Sebi releases guidelines for investment advisors on client segregation
Markets regulator Sebi has come out with detailed guidelines for investment advisers asking them to ensure segregation of advisory and distribution activities at the client level.
Besides, Sebi has fixed a cap on fee that investment advisers (IA) can charge from clients. It has also put in place a procedural framework pertaining to audit and record-keeping.
Under the rules, an individual IA will apply for registration as non-individual investment adviser on onboarding 150 clients and IA will have to enter into an investment advisory agreement with its clients.
In a circular on Wednesday, the regulator said investment advisers will have to ensure compliance with regard to client-level segregation of advisory and distribution activities.
To ensure client-level segregation at the IA’s group level, Sebi said existing clients who wish to take advisory services will not be eligible for availing distribution services within the group/family of IA, and vice versa for those availing advisory services.
It further said a new client will be eligible to avail either advisory or distribution services within the group or family of the investment advisers and this option needs to be made available at the time of boarding.
“IA shall enter into investment advisory agreement with its clients including existing clients latest by April 1, 2021, and submit a report, confirming the same to Sebi latest by June 30, 2021,” the regulator noted.
With regard to fees, Sebi said IAs will charge fees from the clients in either of the two modes — assets under advice (AUA) and fixed fee.
Under the AUA mode, the maximum fees that may be charged will not exceed 2.5 per cent of AUA per annum per client across all services offered by the IA.
In the case of the fixed fee mode, maximum fees that may be charged will not exceed Rs 1.25 lakh per annum per client across all services.
The IA will charge fees from a client under any one mode on an annual basis and the change of mode will be effected only after 12 months of onboarding.
If agreed by the client, IA may charge fees in advance. However, such advance will not exceed fees for two quarters, the regulator said.
With regard to qualification, Sebi said existing individual IAs above 50 years of age as on September 30, 2020, will not be required to comply with the qualification and experience requirements.
However, such IAs will require to hold NISM-accredited certification.
As per the norms, IA must have a post-graduate degree in specific subjects and five years of work experience related to advise in financial products or securities or portfolio management.
An employee associated with investment advice also needs to have such a post-graduate degree and two years of experience.
On registration as non-individual investment adviser, Sebi said an individual IA can apply for registration as non-individual investment adviser on or before reaching 150 clients.
Once the number of clients reaches 150 and till grant of registration as a non-individual IA, Sebi said individual IA will not on-board fresh clients.
However, during the period of examination of application by Sebi, individual IA will continue to service existing clients. In case the IA does not get registration, such IA will continue the advisory activities.
“Existing individual IA having more than 150 clients as on September 30, 2020, shall not on-board fresh clients and such Individual IA shall apply for registration as non-individual IA latest by April 1, 2021,” the regulator noted.
The IA will have to maintain records of interactions with all clients, including prospective clients (prior to on-boarding), where any conversation related to advice has taken place in the form of SMS or telephonic conversation, among others.
Such records will begin with the first interaction with the client and will continue until the completion of advisory services to the client. They need to maintain these records for a period of five years.
However, in the case where a dispute has been raised, such records will be kept till its resolution or if Sebi desires that specific records be preserved, then such records will be kept till further intimation from the regulator.
The deadline for compliance for these guidelines ranges from January 1, 2021, to April 1, 2021, the Securities and Exchange Board of India (Sebi) noted.
Sebi had floated a consultation paper on investment advisers in January and after considering the inputs from public notified the norms in this regard in July and these amended norms will come into force on September 30.
