Madhura Karanth is a fourth-year student at NALSAR University of Law, Hyderabad
The recent amendment to SEBI (Investment Advisers) Regulations, 2013 passed with the intention of strengthening the regulatory framework for investment advisors (“IAs”) has brought back the focus on SEBI’s continuous efforts towards ensuring a strong investor protection regime coupled with sound corporate governance culture in the securities market arena in the country.
SEBI’s consultation paper (“Paper”) on Review of Regulatory Framework for Investment Advisers is essentially a follow-up on its earlier consultation papers in 2016, 2017 and 2018 regarding scope for reducing conflicts of interests that IAs might present. More often than not, IAs play the dual roles of adviser and distributor of financial products raising serious questions of potential conflict of interest. The paper and the subsequent amendment mainly aims to segregate the aforementioned roles to minimize conflict.
Consultation Paper and the 2020 Amendment
The paper proposes three issues and provides working models to ensure their smooth application. Firstly, it suggests the segregation of advisory and distribution services at the client level. This means that the IA is not barred from providing both services, but a particular client cannot access both services from a single IA. The amendment precludes an individual IA from providing distribution services. The family of such IA cannot provide distribution services either and if it does, the IA is barred from providing advisory services. Non-individual/corporate IAs can perform both roles only through different departments maintaining arm’s length distance between the two roles.
Secondly, it addresses the issue of implementation or execution of advice and the fee charged for the same. While implementation services have been permitted, there is a bar on collecting a fee for the same, either directly or indirectly. Thirdly, a detailed account of disclosure of terms and conditions has been put forth through the paper. It not only demands there to be a stipulated mechanism to disclose such terms and conditions to the clients but also enlists the terms and conditions that are mandatorily required to be provided for, along with what should necessarily come under each of these heads. The amendment, however, has also changed fee requirements and enhanced eligibility criteria for IAs in addition to the three aforementioned proposals.
SEBI and Investor Protection
The amendment in question, as well as the parent regulation, provide a new vertical to investor protection regime that SEBI actively promotes. An investor is protected if he is aware of how to invest, possesses knowledge of the market, there is safety in the market and his grievances have a forum to be redressed. Accordingly, the primary goal of SEBI in investor protection is an investor education and awareness through workshops and programmes. Secondly, SEBI imposes disclosure standards with a view to ensure that every relevant detail regarding investments is available in the domain. Thirdly, there are systems in place to ensure safety in transactions that relate to issue and trading of securities, dematerialization etc. Finally, SEBI has grievance redressal mechanisms with efficient enforcement requirements.
Corporate Governance and more
Each of these measures focus mainly on the investors and the corporate players in the market. Plenty of corporate governance measures have been imposed on corporates to effectuate the second and the third mechanisms mentioned above. However, regulations for IAs mark an important shift while making a statement highlighting their significance that cannot go unnoticed. Investors see IAs as their entry points to the market, in each of the dual roles that IAs engage themselves in. Hence, strengthening regulatory mechanisms for IAs so as to protect investors’ rights and interests deserve much more attention and the amendment is a welcome step in that regard. It may be worthwhile to look at what disclosure and other standards applicable to corporates may be replicated to apply to IAs to have responsible governance mechanisms, in the interest of investor protection.
The opinions expressed herein are those of the author in their personal capacity and are not intended to be construed as legal, financial or investment advice.