With an aim to crack its whip on investment advisers possibly indulging in unfair trade practices, watchdog Sebi is putting in place strict norms for them, including putting a ceiling on fees charged by them.

All investment advisers would need to register with Sebi (Securities and Exchange Board of India) after payment of required application and registration fees, while the market regulator eventually wants them to be regulated through an SRO (Self Regulatory Organisation) model.

While the proposals have been approved by Sebi’s board, they could be soon notified by the market regulator, a senior regulatory official said.

As per the proposed norms, the investment advisers would be under strict vigil for any front-running, a phrase used in market parlance for trading in stocks based on prior information about trades to be conducted by a fund manager.

The regulations follow several instances of certain equity research and investment advisory entities, including some overseas firms, issuing negative reports about Indian stocks and they have been accused of unfairly influencing the share prices and charging huge fees for sharing their reports.

To address any conflict of interest, investment advisers would be required to segregate their other businesses from their activity as an investment adviser and disclose all commission and rewards that they receive from their clients.

Also, investment advisers may charge fees subject to the ceiling specified by Sebi.

They would also have to disclose conflicts of interest arising from any association with a product provider, including any material facts that might compromise its objectivity or independence in carrying investment advisory services.

The investment advisers would also have to disclose to the investor its holding or position, if any, in the financial product which is subject matter of recommendation.

If any conflicts of interest cannot be avoided, the investment advisers would have to ensure that its clients are fairly treated and they would be barred from divulging any confidential information about their clients.

They would also have to abide by a Code of Conduct and conduct risks profiling and risk assessment of the investor.

Besides, they would be required to maintain written records relating to investment advisory services for a period of five years and conduct yearly audit in respect of compliance with regulation.

Also, they cannot employ any device or scheme to defraud any client or prospective client.

(This article was published on September 16, 2012)
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