Sebi allows exchanges to regulate registered investment advisers (RIAs)
The Securities and Exchange Board of India (SEBI) has decided to allow stock exchanges to set up subsidiaries to regulate the registered investment advisers (RIAs).
The market regulator, in a circular, said that the decision was taken in view of the growing number of RIAs. As of March 19, 2019, the total number of RIAs in the country stood at 1,136.
Existing RIAs say the move can help in controlling the misuse of registered investment advisers model by stock tippers, as there have been a number of cases where clients have been charged exorbitant fees and promised ‘unrealistic’ gains from stock tips.
“This move has primarily come in the light of tip-based mis-spelling. This is a good move for genuine RIAs, as those misleading clients will now be under tighter scrutiny,” said Tarun Biryani, founder of TBNG Capital Advisors.
“Roping in exchange will help, as it was not possible for Sebi alone to control these malpractices on a day-to-day basis,” he added.
Industry participants say they’d need more clarity on whether the exchange’s regulatory role would be restricted to controlling the practice of stock-tip miss-selling or their scope would also include other aspects of registered investment advisers business.
“Exchanges are transaction-focused organisations, which are well-equipped to handle a very large quantity of transactions. Their functions are not advice-based,” said Suresh Sadagopan, founder and principal planner at Ladder7 Financial Advisories.
Advisors say their business is not transaction-based, but fee-based, so an exchange-backed body may not completely understand the various aspects of the registered investment advisers model.
They point out that Sebi’s proposed norms for RIAs have also been found wanting in covering the nuances of financial planning and the related fee structures.
SEBI in a consultation paper had proposed two options for RIAs. They can either charge a maximum fixed fee of Rs 75,000 “per family across all schemes/products/services provided”, or they can charge a maximum of 2.5 per cent of assets under the advisory through a variable-fee model. RIAs say the proposed norms didn’t take into account that several players operate on a hybrid model.
It was also proposed that RIAs can charge an advance fee for up to two quarters.
“The proposed norms seem to have assumed that RIAs will have clients on an ongoing basis. A lot of clients come for a specific engagement, make their payment and then there is no further engagement,” an RIA said.
The stock exchanges will have 30 days to send in their bids to Sebi, explaining how they will be able to discharge the responsibilities and put in place the requisite systems.
The responsibilities of the regulatory body would include supervision of registered investment advisers both on-site and off-site, grievance redressal of clients and IAs, administrative action that would include issuing a warning and referring to Sebi for enforcement action, monitoring activities of RIAs by obtaining periodical reports, submitting periodical reports to Sebi and maintaining of the database of RIAs.
Stock exchanges with a minimum existence of 15 years, a net worth of Rs 200 crore, nation-wide terminals, with investor grievance mechanism including arbitration and investor service centres in at least 20 cities can bid for the proposed regulatory body.
Advisors add that putting experienced RIAs on board of such a regulatory body would help in ensuring that RIAs’ interests are well-represented. “We need to see how many takers are there for the proposed regulatory body,” said an advisor.