1.
Objective:
To solicit the comments/views from
public on the consultation paper proposing amendments/clarifications to the
SEBI (Investment Advisers) Regulations, 2013 (hereinafter referred as “IA Regulations”). The objective of the
consultation paper is to specify uniform standards across all the
intermediaries/persons engaged in providing investment advisory services
irrespective of whether such activity is incidental to their primary activity
or not and to address the gaps or overlaps in legal or regulatory standards.
2.
Background:
IA Regulations were notified on
January 21, 2013. The object of the IA Regulations, inter alia, was to lay the
framework for independent financial advisers and to address the conflict of
interest arising due to the dual role played by distributors of financial
products. To address such conflicts, IA Regulations specified that the
investment adviser shall: i. act in a fiduciary capacity towards its clients
and shall disclose all conflicts of interests as and when they arise.
ii. not receive any consideration by way of
remuneration or compensation or in any other form from any person other than
the client being advised, in respect of the underlying products or securities
for which advice is provided.
iii. maintain an arms-length
relationship between its activities as an investment adviser and other
activities.
iv. disclose to its client, any
consideration by way of remuneration or compensation or in any other form
whatsoever, received or receivable by it or any of its associates or
subsidiaries for any distribution or execution services in respect of the
products or securities for which the investment advice is provided to the client.
v. disclose to the client any
actual or potential conflicts of interest arising from any connection to or
association with any issuer of products/ securities, including any material
information or facts that might compromise its objectivity or independence in
the carrying on of investment advisory services.
As on September 28, 2016, 515
investment advisers are registered with SEBI.
3. Recent
Developments:
i.
RBI,
vide circular dated April 21, 2016, issued guidelines on investment advisory
services offered by Banks. It is inter alia stated in the guidelines that the
banks cannot offer investment advisory services departmentally. Accordingly,
banks desirous of offering investment advisory services may do so either
through a separate subsidiary set up for the purpose or one of the existing
subsidiaries after ensuring that there is an arms-length relationship between
the bank and the subsidiary.
ii.
AMFI in consultation with SEBI has clarified
that the data feed of the investors who subscribe to direct plan on the advice
of the investment advisers may be shared with such investment advisers after
taking the explicit written consent of the investors.
iii.
PFRDA had come out with draft regulations for
regulating the retirement advisors (“Retirement Adviser Regulations’) to
provide a framework for eligibility, registration process, fees etc. of
Retirement Adviser and to define the scope of work and responsibility of the
Retirement Adviser. iv. Globally, many regulators of the countries such as
United Kingdom, United States of America, Australia, Canada, etc., are in the
process of moving towards fee based investment advisory model.
4.
Proposals:
The amendments/clarifications
proposed to the IA Regulations are enumerated as under:
4.1
Re-look on the exemption from
registration provided to Mutual Fund Distributors:
4.1.1
Regulation 4(d) of
the IA Regulations, inter alia, provides exemption from registration as an
investment adviser to any distributor of mutual funds, who is a member of a
self-regulatory organisation recognised by SEBI or is registered with an
association of asset management companies of mutual funds, providing any
investment advice to its clients incidental to its primary activity.
4.1.2
Under the existing
framework, a mutual fund distributor can sell mutual fund products and also
provide incidental or basic advice on mutual fund products Page 4 of 30 and can
also help in executing the transactions. Such distributors are required to
conduct risk profiling and comply with the requirement of appropriateness of
the product. Distributors are getting the commission from the fund houses i.e.
AMCs and additionally can also charge execution/advisory fee to the client.
4.1.3
In terms of IA
Regulations, investment advisers are not allowed to sell any product and/or to
provide execution services. Only corporate entities registered as investment
adviser can offer execution or distribution services, subject to the condition
that the investment advisory services are offered through separate identifiable
division or department. Such entities are required to keep their investment
advisory services clearly segregated from other activities and shall be
required to maintain arms-length relationship between their activity as an
investment adviser and other activities. Further, investment adviser can obtain
consideration/fee from the client being advised only and is required to comply
with the higher requirements than that of distributors such as fiduciary
obligation, maintenance of records, etc.
