Persons offering investment advice can do so only after registering
themselves with SEBI and must necessarily use the title “investment
advisor” after obtaining the certificate of registration, SEBI has
said in a concept paper.
SEBI plans to regulate investment advisors through a Self-Regulatory
Organisation which will register, set professional standards, certify,
lay down and enforce rules and regulations for investment advisors.
The SRO would also be responsible for educating investors and
resolving disputes for which it will charge registration and annual
fees.
SEBI said that the SRO will take up disputes and complaints arising
out of investment advisory with the respective regulator, i.e. SEBI
for mutual funds, IRDA for insurance and PFRDA for NPS.
The concept paper is intended to clear the confusion among investors
about wealth managers, private bankers, portfolio managers and the
like by mandating the unilateral use of the term “investment
advisors.”
This would help in resolving two areas of conflict of interest
prevalent today, said SEBI. Distributors play a dual role as the agent
of both the investor and the financial product manufacturer, getting
paid from both ends. Such divided loyalty is not in the best interest
of stakeholders and results in a situation where the distributor is
loyal only to himself; churning investors' portfolios and squeezing
more commission from the manufacturer.
The second is the preference of one manufacturer over the other on the
basis of commission received, leading to a scramble among them.
The proposed regulations would cover individuals, banks (through
investment advisory or wealth management) and any entity which
provides advice regarding investment of funds in financial products or
products that are traded and settled like financial products by any
means – written, oral or any other, benefiting the investor for a fee.
REQUIREMENTS
SEBI said that only professionals (CA/MBA or similar) with at least 10
years' experience, armed with SEBI-approved NISM certification and
fulfilling its fit and proper criteria are eligible for registration
as investment advisors.
In addition they would also be required to maintain a minimum net
worth separately for investment advisory, have at least two key
personnel with the above qualifications, and the necessary
infrastructure to discharge their functions.
SEBI has proposed that all investment advisors will act only in the
best interest of their clients (fiduciary responsibility). In case
they provide other services such as broking, demat etc, they should
maintain a Chinese wall between advisory and other services, and must
disclose them to the client, said SEBI.
They should advice clients only after doing proper risk profiling and
cannot indulge in misleading advertising or use client testimonials,
said SEBI.
Investment advisors cannot receive any money from anyone other than
clients and must clearly indicate fees and charges payable along with
detailed information about their businesses, history, and terms and
conditions for advisory. They are expected to maintain voice and data
records of every investment advice, facts and opinions that they
provide, for at least five years, said SEBI.
They cannot outsource any activity except research reports and shall
not be liable for civil and criminal liability for their advice unless
negligence or mala-fide intention is established.
Portfolio Managers providing only investment advice would need to be
registered as investment advisors after their present registration
expires, said SEBI.
EXEMPTION
Lawyers, chartered accountants, print and electronic media, wire
agencies and financial information service providers such as Thomson
Reuters and Bloomberg, stock brokers and insurance brokers not
charging for their advice are exempt from these regulations.
However SEBI plans to request the respective governing councils of the
above entities to enforce a code of conduct for their constituents.
(This article was published in the Business Line print edition dated
September 27, 2011)
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