With the increase in compliance requirements for investment advisers, many are opting for research analyst registration.
When I recently suggested to someone to move to IA, the response was, “we are not ready for the compliance requirements for Investment Advisers. We will tweak our product a bit, to fit into the Research Analyst regulatory domain.”
But then I tell them, “Research Analyst regulations have their own compliance requirements too. If we start strong and set the processes right from the commencement of the business, compliance is manageable for investment advisers.”
I guess that was the problem with SEBI registered research analyst – Trustline Securities Ltd (Trustline).
Trustline was given the license on June 1, 2015. It was primarily registered as a Stock Broker with SEBI.
SEBI carried out an inspection for the financial year 2018-2019 at its office in Noida. On June 23, 2022, issued an Adjudicating Order against Trustline and two of its employees for non-compliance of various provisions of the Research Analyst regulations. Click here to download the order.
SEBI in its order has mentioned that “the focus of inspection was to inter alia analyse the practices and systems put in by Trustline in respect of client onboarding, internal controls, delivery of services, acceptance, redressal of investor grievances, check compliance in respect of SEBI (Research Analysts) Regulations, 2014 and other SEBI regulations / directives / circulars, etc.”
After taking into consideration the nature and gravity of the violation established, Rs. 3 lakhs penalty was levied on Trustline and Rs. 1 lakh on each of the employees.
In the order, along with the violations of the provisions of the regulations, SEBI has also pointed out the Trustline did not follow the Code of Conduct (CoC) under the RA Regulations.
Let us understand the violations.
#1 – Non-maintenance of records for recommendations made through whatsapp / email / terminal
As per Regulation 25(1) (ii), a Research Analyst shall maintain records of the research recommendations provided.
As per Regulation 25(1) (iii), a Research Analyst shall maintain records of the rationale for arriving at a research recommendation.
As per Clause 2 of the CoC – Diligence – Research analyst or research entity shall act with due skill, care and diligence and shall ensure that the research report is prepared after thorough analysis.
As per Clause 7 of the CoC – Compliance –Research analyst or research entity shall comply with all regulatory requirements applicable to the conduct of its business activities.
As per Clause 8 of the CoC – Responsibility of Senior Management – The senior management of research analyst or research entity shall bear primary responsibility for ensuring the maintenance of appropriate standards of conduct and adherence to proper procedures.
SEBI observed that there were instances of recommendations/ trading calls where the rationale was not recorded and, in some instances, recommendations were not recorded by Trustline.
Hence the research entity did not comply with the regulatory requirements.
#2 – Non-maintenance of records for recommendations made through public media
As per Regulation 25(1) (iii), a Research Analyst shall maintain records of the rationale for arriving at a research recommendation.
As per Regulation 25(1) (iv), a Research Analyst shall maintain records of public appearance.
SEBI observed that Trustline had made various recommendations/ trading calls through YouTube, social media (Twitter) and regional media.
However, a mere gist of the recommendations/trading calls made through media were recorded. The records were not maintained with regard to the rationale of such recommendations, and no details were maintained about which form of media a particular recommendation/trading call was made.
#3 – Non-fulfillment of the qualification / certification requirements by the research analyst employed by Trustline
As per Regulation 7(1), individuals employed as research analyst engaged in preparation and/or publication of research report or research analysis shall have the following minimum qualifications, at all times:
(i) A professional qualification or post-graduate degree or post graduate diploma in finance, accountancy, business management, commerce, economics, capital market, financial services or markets provided by:
(a) a university which is recognized by University Grants Commission or by any other commission/council/board/body established under an Act of Parliament in India for the purpose; or
(b) an institute/association affiliated with such university; or
(c) an institute/ association/university established by the central government or state government; or
(d) autonomous institute falling under administrative control of Government of India;
OR
(ii) professional qualification or post-graduate degree or postgraduate diploma which is accredited by All Indian Council for Technical Education, National Assessment and Accreditation Council or National Board of Accreditation or any other council/board/body set up under an Act of Parliament in India for the purpose;
OR
(iii) a graduate in any discipline with an experience of at least five years in activities relating to financial products or markets or securities or fund or asset or portfolio management.
As per Regulation 7(2) ….individuals employed as research analysts shall have, at all times, a NISM certification for research analysts as specified by the Board or other certification recognized by the Board from time to time.
SEBI observed that Trustline had employed 3 research analysts. The RAs did not fulfill the certification requirements as they did not have NISM certification. Also, one of the RAs did not fulfill the qualification requirements as well.