4.1.4
In order to have a
level playing field in respect of investment advisory services offered on
mutual fund products, it is proposed that:
a) Mutual Fund distributors shall not be allowed to
provide incidental or basic investment advice in respect of mutual fund
products. If they want to engage themselves in providing incidental or basic
investment advisory services on mutual fund products, they need to register
themselves as an investment adviser under IA Regulations. A period of three
years shall be provided for those distributors who seek to migrate as an
investment adviser to enable them to obtain necessary certification and to
comply with other requirements specified in IA Regulations to act as an
investment adviser.
b) Many persons engaged as
distributors or agents call themselves by varied names such as 'independent
financial adviser’ or ‘wealth adviser’. This creates confusion in the minds of
the investors. In order to avoid such confusion as to their role and
responsibility, it is proposed that no person shall be allowed to use the name
'independent financial adviser’ or ‘wealth adviser’ unless he obtains
registration from SEBI as an investment adviser. Accordingly, all the persons
including existing mutual fund distributors who are using the nomenclature as
independent financial advisers, wealth adviser, etc. shall comply with
aforesaid requirement of changing the nomenclature within a period of three years.
c) The person who seeks to continue to
engage in the distribution of mutual fund products shall use the nomenclature
as ‘Mutual Fund Distributor’. Such person shall not be allowed to provide basic
or incidental advice in respect of mutual fund products except describing the
product specification without recommending any particular product.
d) The mutual fund distributors who
want to shift from commission based model to fee based advisory model shall be
required to register as an investment adviser under IA Regulations. They shall
be allowed to receive trail commission for the products already distributed
subject to disclosures to the clients. They shall undertake fresh business only
under fee based advisory model from the date of their registration as an
investment adviser and shall receive consideration or fee from the client being
advised only in respect of mutual fund products.
4.2 Re-look on the exemptions from
registration provided to certain persons engaged in providing investment advice:
4.2.1
Under the existing
framework, exemptions from registration as an investment adviser have been
granted to various persons under Regulation 4 of IA Regulations, such as any
person giving incidental advice to their clients, stock brokers, portfolio
managers, chartered accountants, company secretaries, etc.
4.2.2
In order to have
uniform standards across all the intermediaries/persons engaged in providing
investment advisory services, it is proposed that:
a) The registration under IA
Regulations shall be mandatory for all the persons who, for consideration, are
engaged in the business of providing investment advice in respect of securities
or investment products, irrespective of whether such activity is ancillary to
their primary activity or not.
b) All the persons engaged in
financial planning services shall mandatorily be required to register themselves
as investment adviser.
c) Exemption shall be applicable only
to the persons carrying out investment advisory activities which are permitted
under any other regulations specified by SEBI such as merchant bankers
registered with SEBI can render corporate advisory services, etc., and to the
persons providing advice only on insurance products regulated by IRDA, pension
products regulated by PFRDA, etc.
4.3 Investment advisory services through a
separate subsidiary:
4.3.1
In terms of
Regulation 22 of IA Regulations, banks, NBFCs and body corporates providing
investment advisory services to their clients shall keep their investment
advisory services segregated from such activities. Such entities are allowed to
offer investment advisory services only through separately identifiable
departments or divisions (SIDDs). The distribution or execution services can
only be offered subject to the following:
(a) The client shall not be under any
obligation to avail the distribution or execution services offered by the
investment adviser.
(b) The investment adviser shall
maintain arms-length relationship between its activities as investment adviser
and distribution or execution services.
(c) All fees and charges paid to
distribution or execution service providers by the client shall be paid
directly to the service providers and not through the investment adviser.
4.3.2
Under the existing
framework, individuals registered as investment adviser are not allowed to
provide distribution, referral or execution services as it is not practically
possible for them to maintain segregation between advisory activities and other
activities.
4.3.3
RBI has issued
circular dated April 28, 2016 on investment advisory services offered by Banks.
It is, inter alia, stated in the guidelines that banks desirous of offering
investment advisory services may do so either through a separate subsidiary set
up for the purpose or through one of the existing subsidiaries after ensuring
that there is an arms-length relationship between the bank and the subsidiary.
