Sebi's investment advisory guidelines face resistance

Mutual Fund distributors are not allowed to provide incidental or basic investment advice pertaining to MF schemes

United Forum, a forum of national and regional associations of distributors and independent financial advisors (IFAs), has opposed several of the proposed amendments to the Sebi (Investment Advisors) Regulations, 2013.
 
It has said the proposals would put 70-80 per cent of distributors out of business. The Securities and Exchange Board of India (Sebi) had issued a consultation paper last month in this regard, inviting comments by November 4. That deadline has since been extended to November 30.
 
According to the proposed norms, mutual fund (MF) distributors will not be allowed to provide incidental or basic investment advice pertaining to MF schemes unless they register themselves as investment advisers (IAs). United Forum has opposed this. It also wants distributors to be allowed to recommend products, not restrict themselves to describing the products.

 

“There are almost 2,500 MF schemes across multiple categories and there is no standardisation in reporting of data...Historical returns may be reported on a point to point basis, absolute returns, annualised returns or rolling returns... Investors can’t understand all these on their own,” the forum has written to the regulator.
 
Various surveys, it has said, have indicated that Indian investors consider the role of distributors and advice as key to their decision making; they do not have concerns regarding mis-selling and pricing of products. “There is a lot of handholding that investors need for their investments and stopping distributors from playing a meaningful role will be detrimental, as retail (small) investors, especially from B15 (beyond the top 15) cities might not seek advice from registered IAs because of the upfront advisory fees required under the advisory model,” says their note.

 
It wants entities such as brokers or portfolio managers engaged in providing advice to their clients as an auxiliary service to be exempted from registering under the IA regulations. Also, persons providing trading tips, stock recommendations through SMS, e-mail and any other social media should not be asked to first obtain registration as IAs. Restricting of trading tips on social media is akin to a restriction on freedom of speech, the forum has argued.
 
IA services should be allowed to be offered through separately identifiable divisions, rather than separate subsidiaries. “The separate subsidiary requirement may backfire as corporate IAs may set up thinly capitalised subsidiaries, thereby limiting investors’ claims,” says the letter. Even banks, the forum has argued, could be forced to shut their MF distribution business, as they will not be able to distribute these products without an element of incidental advice.