SEBI Proposes That Individual Investment Advisors Can Also Distribute Financial Products
The Securities Exchange Board of India (SEBI) has just issued a consultation paper for amending some of the guidelines regulating investment advisers (IAs). 
 
The consultation paper proposed higher compliance requirements for IAs, a method to standardise calculation of fees and fee limits, and other such proposals. One of the important points proposed was to scrap the present requirement of mixing advisory and distribution business.
 
Under the existing rules, introduced in 2013, IAs cannot provide financial advice and also sell commission-embedded financial products. The idea was to keep the advice completely independent from selling. This was to avoid any conflict of interest in the advice given. SEBI’s move was designed to stop the massive countrywide mis-selling of mutual fund schemes, mainly by large national distributors such as banks. 
 
As a result, those who wished to become an adviser, had to give up their selling for commissions and go for charging fees. SEBI wanted to have an arm’s length relationship between advisers and distributors. But this was only on paper. 
 
While SEBI barred individual and partnership firms registered as IAs from provide distribution and/or execution services, it allowed corporate entities registered as IAs to do that, as long as the investment advisory services are offered through separate identifiable division or department (SIDD). SEBI asked them to keep their investment advisory services segregated from other activities. 
 
This offered enough banks and other corporate entities to easily flout the new regulations, by posing as advisers but acting as distributors. And so, mis-selling continued. See the attached picture, which appeared in a leading daily today. The headline talks of advisory; the business is distribution. This has been going on for the past six years.
 
 
SEBI is now allowing individual and partnership firms also to offer advice / or distribution. It is proposing that advisory and distribution businesses can co-exist if the client is provided either of such services, and not both. 
 
So, if the proposal is accepted, individuals and partnerships can hide behind the same fig-leaf of segregation and pose as advisers but actually be in the distribution business.
 
SEBI has been trying to encourage independent advisers. If the new proposals go through, genuine investment advisers fear that their life will become difficult. 
 
They fear that their role would diminish as investors would be more comfortable dealing with a distributor as the latter provides execution and does not even charge any fees, but get commission which fund houses directly cut from the assets of the investor and pay the distributor. 
 
Other than the above mentioned proposals, the regulator has also increased the net worth requirements for corporate advisers to Rs50 lakh from the current requirement of Rs25 lakh. Even here, the regulator had earlier decided to reduce the net worth requirement to Rs10 lakh from Rs25 lakh to promote advisory business, but has now changed its mind.
 
Disclaimer: Our associate Moneylife Advisory is a SEBI-registered Investment Advisor
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    COMMENTS

    m.prabhu.shankar

    1 month ago

    Why this flip flops ? Institutions like SEBI should tell the reason why they are bringing legislations and changing legislations. They need to explain logic behind every legislations and its changes.

    Investment Advisors: SEBI Proposes Cap on Advisor Fees, Higher Compliance
    The Securities Exchange Board of India (SEBI) has issued a consultation paper for amending the Investment Advisors (IA) regulations, originally released in 2013.
     
    The IA regulations are a set of guidelines or requirements related to qualification, certification, and other general obligations for investment advisors.
     
    The consultation paper proposed higher compliance requirements, allows IAs to play a dual role of distributor and advisor, tries to standardise calculation of fees and fee limits, and other such proposals.
     
    Financial planners and advisors feel the new proposals, if implemented, could hit business and increase overhead costs. 
     
    1. Cap on fees
     
    SEBI has proposed that IAs charge fees either as a percentage of the total assets under their advisory OR a fixed fee. The regulator has proposed a cap of 2.50% on fees based on AuA (assets under advisory), and a cap of Rs75,000 on fees based on fixed prices.
     
    Currently, IAs have the freedom to decide on the fees to be charged to customers.
     
    This approach considers different expectations and requirements of individual clients, and this works fairly well as investment advisors also provide other value added services like tax filing, and estate planning. 
     
    But SEBI’s intervention in this matter would leave IAs juggling both client requirements and adhering to guidelines, a process that would waste time and resources.
     
    Further, SEBI has proposed that IAs can only collect advance fees for up to two quarters. This is contrary to the standard industry practice of collecting the entire year’s fees in advance, or if it is a higher sum, only then in a couple instalments.
     
    This move will double the efforts put into customer retention and fee recovery, leaving less time for the core advisory function.
     