4.3.4
In order to
address the concerns arising from the conflict of interest in an effective
manner, it is proposed that, the investment advisory services shall not be
allowed to be offered through separate division or department. Investment
advisory services are required to be offered only through separate subsidiary.
Further, a time period of three years is proposed to be provided for existing
entities offering investment advisory services through separate department or division
to set up a separate subsidiary.
4.4 Clarification in respect of investment
product and advice in electronic/ broadcasting media:
4.4.1 In terms of Regulation 2(i) of IA
Regulations, “investment advice” means advice relating to investing in, purchasing,
selling or otherwise dealing in securities or investment products, and advice
on investment portfolio containing securities or investment products, whether
written, oral or through any other means of communication for the benefit of
the client and shall include financial planning: Provided that investment
advice given through newspaper, magazines, any electronic or broadcasting or
telecommunications medium, which is widely available to the public shall not be
considered as investment advice for the purpose of IA Regulations.
4.4.2 However, the term 'investment
products' has not been defined in the IA regulations.
4.4.3
It is, therefore,
proposed to define the term investment product as, “Investment products shall
include all financial instruments that are regulated by any financial sector
regulator in India. However, advice exclusively on products in non-securities
market which are regulated by sectoral regulators shall be outside the scope of
the IA regulations".
4.4.4 It is also proposed to clarify
that the persons providing investment advice in any electronic or broadcasting
or telecommunications medium such as newspaper, magazines, etc. which is
available to the public in general shall have to comply with provisions
pertaining to recommendations in public media as specified in Regulation 21 of
SEBI (Research Analysts) Regulations, 2014.
4.4.5
Advising the
clients after enrolling/getting the clients registered/subscribed on any public
media platform, shall be considered as engaging in providing investment
advisory services and accordingly shall be required to comply with the IA
Regulations.
4.5 Restriction on providing trading tips
4.5.1
It is observed
that, many persons are engaged in providing/sending the trading tips/securities
specific recommendations, etc., using various electronic modes such as bulk
short message services (SMSs), e-mails, blogs, internet or through any other
social networking media such as WhatsApp, ChatOn, WeChat, Twitter, Facebook,
etc. The general public is getting attracted or lured by such trading tips,
securities specific recommendations and their investment decisions are being
influenced by such messages which solicit investments and/ or promise
unrealistic returns in the securities market.
4.5.2
In order to curb
such practice of providing trading tips/messages containing buy/sell/hold
recommendations on securities, it is proposed that:
a) No person shall be allowed to
provide trading tips, stock specific recommendations to the general public
through short message services (SMSs), email, telephonic calls, etc. unless
such persons obtain registration as an Investment Adviser or are specifically
exempted from obtaining registration.
b) No person shall be allowed to
provide trading tips, stock specific recommendations to the general public
through any other social networking media such as WhatsApp, ChatOn, WeChat,
Twitter, Facebook, etc. unless such persons obtain registration as an
Investment Adviser or are specifically exempted from obtaining registration.
c) A provision or clause shall be
added in the SEBI (Prohibition of Fraudulent and Unfair Trade Practices
Relating to Securities Market) Regulations, 2003 {PFUTP Regulations} to
restrict such activities by making necessary amendments to PFTUP Regulations.
4.6 Restriction on offering or
organising schemes/competitions/games related to securities market:
4.6.1
It is observed
that various entities are offering schemes/competitions/ games/leagues, etc.
related to securities market through various modes and/or soliciting public
participation thereon. Such schemes/competitions/ games/leagues, etc. are
generally based on predicting the price movement of securities and are neither
approved nor endorsed by SEBI. There is no recourse available to investors from
SEBI with regard to loss in competition, etc.