#4 – Non segregation of RA activities / operations from other business activities
As per Regulation 13(iii), research analysts registered under these regulations shall use the term ‘research analyst’ in all correspondences with its clients.
As per Regulation 15(2), a research analyst or research entity shall have in place appropriate mechanisms to ensure independence of its research activities from its other business activities.
As per Regulation 24(1), a research analyst or research entity shall maintain an arms-length relationship between its research activity and other activities.
SEBI observed that Trustline was providing research services as an add-on service to the clients who availed broking services. However, Trustline did not mention anywhere in the client induction form / account opening form about its registration as a Research Analyst.
SEBI also observed that client requests, complaints and queries were resolved through a common helpdesk and not directly handled by the research team. There was no separate complaint redressal mechanism related to RA services.
#5 – Failure in framing/adopting internal policies and control procedures governing the dealing and trading by RAs
As per Regulation 15(1) of the RA regulations, a research analyst or research entity shall have written internal policies and control procedures governing the dealing and trading by any research analyst……
SEBI observed that Trustline had failed to put in place internal policies and control procedures governing the dealing and trading of its RAs. Even if Trustline had an internal policy document, it was undated.
#6 – Lack of restriction on the individuals employed by Trustline as RAs from trading in a certain manner
As per Regulation 16 (1), personal trading activities of the individuals employed as research analyst by research entity shall be monitored, recorded and wherever necessary, shall be subject to a formal approval process.
As per Regulation 16 (2), individuals employed as research analysts by research entities or their associates shall not deal or trade in securities that the research analyst recommends or follows within thirty days before and five days after the publication of a research report.
As per Regulation 16 (3), Individuals employed as research analysts by research entities or their associates shall not deal or trade directly or indirectly in securities that he reviews in a manner contrary to his given recommendation.
As per Clause 1 of the CoC – Honesty and Good Faith : Research analyst or research entity shall act honestly and in good faith.
As per Clause 3 of the CoC – Conflict of Interest: Research analyst or research entity shall effectively address conflict of interest which may affect the impartiality of its research analysis and research report and shall make appropriate disclosures to address the same.
SEBI observed that the personal trading of the research analysts employed by Trustline was not monitored.
From the trading details of the RAs obtained from NSE and BSE, SEBI also observed that in some of the instances, the research analyst employed by Trustline traded in securities recommended by them and did not follow the trading restrictions. Also, in some of the instances, the research analysts traded in a manner contrary to their own recommendations.
During the inspection, the research analyst gave wrong declarations of thier personal trading. Hence did not act honestly as well as did not make appropriate disclosures.
#7 – Failure to make disclosures in the research reports and public appearances
As per Regulation 19 of the RA regulations, a research analyst or research entity shall disclose all material information about itself including its business activity, disciplinary history, the terms and conditions on which it offers research report, details of associates and such other information as is necessary to take an investment decision, including
- Disclosures about ownership and material conflict of interest
- Disclosures about receipt of compensation
- Disclosures in public appearance about receipt of compensation
- Disclosure on whether the research analyst has served as an officer, director or employee of the subject company;
- Disclosure on whether the research analyst or research entity has been engaged in market making activity for the subject company
As per Regulation 21 (1), Research analyst or research entity including its director or employee shall disclose the registration status and details of financial interest in the subject company, if he makes public appearance.
SEBI observed that though few of the requisite disclosures under regulation 19 were made, Trustline failed to make complete disclosures required under each and every provision of the Regulation 19.
SEBI also observed that one of the employees had made various recommendations/trading calls in public appearances on youtube and in regional media. However, he had failed to make the requisite disclosures.
#8 – Failure to obtain SCORES authentication
As per SEBI circular no. CIR/OIAE/1/2014 dated December 18, 2014, all SEBI registered intermediaries are required to obtain SCORES credentials within a period of one month from the date of registration. Failure by any SEBI registered intermediary to obtain the SCORES user ID and password would not only be deemed as non-redressal of investor grievances but also indicate willful avoidance of the same.
SEBI observed that Trustline had also failed to obtain SCORES authentication for RA registration.
Trustline has also failed to put in place a separate grievance redressal system for its RA activities as the same was being handled through the grievance redress mechanism meant for its stock broking activities. There was no separate complaint redressal mechanism related to RA services.