    2. Higher compliance, net worth requirements
     
    SEBI has proposed that individual IAs would require a net worth of Rs10 lakh, against the current requirement of Rs1 lakh. Corporate IAs would be required to maintain a net worth of Rs50 lakh, higher than the current Rs25 lakh.
     
    The net worth of IA is of no relevance to clients. This move would eliminate small and upcoming IAs aspiring to grow their business. Besides, there is no correlation between net worth and service quality. A higher net worth does not translate into better quality of advice. 
     
    Besides the higher net worth requirements, SEBI has proposed a higher compliance check on the activities and services rendered. This includes checks by auditors on whether the same client is not offered distribution service along with advisory, requiring clients to sign a terms & conditions form mentioning all the scope of services, function of the advisor, risk factors and disclosures and a separate compliance audit.
     
    This bureaucratic process forced upon IAs is completely fine if it were a standard practice applicable to everyone involved in some or another type of investment advisory. 
     
    But the fact is that distributors and agents, who do not fall under the ambit of IAs yet continue to falsely represent themselves as one, have no consequences to face even after deliberate mis-selling of wrong investments. 
     
    We cannot have IAs burdened with so many restrictions when another group of distributors and agents provide the same type of service, earn fat commissions and easily get away with it.
     
    Ideally, all types of investment products including investment-cum-insurance schemes should be sold only by an IA. Having these separate branches, one to advice, another to sell, has only seemed reasonable in theory but ineffective in practice.
     
    Disclaimer: Our associate Moneylife Advisory Services is a SEBI-registered Investment Advisor
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    NSE Algo Scam: SEBI Exonerates Former Top Executives including Ravi Narain, 8 Others in Sampark Dark Fibre Case
    Market regulator Securities and Exchange Board of India (SEBI) has absolved National Stock Exchange (NSE)'s former chief Ravi Narain, vice president Suprabhat Lala and eight others in the co-location (colo) scam where brokers were alleged to have received preferential access to the trading systems of the bourse. SEBI says all these key executives of NSE neither had a role as director or key management personnel (KMP) in facilitating Sampark Infotainment Pvt Ltd to lay down dark fibre line to point-to-point (P2P) connectivity nor in modifying a 2009 circular from the Exchange. 
     
    The order passed by SK Mohanty, whole time member of SEBI, says, "...from the records, I do not find any evidence or any material that establishes or even remotely indicates any role played by any of the noticees as far as establishment of P2P connectivity by 'Sampark' is concerned. There is nothing on record which could even suggest that any of the entities was occupying a post of director or KMP and on account of holding of such post, the respective noticees could be fastened with the accountability for the lapses, breaches and discriminatory treatment meted out to the market participants by permitting a selected few stock brokers to avail dark fibre connectivity from 'Sampark'."
     
    "In my view, based on the evidences available on record and after having considered the same, it cannot be held that the noticees herein were involved in facilitating 'Sampark' to lay down the dark fibre line to provide P2P connectivity.
     
    There is also no evidence to suggest that noticees had any role in modifying the Circular of 2009 in the year 2013. Consequently, they were also not responsible for the non-transparent dissemination of the modification so made in the above mentioned circular of 2009 and therefore, the noticees cannot be held responsible for any misconduct or non-compliance as far as laying of P2P connectivity using dark fibre is concerned." 
     
    Mr Monahty further says, "I observe that the allegations pertaining to the involvement of the Noticees have been made only because of their association in some capacities with National Stock Exchange India Ltd (NSEIL during the relevant period of time. It is an admitted position that none of the noticees was occupying the position of a director in NSEIL, more particularly during the relevant period, when 'Sampark' was allowed to lay down dark fibre lines to establish P2P connectivity between the two stock exchanges for a few selected stock brokers," the order says.
     
    Those exonerated by SEBI includes, Ravi Narain (former MD & CEO), R Nandakumar (former senior vice president -VP for operations), Mayur Sindhwad (chief operating officer-COO for trading), Sankarson Banerjee, (chief technology officer-CTO for projects), G Shenoy (CTO for operations), Suprabhat Lala (vice president -regulations), Ravindra Apte (former CTO), N Muralidharan (former CTO) and Jagdish Joshi (former head for colo). 
     