4.6.2
The entities
offering such schemes may have vested interest and there is no regulatory
obligation on them. In absence of transparency and authenticity in the process
being followed, there is a scope for general public getting attracted or lured
by such schemes/competitions/games/leagues, etc. The general public may also
follow such offerings presuming that entities/ participants possess expertise
in predicting securities market or in securities. Further, there is no
obligation on the organizer :
i. to disclose the actual or potential conflicts of
interest to the general public, including any material information or facts
that might compromise its objectivity or independence.
ii. to ensure that the general public
has necessary experience and knowledge to understand the nature and risks
involved in the offering.
iii. to ensure that the offering is
based on the risk tolerance of the general public.
iv. to ensure the suitability of the
offerings to the general public.
v. to take responsibility of any loss
to the general public and for the results obtained.
4.6.3
In order to
protect the interest of the investors in the securities market and to curb such
practice of offering schemes/competitions/games/leagues, etc, it is proposed
that:
a) No person shall organize or offer
any scheme/competition/game/ league on securities or related to securities
market.
b) A provision or clause shall be
added in the SEBI (Prohibition of Fraudulent and Unfair Trade Practices
Relating to Securities Market) Regulations, 2003 {PFUTP Regulations}, to
restrict such activities by making necessary amendments to PFTUP Regulations.
4.7 Clarification in respect of receipt of
consideration:
4.7.1
In terms of IA
Regulations, “investment adviser” means any person, who for consideration, is
engaged in the business of providing investment advice to clients or other
persons or group of persons and includes any person who holds out himself as an
investment adviser, by whatever name called.
4.7.2
The term
consideration is being misinterpreted. The persons engaged in providing
investment advisory services without obtaining consideration from the clients
directly are of the view that their activity does not fall under the purview of
IA Regulations, as they are not taking any consideration from the client being
advised.
4.7.3
It is proposed to
clarify that consideration covers all forms of remuneration or compensation
including the receipt of any economic benefit, whether in the form of an
advisory fee, some other fee relating to the total services rendered,
commission received or receivable by an investment adviser or any of its
associates or subsidiaries either directly or indirectly in respect of the
underlying products or securities for which advice is being provided.
4.8 Clarity between the activities of investment
adviser and research analyst:
4.8.1
SEBI (Research
Analysts) Regulations, 2014 (“RA Regulations”) were notified on September 01,
2014 and came into effect from December 01, 2014.
4.8.2
In terms of RA
Regulations, “research analyst” means a person who is primarily responsible
for, and any associated person who reports directly or indirectly to such a
research analyst in connection with, preparation and/or publication of
substance of research report or who provides research report or who makes
'buy/sell/hold’ recommendation of a security or give price target of a security
or offers an opinion concerning public offer or securities that are listed or
to be listed and are traded or to be traded in a Indian stock exchange whether
or not any such person has the job title of "research analyst" and
includes any other entities engaged in issuance of research reports or research
analysis.
4.8.3
The RA Regulations
aimed at specifying the requirements to foster objectivity and transparency in
research so that investors get more reliable and useful information for taking
informed decisions and promoting reliable research that reflects the
independent and unbiased view of research analysts.
4.8.4
It is observed
that many persons are getting themselves registered as research analyst instead
of investment adviser in order to avoid various compliance requirements
specified in IA Regulations such as suitability of the recommendation, risk
profiling, etc. They are providing stock specific recommendations and/or
research services to investors through different subscription packages such as
mid cap, small cap, sector specific research. In such cases, they are sending recommendations
only through SMSs or e-mails and are not sending the research report with
disclosures as specified in RA Regulations to the clients. The responsibility
to choose the appropriate package lies with the subscriber/client. It is
difficult for retail investors to understand whether the said subscription
package is suitable for them and whether it is in their best interest.
4.8.5
In order to
provide clarity with regard to the research services provided by research
analyst or research entity, it is proposed that:
a) Research Analysts or research
entity shall provide the research report to all class of clients at the same
time. A research report shall not be made available selectively to internal
trading personnel or a particular client or class of clients in advance of
other clients.
b) Investors, either directly or with
the help of registered investment adviser, can take an informed decision
whether the recommendations given in the research report are suitable for
his/her risk profile.
c) Research Analysts providing
research services to retail clients for a separate fee through various packages
shall act in the best interests of the clients and shall also ensure that the
research service offered to the investor is based on overall financial
situation and investment objectives of the client. They shall act in fiduciary
capacity and shall comply with the requirements specified in Chapter III of IA
Regulations.
d) The research services offered by
registered research entities shall be considered as incidental to their primary
activity when there is no separate fee or consideration being charged from
client.
e) Making ‘buy/sell/hold’
recommendation on a security by providing entire research report, shall
continue to be regulated under RA Regulations.
