Sebi asks registered entities to end contracts with unregistered advisors

Markets regulator Sebi on Tuesday provided three months to registered entities and their agents to terminate their existing contracts with unregistered financial advisors.

This is part of Sebi's move to curb unauthorized financial advice and performance claims in the securities market.

This came after Sebi in August amended rules aimed at regulating associations between intermediaries (like stock exchanges, clearing corporations, and depositories) and entities providing financial advice or making performance claims.

The rule restrains intermediaries, their agents, or associated persons from having direct or indirect ties with any entity that provides investment advice or recommendations without being registered or permitted by Sebi or makes performance or return-related claims unless specifically authorized by the regulator to do so.

However, if these interactions occur through specified digital platforms, they will not be subject to these restrictions.

In its circular on Tuesday, Sebi said persons regulated by the Board (including recognised stock exchanges, clearing corporations and depositories), and their agents are advised to terminate their existing contracts, if any, with persons engaged in unauthorized advisory services or performance claims within three months.

It said the framework allows associations through "specified digital platforms," which the regulator will designate based on their ability to implement robust preventive and curative measures. Additionally, Sebi has floated a consultation paper proposing requirements for recognition as "specified digital platforms".

These platforms must demonstrate to Sebi's satisfaction that they can prevent misuse, such as unauthorized advice or misleading performance claims, ensuring investor protection and market integrity.

The regulator clarifies that individuals or entities engaged solely in investor education are exempt from these restrictions. However, they must refrain from offering investment advice or making performance claims related to securities, either directly or indirectly.

In its consultation paper, Sebi proposed requirements for recognition as "specified digital platform (SPD)" recommending such platforms to proactively prevent fraud, impersonation, unauthorized claims, and unregistered entities from operating.

The regulator suggested that specified digital platform to use artificial intelligence or machine learning (AI/ML) tools to identify content or ads related to securities, ensuring the entity is Sebi-registered or permitted, no unauthorized advice, recommendations, or performance claims are made.

The platform should ensure that genuine investor education content is allowed and content does not redirect users to other media such as WhatsApp or Telegram for unauthorized activities.

Also, the platform should share data with the regulator when requested and act on its inputs. It should provide badges to Sebi-registered entities to help users identify authorized participants.

The regulator proposed that only Sebi-registered entities, permitted advertisers, or educational content providers can post securities-related content on the platform.

Additionally, such platforms can remove fraudulent or non-compliant content and penalize offenders.

The Securities and Exchange Board of India (Sebi) has sought comments from the public on the specified digital platform till November 12.