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SAT order on advisory services by a Portfolio Manager

Finsec Law Advisors

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In an order dated March 29, in the matter of Vijay Kumar Gaba v. SEBI, the Securities Appellate Tribunal while discussing the nature of services provided by a portfolio manager (PM), has stated that rendering advisory-only services will not tantamount to portfolio managerial activities.

The issue under consideration for the Tribunal was whether a person rendering advisory services ‘for consideration’ could be considered as a PM in terms of SEBI (PM) Regulations, 1993. It is important to state here that this matter dates back to 2006 when the SEBI regulations governing investment advisory activities – the SEBI (Investment Advisers) Regulations, 2013 – were not in place.

While setting aside SEBI’s order which held the appellants liable for undertaking portfolio managerial activities without obtaining a registration under the PMS Regulations, the Tribunal held: advisory services coupled with management/administration of client’s portfolio will amount to portfolio managerial services. It can be either discretionary or non-discretionary. While in the former, the PM has full leeway to make decisions; in the latter, the PM has to counsel the investor and it cannot itself take decision for investment of client’s funds. Lastly, mere advice regarding securities cannot be clothed as portfolio management services. Hence, it was held that since the law governing advisory-only services came in 2013, therefore, the act of appellant undertaken in 2006 cannot be termed as portfolio management activities.

The Tribunal has rightly stated that while rendering non-discretionary portfolio management services, the PM is required to ‘counsel’ the investor first, thereby differentiating between a PM and an execution-only intermediary, such as a stock broker. This is also consistent with the fiduciary obligations of a PM.

However, as per the order, a person undertaking advice-only activities related to securities cannot be termed as a PM. It should be noted that the PMS Regulations itself envisages three kinds of PM(s), including the ones into purely advisory business: Regulation 12E(2) and 16B(2)(b) provides for various obligations of an advisory-only PM. Similarly, Schedule I and V of the PMS Regulations, also provides for an enabling procedure to seek registration as an advisory-only PM. The order appears to be in the teeth of clear legal provisions and unlikely to be sustained in an appeal. We believe that the observations of the Tribunal must be read in the light of the facts and circumstances of the present matter only.