4.9 Applicability of risk profiling and
suitability requirement for non-individual investors:
4.9.1
In terms of IA
Regulations, it is mandatory to conduct risk profiling for all category of
clients. The current provisions do not differentiate between retail individual
investors and non-individual investors such as corporate, institutional, etc.
It is difficult to comply with risk profiling requirements in case of
non-individual investors, because of the following reasons:
i. Some of the prescribed factors for
risk profiling may not be applicable to non-individual investors
ii. Assessment of a non-individual
investor’s ability to accept the risk of loss and ability to absorb such loss
requires specialized skills beyond the core skills of Investment Advisors and
accordingly may not be implemented with the rigour desired. Moreover such
assessment is typically undertaken by the management of non-individual entity.
iii. A non-individual client cannot be
administered a psychometric assessment of risk tolerance.
4.9.2
It is, therefore,
proposed that assessment of risk profile and suitability of the advice being
provided is mandatory for individual investors. For non-individual investors
such as institutional/corporate clients, risk profiling and suitability of the
advice being provided shall be mandatory only when the investment advice is
related to complex financial products such as investment in derivatives,
complex structured products, etc.
4.10
Clarity on the compliance audit
requirement
4.10.1
In terms of
Regulation 19 (3) of IA Regulations, an investment adviser shall conduct yearly
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.
4.10.2 In order to provide clarity in
respect of compliance audit requirement, it is proposed that the compliance
audit shall be completed within 3 months after the end of financial year and
adverse observances or comments, if any, shall be brought to the notice of
SEBI.
4.11 Clarity on mode of acceptance of fee:
4.11.1
In terms of IA
Regulations, investment adviser shall ensure that fees charged to the clients
is fair and reasonable. IA Regulations do not specify the mode of payment of
fee. It is observed that many investment advisers are receiving advisory fee in
the form of cash deposit.
4.11.2 It is, therefore, proposed that
an investment adviser shall accept fees strictly by account payee crossed
cheque / demand draft or by way of direct credit into the bank account through
NEFT/ RTGS/IMPS or any other mode allowed by RBI.
4.12 Requirement of providing ‘Rights and
Obligations’ document to the clients
4.12.1
Under the existing
framework, investment advisers are required to maintain copies of agreements
with clients, if any. However, entering into agreement or providing any
document clearly specifying the terms and conditions of the advisory services
offered is not mandatory.
4.12.2 In order to clearly define the
terms and conditions of the service, it is proposed that an investment adviser
shall, at least two days prior to onboarding the clients, provide ‘Rights and
Obligations’ document to the clients stating the interse relationship and terms
and conditions of investment advisory services offered, which shall be binding
on investment adviser and its clients. The ‘Rights and Obligations’ document
shall, inter alia, contain the following:
a.
General Obligations of the Investment Adviser:
i. The investment adviser shall act
in a fiduciary capacity towards its clients and shall disclose all conflicts of
interests as and when they arise;
ii. The investment adviser shall
provide suitable investment advice to the client which is in best interest of
the client after assessing risk profile of the client;
iii. The investment adviser shall
disclose the following information /details to the client before accepting
advisory fee from the client:
a.
Scope of services to be provided by the investment adviser subject to the
activities permitted under IA Regulations;
b.
type of instruments for which advice is proposed to be provided;
c.
tenure of the services;
d.
fees payable to the investment adviser and the quantum and manner thereof;
e.
Disclosure on performance fee, if any;
f.
risks involved;
g. liabilities
and obligations relating to advisory services;
h.
Disciplinary history;
i.
Settlement of grievances/disputes and provision for arbitration;
j.
any other information relevant to IA Regulations.
iv.
The investment
adviser shall clearly and concisely state the terms and conditions of
investment advisory services being provided for easy understanding of the
potential client.
v.
