Market regulator Securities and Exchange Board of India (SEBI) has clarified that registered investment advisors (IAs) can offer execution services for their advisory clients but only without charging any commission or fees.
SEBI has reiterated that an investment adviser (or group or family of investment adviser) cannot avail reimbursement of any amount or implementation fee or referral fees (whether embedded or indirect) for the services given to its clients from the asset management companies (AMCs) whose direct plans are being sold by it to clients.
SEBI’s clarifications are a part of informal guidance sought by Paytm Money Ltd (PML) regarding SEBI's investment advisors (IA) norms.
PML divulged that it currently does not charge advisory or execution fees but expressed its intention to secure reimbursement of the service-related out-of-pocket expenses such as know-your-customer (KYC), technology hosting and platform maintenance from AMCs. PML attempted to justify this by saying that it is bearing the cost that the AMC would have borne in case the investments were directly routed through them.
PML then sought SEBI’s clarification on whether availing such reimbursement from AMCs is in violation of the IA norms.
In its response made public, SEBI concurred that an investment adviser may provide implementation services to clients in the securities market but subject to the condition that "investment advisors shall ensure that no consideration including any commission or referral fees, whether embedded or indirect or otherwise, by whatever name called is received, directly or indirectly, at investment advisor's group or family level for the said service, as the case may be."
It further said such implementation services need to be provided only through direct schemes or products in the securities market.
SEBI also stressed that clients are not under any obligation to avail implementation services offered by the investment advisor. In view of this, SEBI concluded "PML cannot avail reimbursement of any amount for the services given to its clients from the AMCs whose direct plans are being sold by them to clients."
According to SEBI guidelines, an investment adviser should not render any investment advice or charge any fee until consent is received from its clients on the terms and conditions.
The regulator also noted "...merely seeking an electronic consent and sharing the same with the clients on their registered email address may not be considered as sufficient compliance with IA regulations.”
Hence, in order to ensure enforceability, an agreement between IA and the client, incorporating the terms and conditions in the document as specified by SEBI, has to be in place before the IA can offer any services to clients or charge any fees, the regulator says.
About principal officer, SEBI says a member of the committee, including a department head in charge of advisory business, appointed by the board of IA to oversee the advisory functions and operations cannot be the principal officer of the IA unless he is also the managing director or executive chairman of the board or equivalent management body of the IA.
SEBI categorically stated that this position is based on the information furnished by PML in the request for clarification, and averred "…different facts or conditions might lead to a different interpretation. This letter does not express a decision of the board on the question referred."