SEBI Finalises Amendments to Investment Adviser Rules

The final rules increase the net worth, qualification and experience requirements for investment advisers and introduce client-level segregation of advice and distribution activities.

SEBI (Securities and Exchange Board of India) has adopted new regulations governing investment advisers.

In January, SEBI issued a consultation paper proposing tougher regulatory requirements for investment advisers, including a INR 1 million net worth requirement for individual investment advisers and INR 5 million for non-individuals.

Under the final rules, a lower net worth requirement of INR 500,000 is adopted for individual investment advisers (up from INR 100,000 under current rules), but it will remain INR 5 million for non-individuals (up from INR 2.5 million under current rules).

SEBI has not yet specified the transition period that will be allowed for investment advisers to comply with the new net worth requirement. The consultation paper had proposed a three year transition period.

Individuals advisers with more than 150 clients will have to register as non-individuals. This is the first time a threshold has been set for corporatisation.

SEBI has also adopted client-level segregation of activities to prevent conflicts of interest, barring advisers from offering investment advice and product distribution services to the same client.

For non-individual advisers, segregation should be implemented at the group level, where arm’s length is maintained between the advisory and distribution functions. In essence, the more than 100,000 mutual fund distributors in India will no longer be able to provide incidental advice.

Under the rules, investment advisers can provide securities market execution services, but may not receive any consideration directly or indirectly, either at the group or family level, for these services.

This will help to end the practice by some corporate investment advisory firms of charging superficially low fees but offering in-house products or those from associated companies, and the practice of charging high commissions on equity placements.

Client fees will also have to be charged by investment advisers in the manner as specified by SEBI, which is as yet unspecified. In the consultation paper, this was capped at 2.5 percent of the assets under advice, or a fixed fee of INR 75,000 per year per family across all products and services provided.

SEBI has also prohibited the use of terms like ‘wealth adviser’ or ‘independent financial adviser’ by non-registered investment advisers.

Individual investment advisers and principal officers of a corporate investment advisor are now required to have a related post-graduate qualification and five years of advisory work experience. Employees of corporate advisory firms also need a post-graduate qualification but just two years of experience.

The new rules, outlined here, will take effect 90 days the date of their publication in the official gazette.

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