The investment
adviser shall charge an agreed fee from the clients for rendering investment
advisory services without guaranteeing or assuring, either directly or
indirectly, any return.
vi.
The ‘Rights and
Obligations’ document shall contain the following risk factors:
a.
investments in securities are subject to market risks and there is no assurance
or guarantee that the objective of the investments will be achieved.
b.
past performance of the investment adviser does not indicate its future
performance.
vii.
The investment
adviser shall obtain an acknowledgement from the client that he has read and
understood the terms and conditions of the advisory services and fee structure.
b.
Dispute Resolution
i.
The investment
adviser shall provide the client with the relevant contact details of the
designated person who is responsible for dispute resolution including the name,
telephone number and e-mail id.
ii. Details of the SCORES URL may
also be provided for lodging complaint with SEBI.
iii.
The investment
adviser shall co-operate in redressing grievances of the client in respect of
advisory services.
iv. The client and the investment
adviser shall refer any claims and/or disputes, to arbitration in accordance
with the Arbitration and Conciliation Act, 1996.
c.
Termination of Relationship
i.
The relationship
between the investment adviser and the client shall be terminated if the
registration as an investment adviser is cancelled by SEBI for any reason
including voluntary surrender of registration, death, expulsion, etc.
ii.
The investment
adviser and the client shall be entitled to terminate the relationship between
them after giving notice in writing of not less than one month to the other
party. Notwithstanding any such termination, all rights, liabilities and
obligations of the parties arising out of or in respect of transactions entered
into prior to the termination of this relationship shall continue to subsist
and vest in/be binding on the respective parties or his/its respective heirs,
executors, administrators, legal representatives or successors, as the case may
be.
iii.
In case the
clients are not satisfied with the services being provided by the investment
adviser and want to terminate/ stop the advisory services or the investor
adviser is unable to provide the advisory services, either party shall have a
right to terminate the advisory relationship at any time subject to refund of
the proportionate advisory fee. The investment adviser can add additional
clauses in the ‘Rights and Obligations’ document which are not in contravention
with the aforesaid clauses and provisions and circulars issued under IA
regulations.
4.13 Advertisement Code:
4.13.1
Under the existing
framework, there are no guidelines to be followed by any person including
investment advisors while issuing advertisements. The advertisements,
generally, solicit investments and/ or promise unrealistic returns in the
securities market and may attract the general public and/or influence their
investment decisions.
4.13.2
It is proposed
that the following advertisement code shall be followed by any person including
investment adviser:
a.
An advertisement
issued for investor solicitation and/or motivating investors to trade or invest
in the securities or in securities related market shall not contain any untrue
statement of a material fact or is otherwise false or misleading.
b.
An advertisement
shall be truthful, fair and clear and shall not contain any statement, promise
or forecast which is untrue or misleading. An advertisement shall be considered
to be misleading, if it contains:-
i.
Statements made about the performance or activities of the advertiser in the
absence of necessary explanatory or qualifying statements, which may give an
exaggerated picture of the performance or activities, than what it really is.
ii.
An inaccurate portrayal of the past performance or portrayal in a manner which
implies that past gains or income will be repeated in future.
c.
No person shall
circulate or distribute an advertisement that:
i.
Refers to any kind of performance assurance or guarantee.
ii.
Refers to any testimonial about the services;
iii.
Refers to past specific recommendations, which were or would have been
profitable to any person, except under specified circumstances;
iv.
Represents that any graph, chart, formula or other device can, in and of
itself, be used to determine which securities to buy or sell or when to buy or
sell them, without disclosing the limitations thereof and the difficulties with
respect to its use; or
v.
Refers to any report, analysis, or service as free, unless it actually is free
and without condition or obligation.
vi.
Contains information, the accuracy of which is dependent on assumptions.
d.
The advertisement
shall not be so designed in content and format or in print as to be likely to
be misunderstood, or likely to disguise the significance of any statement.
Advertisement shall not contain statements which directly or by implication or
by omission mislead the investor.
e.
