The earlier notification by SEBI introducing the framework for SEBI (Investment Advisors) (Amendment) Regulations, 2020 dated 3 July 2020 left many questions unanswered of the RIA’s which drew many speculations and interpretations. Our article has been divided into six sections mentioned below:
- Segregation at client level for distribution and advisory
- Agreement between IA and the client (Considerations & Contents)
- Fee to be charged by IA to the client
- Registration as a Non-individual Investment Advisor
- Maintenance of records & Audit
- Risk profiling and display of details on website
IMPORTANT DATES TO CONSIDER
These guidelines shall come into force from 30 September 2020. Further, timelines specific to the regulations specified have been stated in the table below:
| Implementation of the respective regulations | |
| Before 01 April 2021 | Before 01 January 2021 |
| Client level segregation between distribution and IA clients | Maintenance of all the records of communications with client |
| Considerations & Contents of Agreements | Risk profiling and suitability |
| Fee to be charged to the client | Display of details on the website |
| Registration as non-individual if more than 150 clients as on 30 September 2020 |
Other due dates to be considered under the regulations
| Particulars | Date (Comply before) |
| Submission of the report on the agreement implementation | 30 June 2021 |
| Qualifications & certification requirements | 3 years for existing IA’s |
| Reporting of adverse finding in audit report with action taken from the FY 2020-21 audit | 30 days from audit report or 31 October whichever is earlier |
| Reporting by Individual IA having more than 150 clients as on 30 Sep 2020 file report with SEBI in required format | 15 October 2020 |
| Particulars | Points to consider in the Guidelines |
| Segregation at client level for distribution and advisory | Important points to note: Where existing clients are provided both, distribution & IA services, option to be given for continuing with any one service to clientDiscretion given to the clients to keep holding such assets prior to such applicability of selection between advisory/ distributionPAN to be considered for keeping control of clients for such segregation. Family of the client to be considered as a single control recordIA to advice only direct plans, wherever available (Emphasis supplied) Additional Compliance: Obtain an annual declaration from the client for having the information on dependent family membersObtain annual certificate from auditor/ statutory auditor for client level segregation Action points: IA’s offering both distribution and IA services should segregate the clients by giving them option and obtain relevant declaration |
| Agreement between IA and the client (Considerations & Contents) | Important points to note: Terms & Conditions have been specified for the purpose of inclusion in the IA agreement with the clientNo advice to be provided or fee to be charged until the agreement is signed with the client and copy delivered to the client. Now a question in this scenario arises whether digital modes of signing would be considered as valid when it has been specified that the agreement to be signed and delivered to the client. Answer: In our view, the intent of this is to have the client agreed to the terms as stated by the IA in the agreement and delivering a copy of the same to the clients knowledge. The modes of acceptance of a valid contract/ agreement should include the way of digital signing like by way of ‘digital signature’ and having an email of the same delivered to the registered email ID. We have also seen lately many Fintech driven companies follow the process of e-signatures followed by OTP verification where the agreements are integrated and signed with the phone number or AADHAR number linked phone number, which means that the client has given his consent, which is also considered as a valid agreement in certain situations. However, one needs to verify the process before implementing the same whether the process would be considered as valid in the eyes of law depending upon the stakes involved. All these agreements have to be done and executed with the existing clients by 01 April 2021. Additional Compliances: A report confirming that all the agreements have been done by the format and per the requirements of the regulations of IA needs to be submitted to SEBI by 30 June 2021. Action points: The IA should identify the differences between the existing agreements and the proposed agreement under the IA regulations and can either opt to enter into a fresh agreement or make an addendum to the existing agreement, based on his requirements. However, he will have to confirm that all the clauses required have been covered and those clauses which are against the interest of the IA regulations have been omitted. |
| Fee to be charged by IA to the client | Important points to note: Two methods have been prescribedAUA mode – 2.5% of AUA maximum can be charged per annum across all services. Assets pertaining to pre-existing regime of distribution shall be deducted from AUA.Fixed fee – maximum fee that can be charged under this shall not exceed INR 1.25 lac p.a.The fee pattern agreed shall remain for 12 months from the date of onboardingIA may charge in advance, however it shall not accept advance fee for more than 2 quarters.The mode selected in the above can differ from client to client Additional Compliances: None Action points: The existing fee model will have to be reworked and the IA will have to revisit on its terms with the client. Since the family of a client will have to be considered as a single client, the terms will have to be reconsidered and a thorough diligence of the existing model and the revised model will have to be done to understand which model is beneficial between the two client-wise. |
| Registration as a Non-individual Investment Advisor | Important points to note: Limitation prescribed to have not more than 150 clients as an individual IAAn IA having more than 150 clients as on 30 September 2020, shall Apply for non-individual license in Form AApplication to be made by 01 April 2020Not onboard further clientsCan continue servicing the existing clients Additional Compliance: Where the IA has more than 150 clients as on 30 September 2020, he/she shall file the details in required format to SEBI by 15 October 2020 Action points: Where the individual IA is nearing the count of 150 clients or has already onboarded more than 150 clients, should apply for the license in Form A to sustain continuity. |
| Maintenance of records & Audit | Important points to note: All records of communications with the client shall be preserved by the IA, i.e. from first communication until the advisory services existThe records shall be preserved for 5 years or until such time till the dispute, if any, is resolvedAnnual audit shall be conducted for ensuring compliance with the regulation within 6 months from end of financial year Additional Compliances: Report on adverse findings, if any, along with action taken, shall be submitted to the SEBI office within 1 month from audit report and not later than 31 October from the report of FY 2020-21 Action points: The IAs are expected to review all their previous audit reports and set in place their controls and requirements per the regulations to avoid any adverse observations by the auditors. It is advisable that the interim audit is conducted to identify the issues and address them before the final audit. |
| Risk profiling and display of details on website | Important points to note: For the purpose of risk profiling and suitability analysis of non-individual clients, IA should document the investment policy approved by such client’s board/ managementIn absence of the same, it should be to the discretion of the IA for such onboardingIA shall display the relevant details provided in regulation on its website and all communications Additional Compliance: None Action points: The IA shall communicate to all the non-individual clients for their management approved investment policyThe IA shall identify the standard formats of communication and also on its website, the required details and make relevant edits thereto to comply with the regulations |