In continuation with earlier post on the recently notified SEBI(Investment Advisers) Regulations, 2013 (“the Regulations”), the following further points are worth noting.
1) The Regulations apply to all Investment Advisers giving investment advice. They are required to register themselves with SEBI.
2) The term investment advice has been defined to cover advice relating to securities and investment products. This covers a very wide range of products. Investment products may also cover even real estate, gold, etc., i.e., non-financial products. It appears from the Scheme of the Regulations though that the intention may not be to cover such non-financial products. However, every form of securities/investment products, including even bank deposits, national savings certificates, company deposits, etc. would be covered, apart from shares, derivatives, insurance products, mutual fund units, etc.
3) The investment advice needs to be rendered for consideration in cash or in kind. It is not clear whether the intention is to cover only those Investment Advisers who accept consideration from their clients. From the wording of the Regulations, it appears that the consideration may flow from any person. If this is not the intention, then it will need clarification since otherwise many persons would inadvertently get covered by the definition of Investment Advisers.
4) A person rendering such investment advice for consideration (in cash or in kind) is an Investment Adviser. However, there are several exclusions.
a) Insurance brokers/agents registered with IRDA are excluded, provided they offer advice solelyin investment products. Same for pension advisers. It is common to see advisers offering advise on a range of products and insurance, pension, etc. are part of such products.
b) Distributors of mutual funds, stock brokers, sub-brokers, etc. are excluded provided that they give investment advice incidental to their respective primary activity.
c) Similarly, professionals like CAs, CSs, ICWAs and lawyers are excluded if they given investment advice incidental to their respective professional service/practice. However, considering the wide definition of investment advice, professionals who specialise in financial advice generally may have to consider whether they are covered.
5) Since the exclusions are specific, any other person who acts as investment adviser, whether full time or part time and whether gives advice generally even incidental to the financial products that he is distributing would be covered. Concern thus arises for persons who act as agents for small savings, company deposits, etc.
6) Considering the fairly broad definition of Investment Advisers and the limited exclusions, it would appear that perhaps lakhs of persons operating in the financial markets as agents and the like may also get covered. However, it appears, from the history of these Regulations that the intention does not seem to cover persons already regulated by other authorities such as IRDA, etc. In particular, the intention may be to cover only those Investment Advisers whose primary or sole business to render investment advice for consideration. This, however, has not been brought out and a clarification is needed.
7) Small investment advisers may face the elaborate requirements of registration and compliance of various requirements particularly cumbersome and costly. The Investment Advisers are required to obtain annual a certificate of compliance of Regulations. There are numerous other requirements/procedures some of which are similar to codes of conducts and some involve heavy documentation.
a) The requirements of disclosure and documentation are so elaborate so as to be unrealistic, even if well intended. KYC documents of each client have to be obtained and kept. Risk profiling and risk assessment of every client has to be maintained in writing. The investment advice provided and rationale for it has to be documented. And so on. These requirements are quite unrealistic and even extraordinary. Even professionals like CAs, lawyers, etc. give various types of professional advice for consideration but they are not required to maintain such records in writing. It may be different if there are a few large clients for whom certain infrequent large transactions are advised on. For small and medium sized clients, this may be meaningless and they may end up implementing in a cursory/summary way.
8) If, as expected, a very large number of Investment Advisers are covered and have to apply for registration, it will be a mammoth job for SEBI to register them, to keep track of them and to ensure that they comply with the elaborate requirements. And, as it is quite likely, there will be numerous non-compliances, small and big, and SEBI will have to spend time and energy in taking action. The question will whether such effort will be worth it and effective.
a) There is a strong case for exempting Investment Advisers earning income below a certain limit. Else, assuming that the definitions are broadly applied, thousands of Investment Advisers may simply have to close down shop.
9) There are valid complaints against many Investment Advisers. That they give biased advice to favor products where they get larger commission/fees directly or indirectly, that they take positions conflicting to their advice, that they act negligently without carefully considering what the client needs/risks. And so on. Thus, some sort of regulation was quite overdue. However, it appears that placing such elaborate but often vague requirements/formalities creates disproportionate costs and efforts on one hand but not being able to control such mal practices on the other hand.
10) The requirements of basic qualification and specialized training/qualification are fair and it is obviously a must that only qualified, knowledgeable and trained people enter this field. Though not wholly clear, it appears that apart from the basic qualification, an additional certificate in the finance field is also required. A two year period is given for those who do not have such certification.
11) Body corporates and firms who act as Investment Advisers need to appoint a compliance officer who would be responsible for compliance of the Act, these Regulations, etc.