As the investors
may not be sophisticated in legal or financial matters, care shall be taken
that the advertisement is set forth in a clear, concise and understandable
manner. Extensive use of technical or legal terminology or complex language and
the inclusion of excessive details which may detract the investors shall be
avoided.
f. No person shall be allowed to
provide trading tips, stock specific recommendations to the general public
through short message services (SMSs), email, telephonic calls, etc. unless
such persons obtain registration as an Investment Adviser or is specifically
exempted from obtaining registration.
g.
No person shall be
allowed to provide trading tips, stock specific recommendations to the general
public through any other social networking media such as WhatsApp, ChatOn,
WeChat, Twitter, Facebook, etc. unless such persons obtain registration as an
Investment Adviser or is specifically exempted from obtaining registration.
h.
No person shall
organize or offer any scheme/competition/game/league on securities or related
to securities market.
i. The copy of advertisement shall
be retained for a period of five years.
4.14 Display of details on website
4.14.1
It is observed
that many investment advisers are providing investment advisory services
through websites without disclosing their details in a proper manner and
thereby creating confusion to the investors with regard to authenticity of
their registration.
4.14.2
It is, therefore,
proposed that all investment advisers shall display more prominently their name
as registered with SEBI, registration number, validity of registration, own
logo, if any, and complete address with telephone numbers on its portal /web
site, if any, notice / display boards, advertisements, publications, know your
client forms, client agreements and correspondences with the clients.
4.15 Restriction on providing free trial
trading tips.
4.15.1
It is observed
that many investment advisers are engaged in providing free trial trading trips
for two to three days to prospective clients without considering whether such
advice is suitable to them.
4.15.2
Such free trial services
are being provided to the prospective clients without any thorough analysis of
their needs and without considering the risk profile of the client and
suitability of the product and the same may not be in their best interest.
4.15.3
In order to curb
the practice of providing free trial trading tips, it is proposed that
investment adviser shall not be allowed to provide free trial of trading tips
to prospective clients.
4.16 Online Investment Advisory Services and
Use of Automated Tools
4.16.1
Robo advisors are
essentially wealth management companies providing an automated support for all
financial advisory services without any human intervention. Be it trading,
investment, portfolio rebalancing or tax saving, the robo advisors can help
investors without any human interference. It works with a pre-defined algorithm
and analytics, and calculates the best returns and plans for each individual as
per his requirements and preferences.
4.16.2
In the United
States of America, they are regulated just like independent advisers who set up
offices and meet clients on a regular basis - they typically register with the
U.S. Securities and Exchange Commission and are deemed "fiduciaries"
who must put their clients' interests above their own. In India, automated
financial advisory services are provided by some companies mainly assisting
mutual fund investors in designing their portfolio.
4.16.3
Further, IOSCO has
published a report on the IOSCO Social Media and Automation of Advice Tools
Surveys. It is inter alia stated in the said report that:
i. From an intermediary’s
perspective, providing customers advice through an automated means presents an
opportunity to formulate and deliver advice in a cost effective way.
ii. There is a spectrum of
Internet-based automated investment selection tools being used today. At a
basic level, there are simple financial planning models that are offered on
intermediaries’ web-sites. A second level of tools provides a list of
securities, investment funds or model portfolios that may be considered low,
medium, or high risk for investors to choose from based on the customer’s risk
appetite but without detailed information about the individual customer. A
third level of tools allows an intermediary or customer to indicate an investment
goal and input personalized investor information such as age, financial
condition, and risk tolerance and run simulations to estimate the probability
the customer will meet his/her objective with their current portfolio. Many of
these tools then produce a recommended asset allocation (e.g., 50% large cap,
25% small cap, 25% bonds) to address investment allocations. More sophisticated
tools may then generate either a more general or specific list of securities or
model Page 26 of 30 portfolios that a market intermediary could recommend or
that the investor could choose to buy to meet his/her investment goal. In
summary, there are a wide variety of automated tools available today, and it is
reasonable to expect more in the future.
iii. Some intermediaries generally use
automated tools to assess a customer’s profile before making investment
recommendations, including assisting with suitability and know your customer
requirements. Accordingly, a firm’s automated tools typically take into account
a wide variety of factors including a customer’s age, income, educational
level, time horizon, investing experience, risk tolerance, investment
objectives and current assets. Some intermediaries use automated tools for,
among other things, portfolio margining, surveillance and monitoring of
intermediaries’ interactions with customers, and providing an objective and
consistent approach to customer interactions.
