Sebi proposes norms for regulating investment advisors

In the backdrop of the alleged multi-crore fraud by a Citibank employee, market regulator the Securities and Exchange Board of India (Sebi) today proposed to bar investment advisors from acting as agents for promoting financial products.

The entities, which include banks and fund managers, would have to be registered with a Self Regulatory Organisation (SRO) as investment advisors, said the concept paper on Regulation of Investment Advisor issued by the Sebi.

"No financial incentives/consideration would be received from any person other than investors seeking advice. In case of advice regarding investment in entities related to the investment advisor, adequate disclosures shall be made to investor regarding the relationship," said the paper on which Sebi has invited comments from stakeholders by October 31.

It further said, "the person who interfaces with the customer should declare upfront whether he is a financial advisor or an agent of the manufacturer."

The paper further said that "conflict of interest in the financial product distribution space" due to the dual role played by the distributors raises doubt on their credibility to protect interest of investors.

"This [conflict of interest] is due to the fact that with respect to many financial products, agents receive their payments from two sources: commissions from the manufacturers, and advisory fees or other charges received from the investors," it added.

The paper has proposed that investment advisors, or banks providing such services, should be regulated by an SRO, registered with Sebi.

It also said the advisors should be strictly identified as "investment advisors" and not by names like wealth managers or private bankers. Besides, they should be highly qualified.

"This causes much confusion as to their role and responsibility. Hence the [proposed] regulations will provide that no person can carry on the activity of offering investment advice unless he is registered as an Investment Advisor under the regulations," Sebi said.

Last year, a Rs 461-crore fraud was unearthed at Citibank's Gurgaon branch allegedly engineered by its Global Wealth Manager Shivraj Puri.

Sebi's proposed regulatory framework intends to regulate the activity of providing investment advisory services in various forms by a wide range of entities, like independent financial advisors, banks and distributors.

Duties of an SRO would include registering and setting professional standards for investment advisors.

"While the activity of giving investment advice will be regulated under the proposed framework through an SRO, issues relating to financial products other than securities shall come under the jurisdiction of the respective sectoral regulators...," the paper added.