The market regulator has once again turned its attention towards separating the distribution of mutual funds and advisory activities carried out by the same individual, partnership or corporate, through a discussion paper floated for public comments. This issue has been weighing on the regulator since 2013, when the investment adviser regulations were notified. The regulator had then succumbed to pressure from lobby groups and created large gaps in the rules that were not in investors’ interest. Despite three discussion papers floated since then to make amends, the regulator has been unable to take the final step in enforcing the separation of the two activities. The current discussion paper proposes a practical solution to the problem that acknowledges the difficulty faced by the investment adviser fraternity. It is hoped that SEBI makes an extra effort to implement the proposals.

According to existing rules, individual and partnership firms registered as investment advisers cannot provide distribution services. Only corporates IAs can offer execution or distribution services through separate division or department. But many individual IAs are circumventing the rules by distributing mutual funds through their family members. Complaints have also been received against corporate RIAs about mis-selling, promising exorbitant returns and so on. The argument put forth by individual RIAs for also carrying on distribution activity is that Indian investors are not willing to pay much for advisory fee, making them rely on distribution commission. SEBI is now seeking to address this conundrum by proposing that all IAs, whether individual or corporate, can also distribute MFs, but there should be segregation at the client level. That is, an IA cannot provide both distribution and advisory service to the same client. The client has to choose whether he wants to avail advisory or distribution service. The segregation has to be done at family level in case of individuals and at group level for corporate investment advisers. This proposal sounds practical since individual RIAs are now legally allowed to distribute funds as well, after they obtain the necessary registrations. This leeway can lead to more investment advisers getting registered with SEBI. The requirement of an annual certificate from an auditor for compliance with these rules is a good idea. SEBI’s proposals on networth requirement, qualification and fee charged by IAs are also welcome.

Another important suggestion in the paper is that RIAs shall advice direct plans only, wherever available. It is also proposed to bar IAs from collecting implementation or referral fee for executing client transactions. The suggestion that RIAs should maintain records of all conversations with clients however sounds onerous. It is quite likely that many distributor groups would attempt to stall the implementation of these rules citing the relatively lax oversight of distribution of insurance products. But SEBI needs to press ahead in order to bring this issue to a closure.

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