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.

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