Four consultation papers and several circulars later, Investment Advisers (IAs) have been wondering what does the regulation expect from them!
The actions of several unregistered IAs or stock tip providers have ensured that those operating on a fair basis within the ambit of the regulation, bear the brunt of these changes.
The final regulation based on the most recent consultation paper (CP-4) will be out any time but there is apprehension in IAs mind, specially the individuals. Click here to know more about the CP-4.
Just before this CP-4, on December 27, 2019, SEBI took another step to have control on the conduct of business by IA.
SEBI issued a circular for all investment advisers containing mandatory measures for conduct of all IAs.
Although this circular seemed to be aiming at the IAs who are in the business of providing stock-tips, all RIA (registered investment advisers) have to follow the same.
Here are the highlights:
#1 – No more Free Trials
Free trial is mostly given by stock-tip providers and robo-advisors to prospective clients. Trials are given before completing risk profiling of the client and suitability assessment of the advice and investors act on the advice. To curb this practice, IAs are now prohibited from giving free trials of their products.
For those who want to give trials to prospects, access can be given for short period with refundable fees. However, risk profiling of the client and suitability assessment of the product before giving access to such product is mandatory.
#2 – Part Payment of fees restricted?
RIAs are not allowed to accept part payments (where some part of the fee is paid in advance) for any product/service. By plain reading of the words, this mean RIAs can accept entire fees at one time.
However, in the latest consultation paper, SEBI has mentioned that RIAs can charge fee in advance for 2 quarters. This contradicts the existing measures issued by SEBI. One must wait for the final regulations in this regard.
#3 – Consent on risk profile is must before providing investment advice
RIAs can provide investment advice only after completing the risk profile of the client based on information provided by the client.
In most cases, the clients do not fill the entire risk profile questionnaire, or the questionnaire is filled by the RIA himself. In such cases, the client is unaware of his risk profile.
To make the client aware, SEBI has now mandated RIAs to make sure that complete risk profiling is done, and consent of the client is obtained on the risk profile either through registered email or physical document.
Even an acknowledgement on the email for the risk profile arrived at will be considered as consent. The records of the consent should be kept for audit purpose.
#4 – Mode of acceptance of fees
RIAs can accept fees strictly by way of direct credit into their bank account through NEFT / RTGS / IMPS / UPI or by account payee crossed cheques / demand draft. RIAs can not accept cash deposits.
It seems that receiving fees through any payment gateway channel is also prohibited.
Although this step does not seem necessary, this step is taken by SEBI to bring transparency in dealing with clients.
#5 – Information about complaints
RIAs are now required to display information about the complaints on the homepage of their website / mobile app. SEBI has not clarified what is a “complaint”. It is also not clarified whether only complaints received on SCORES platform of SEBI need to be displayed or complaints received directly too.
The format for information display is as below:
SEBI has also specified the following:
- The information should be displayed on the homepage without scrolling. This means that the information cannot be providing by adding a link on the website.
- The information should be displayed properly using font size of 12 or above
- The information should be made available on monthly basis, within 7 days of end of the previous month. E.g. information on complaints for the month of March 2020 should be displayed on the website before April 7, 2020.
For this, all IAs need to have login credentials for SEBI’s SCORES platform. Click here to know how to get registered on SCORES platform.
Though these measures are issued to strengthen conduct of IAs, SEBI should have given more details, clarifications and examples for better understanding.
Will these measures strengthen conduct of RIA – is a big question. We will have to see how is SEBI going to keep a track of the same.
What SEBI should have done in addition to the measures is make the investors aware of the practices by RIA. Also SEBI should mandate self declaration by RIA for compliance of IA regulations and submission of reports along with audit by professionals.
With the receipt of more and more complaints against investment advisers, mostly stock-tip providers, SEBI seems to have lost focus on the business conduct of other types of RIAs. The same is evident from the latest consultation paper issued by SEBI on IA regulation.
If you are looking for professional assistance in ensuring compliance of the IA regulations of audit services, you can write to me at kruti@cskruti.com.