Sebi pushes for regulation of investment advisors

Market regulator Sebi has proposed new rules for investment advisors that will require them to be registered with a self-regulatory organisation (SRO) before undertaking such a role.

The proposed framework intends to regulate investment advisory services in various forms including independent financial advisors, banks, distributors and fund managers.

"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 such as action for mis-selling, violation of code of conduct, conflict of interest, etc," the Securities and Exchange Board of India (Sebi) said in a concept paper.

Persons or entities seeking registration as investment advisors shall have to obtain it from the SRO.

"The SRO formed to regulate investment advisors will be registered under the Sebi (Self Regulatory Organisation) Regulations, 2004.

"Its duties would include registering and setting minimum professional standards, including certification of investment advisors, laying down rules and regulations and enforcing those; informing and educating the investing public; setting up and administering a disputes resolution forum for investors and registered entities, etc," Sebi said.

Entities registered with SRO will provide advice on investments in financial products or products that are traded and settled like financial products. The services will include financial advice, financial planning service and actions which would influence an investment decision.
    
Besides, representatives of investment advisors or their intermediaries would also be eligible.
    
"Investment advisors tend to call themselves by varied names viz. Wealth managers, private bankers, etc. This causes much confusion as to their role and responsibility.
    
"Hence the 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," the Sebi paper said.
    
Sebi said that in case of corporate entities, eligibility criteria would include banks providing investment advisory or wealth management services and other entities representing an investment advisor.
    
"A person shall be deemed not to be engaged in the business of providing investment advice, if the advice is solely incidental to some other business or profession and the advice is given only to clients of the person in the course of such other business or profession...," Sebi said, adding that advocates and solicitors, chartered accountants and stock brokers, among others would be in this list.
    
For registration with SRO, individuals would require professional qualification like Chartered Accountancy or MBA or certification from other institutions recognised by Sebi.
    
In case of entities, they would need to maintain a minimum net worth which would be separate from the net worth required for other activities and should have at least two key personnel having the relevant experience exclusively for acting as investment advisors.
    
"The investment advisor will be responsible to maintain confidentiality of the... (and) would be required to do adequate risk profiling of the client before any investment service is provided to them," Sebi said.
    
It said that records in support of every investment recommendation or transaction have to be maintained and retained for at least five years.
    
"Investment advisors shall not accept funds/securities from investors, except the fee for investment advice... Other than sourcing of research reports, no other part of investment advisory activity can be outsourced," the concept paper added.