SEBI paper moots demarcation of MF distributor and advisory roles

Securities market regulator SEBI wants distributors of financial products, who earn commissions from mutual funds or insurance companies, to be identified separately from investment advisers, who earn their fees from investors. To this end, the Securities and Exchange Board of India published a consultation paper on Friday, proposing amendments to the SEBI (Investment Advisers) Regulations, 2013.

According to the new proposals, mutual fund distributors will no longer be allowed to provide incidental or basic investment advise on any MF schemes they sell, unless they register separately with SEBI as investment adviser as well. They will be given three years to become advisers and until then, will have to refer to themselves as only “mutual fund distributors” and not as “wealth/financial advisers”. If a distributor becomes a pure adviser instead, “he shall be allowed to receive trail commission for the products already distributed subject to disclosures to the clients. (However), he can undertake fresh business only under a fee-based advisory model.”

Under the existing framework, exemptions that were earlier allowed to those who provided incidental investment advise will no longer hold good, which means stock brokers, chartered accountants and portfolio managers will need to register with SEBI as well according to the new proposals. Additionally, banks, NBFCs or other corporates which also provide investment advise must hive off this business into separate subsidiaries. Also, no individual can provide trading tips or stock-specific recommendations through bulk SMS, emails, blogs or social networking or chatting apps without registering with SEBI first as an investment adviser.

Robo-advisers, which are online algorithm-driven investment advisers, can continue doing business, SEBI proposes, as long as they comply with investment advisory regulations, make sure their automated tools are robust and fit clients’ needs, make full disclosures to clients and that the tools and algorithms are periodically audited. The proposals also lay out the definitions for consideration, the obligations of an investment adviser (making full disclosures on fees, performance, risks) and an advertisement code for advisers trying to win clients over.

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