4.16.4
Under IA
Regulations, there is no express prohibition for use of automated advice tools
by SEBI registered investment advisers. The risk profiling of the investor is
mandatory and all investments on which investment advice is provided shall be
appropriate to the risk profile of the client. IA regulations have also
specified that where tools are used for risk profiling, it should be ensured
that the tools are fit for the purpose and any limitations are identified and
mitigated. The records pertaining to risk profiling and risk assessment of the
client and suitability assessment of the advice being provided shall have to be
maintained by the investment adviser for a period of five years.
4.16.5 It is proposed that the
investment advisers providing online investment advisory services using
automated tools, shall ensure the following compliance requirements in addition
to the compliance with the existing provisions of IA Regulations:
i.
ensuring that the automated tools used are fit for the purpose;
ii.
robust systems and controls to be in place to ensure that any advice made using
the tool is in the best interest of the client and suitable for the clients;
iii.
automated tool is to be used only for the target clients, for which it is
designed;
iv.
disclosure to the clients in relation to how the tool works and its limitations
of the outputs it generates;
v.
comprehensive system audit requirements are put in place;
vi.
Investment adviser using the tool shall be held responsible for the advice;
vii.
The automated tools used by the advisers shall also be subject to audit and
inspection.
4.17 Recognition to Chartered Financial Analyst
Charter Programfrom CFA Institute:
4.17.1
In terms of
Regulation 7 (1) of IA regulations, an individual registered as an investment
adviser under IA Regulations and partners and representatives of an investment
adviser registered under these regulations offering investment advice shall
have the following minimum qualifications, at all times:
(a)
A professional qualification or post-graduate degree or post graduate diploma
in finance, accountancy, business management, commerce, economics, capital
market, banking, insurance or actuarial science from a university or an
institution recognized by the central government or any state government or a
recognised foreign university or institution or association.
(b)
A graduate in any discipline with an experience of at least five years in
activities relating to advice in financial products or securities or fund or
asset or portfolio management.
4.17.2
In terms of
Regulation 7 (2) of IA regulations, an individual registered as an investment
adviser and partners and representatives of investment advisers registered
under IA 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:
(a)
from NISM; or
(b)
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.
4.17.3
In this regard,
NISM has launched the following certification examinations: i. NISM-
Series-X-A: Investment Adviser (Level 1) Certification Examination ii.
NISM-Series-X-B: Investment Adviser (Level 2) Certification Examination
4.17.4
Further, NISM has
accredited the following certification examinations:
i.
Chartered Wealth Manager (CWM) by American Academy of Financial Management
India Pvt. Ltd.
ii.
Certified Financial Planner (CFP) by Financial Planning Standards Board India
iii.
International Certificate in Wealth & Investment Management (India)
Certification by Chartered Institute for Securities and Investment.
iv.
Wealth Management Certification (Advance Level) by Centre for Investment
Education and Learning Pvt. Ltd.
4.17.5
CFA Institute has
requested SEBI to recognize its Chartered Financial Analyst (CFA) certification
program as professional qualification under IA Regulations. It is, inter alia,
stated that, Chartered Financial Analyst (CFA) program has global recognition.
CFA institute is a global association of investment professionals. Further, CFA
program has been recognised by many regulators across the world including The
Unites States of America, Australia, Canada, Hongkong, etc.
4.17.6
It is proposed
that:
a)
CFA Institute’s CFA charter program shall be considered as professional
qualification under Regulation 7(1) (a) of IA regulations.
b)
The individuals and representatives of firms who hold Chartered Financial
Analyst charter from CFA Institute shall not be required to obtain certification
from either NISM or from its accredited institutions.
5. Public Comments In light of the
above, public comments are invited on the proposals contained in the
consultation paper.
Issued On: October 07, 2016
No comments:
Post a Comment