#9 – Failure to conduct appropriate audit
As per Regulation 25(3) Research analyst or research entity shall conduct annual audit in respect of compliance with these regulations from a member of Institute of Chartered Accountants of India or Institute of Company Secretaries of India.
SEBI observed that though Trustline had submitted a report by a Chartered Accountant, the report merely confirmed the compliance in respect of all the aspects covered in the report. The audit report does not mention the details of records relied upon by the auditors for their findings.
Trustline had submitted their response to the Show Cause Notice (SCN) and had also taken corrective measures. The same was reported to SEBI. However some of them were not upto the expectations of the SEBI officer.
WHAT SEBI EXPECTS:
SEBI expected them to follow the regulations in letter and spirit.
Here are the details on how SEBI wants Research Analysts to comply with the regulations.
- Records of rationale for arriving at research recommendations should be maintained for all the recommendations including for commodity derivatives. It is suggested that a proper list of the recommendations provided should be maintained along with the rationales / research reports.
- Records of public appearances of the employees should be maintained. Public appearance includes appearances by the research analysts on YouTube, regional media as well as Twitter.
- Any person who is carrying out RA activities, even though not designated as a RA will fall under the purview of RA regulations and hence has to fulfill the qualification and certification requirements.
- Research Analyst is required to use the term “research analyst” in all its correspondences with its clients including client onboarding / account opening form.
- There should be appropriate internal policies and control procedures governing the dealing and trading of the Research Analyst. The policy should be signed by the authorised signatory and dated (to know when the policy was adopted). Wherever possible, the internal policy should be approved by the management / Board of directors.
- The personal trading restrictions of the employees should be monitored and the internal policy should have a provision for prior approval of the trading activities of the research analysts.
- The research entity as well as the research analysts should not trade contrary to their recommendations.
- Appropriate disclosures should be given by the research analyst and the research entity w.r.t all the provisions of the regulations 19 and 21 of the RA regulations in research reports and public media appearance.
- The research entity should insist the auditor conducting the annual audit should mention details of records relied upon by the auditors for the findings. SEBI in its order mentioned that “taken into consideration the allegation leveled in the SCN the audit undertaken appears to be a box-ticking exercise undertaken to purely be in compliance with the letter of regulation 25(3) and not its spirit.”
Important points for the registered entities which have employed as research analysts:
- Giving recommendations on Twitter is also considered as making public appearances. The entities should monitor the Twitter handle of the research analysts.
- Be careful of what is written in the appointment letters or the employment terms for the research analysts including the designation and various duties.
- If the Twitter handle of the employees does not mention any association with the research entity, SEBI will rely on what is mentioned in the appointment letters. In the case of Trustline, the appointment letter of one of the research analysts mentioned – Any work/ project / assignment handled/ developed by you individually or as part of a group during your employment with the company, will be exclusive property of the company….. SEBI interpreted it as the recommendations given on Twitter were given on behalf of Trustline.
- It is difficult to prove that the recommendations given by the research analysts, during the course of their employment, are given in personal capacity.
- Check what is mentioned in the bio of the social media accounts of the employees.
- The designation of the persons employed does not matter but the job profile matters. Even if the designation of persons is not “Research Analyst” but they are giving “buy / sell / hold recommendations / calls” or involved in preparation or publication of the content of the research report or report directly or indirectly to such a research analyst in connection with research activities, they will be considered as research analysts employed by the research entities. Hence such employees have to fulfill the qualification and certification requirements under Regulation 7 of the RA regulations.
- A research entity is said to have provided the research services irrespective of whether the fee is charged or not.
- The compliance officer should also maintain copies of supporting documents for trading details from CDSL / NSDL. The compliance officer should insist the research analysts give true declarations regarding the transactions executed by them.
This order puts out in detail as to what SEBI expects from Research Analysts. It is definitely not a way out from Investment Advisers. There are no escape routes. Time to take Research Analyst regulations seriously!
To avoid an order, get your house in order.
If you need any guidance on the ongoing compliance of the RA regulation, or want to get the compliance audit done, you can get in touch with me at kruti@cskruti.com
What type of regulations are these? Seems they want to kill those who are providing research. Industry only meant for MF Managers and PMS Managers, peddling gyaan. Elitist society where Equality of opportunity won’t exist. Killing the baby with regulations. In USA hedge fund managers managing billions have lesser regulations. Here for chillar capital, motto is– keep regulating till the guy is dead.
Compliance of regulations is not bad or difficult if the processes are set from the start.
Better surrender your license and looks for other options. Too complicated.