    The co-location case which dates back to 2015 sparked controversy when Moneylife published a letter by a whistleblower going by the name Ken Fong in June 2015. The 
    whistleblower wrote to the SEBI with a copy to Moneylife, alleging the NSE was giving a few high-frequency brokers preferential access to its servers by allowing them to place their servers in the NSE premises that benefited both the parties at the cost of others.
     
     
     
    In May 2019, SEBI had indicted well-known market economist Ajay Shah and Suprabhat Lala, a senior official of NSE in the algo trading scam.  The order said a private firm of Sunita Thomas (Mr Lala’s wife and sister-in-law of Ajay Shah), 'commercially exploited' confidential data obtained from the NSE for writing algo trading software. SEBI had also directed NSE to take legal action against Mr Shah, Ms Sunita Thomas, her firm Infotech Financial Services Pvt Ltd, and Krishna Dagli, director of the company. One of the orders indicts, Ravi Narain and Chitra Ramakrishna, both former MDs of NSE overlooking conflict of interest in awarding contract to Infotech Financial. (Read: NSE Algo Scam: SEBI Says Ajay Shah, Suprabhat Lala & Their Wives ‘Commercially Exploited’ Confidential Data)
     
    Before that in April last year, SEBI had ordered disgorgement of profits from NSE and salaries of former MDs, Ravi Narain and Chitra Ramkrishna.  The regulator has also asked the exchange to disgorge an amount of Rs624.89 crore along with interest calculated at the rate of 12% per annum to the Investor Protection and Education Fund (IPEF).
     
    SEBI estimated that NSE earned a profit of Rs624.89 crore during 2010-11 to 2013-14 from its co-location operation. Finding Narain guilty in the case, SEBI has asked him to disgorge 25% of the salary drawn for FY11 to FY13 to the IPEF. In case of Ramkrishna, she has been asked to disgorge a quarter of her salary drawn for FY14. She has also been prohibited from associating with a listed company or a market infrastructure institution for a period of five years. (Read: NSE Co-location Scam: SEBI Orders Disgorgement of Profits from NSE and Salaries of former MDs, Ravi Narain and Chitra Ramkrishna)
     
    In a second order last year, related to “dark fiber” involving unregistered service provider, Sampark Entertainment, SEBI had said that since NSE is a recognised stock exchange and the leading market infrastructure institution, it occupies a pivotal role as a front line regulator. Therefore apart from reformatory steps under section 11, 11(4) and 11B of the SEBI Act, 1992 and Section 12A of the SCR Act, 1956, “considering the gravity of the allegations that have been established…, additional exemplary directives need to be issued could pose an effective deterrence and dis-incentive to the noticee (NSE) to perpetrate such kind of violations in future so far as administration and governance of its Colo facility is concerned.”
     
    SEBI has directed NSE to deposit a reasonable portion of revenue earned by NSE through its co-location facility during 8th May 2015 to 10th September 2015 to the Investor Protection and Education Fund (IEPF) of SEBI. This amounts to Rs.177.43 Crore.
     
    Since NSE has allowed Sampark “to provide P2P connectivity without having proper licence, to a few stock brokers in a preferential manner while denying the same service to other stock brokers and the said illegitimate service continued for a period of four months, SEBI has asked for Rs62.58 crores to transferred to IPEF. Two co-location traders Way-2-Wealth and GKN Securities, were found to have “fraudulently availed of P2P connectivity with the help of an unauthorized Telecom Service Provider (Sampark) at the Colo facility of NSE… in a manner to gain undue advantage in terms of low latency and high bandwidth in data transmission as compared to other stock brokers in securities market.”
     
    Hence, SEBI has asked them to deposit an amount equivalent to income from trading in their proprietary trading accounts during the period Sampark was permitted to provide P2P connectivity to them, to the IPEF. This comes to Rs15.34 crores for W2Wand Rs4.9 crore for GKN.
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    COMMENTS

    m.prabhu.shankar

    1 month ago

    These people were not involved. Fine. Then who is involved in allowing Sampark to lay dark fibre for P2P connection. This looks like many murder / rape case judgements where its very clear murder / rape has happened but there is no proof against the accused and hence the accused it let off.

    Sreepathid

    1 month ago

    Many employee lives turned up and down. Can the reputation of all those employees restored ?

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