.com
Thanks for the timely information!
I have a slightly different question, though. I know that you have already covered the topic sometime back (https://cskruti.com/qualification-requirements-sebi-ia-and-ra/). But in that topic you had also mention that a person with CMT or CFTe also fulfills the criteria as mandated by SEBI.
My question is, if I am an Engineer and passed the CFTe exam (Level I & II), then can I qualify as a person to apply for RA. I did not find any clause saying that Engineers cannot apply for CFTe exam. So this can be a roundabout way to satisfy the criteria. What’s your take on this. Your comments/suggestions are eagerly waited.
Hi Mainak, In my view, if you are a CFTe, you fulfill the qualification requirements as CFTe is a globally recognized qualification.