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SEBI’s Informal Guidance on advisory services rendered by Investment Advisers

Finsec Law Advisors

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On April 09, 2021, SEBI in its informal guidance (Guidance) issued to Paytm Money Limited (PML) clarified that an investment adviser (IA) cannot receive any reimbursements from the asset management companies whose direct plans are sold to the IA’s clients.

PML being registered with SEBI as an IA, provides advisory services to its clients, and facilitates the implementation of advice issued to its clients. Under its advisory services, PML recommends direct mutual fund products to its clients. Considering the above, PML sought clarification from SEBI regarding the permissibility to avail reimbursement for out-of-pocket expenses related to the KYC process, technology hosting, platform maintenance etc. from asset management companies (AMC) whose direct plan may be subscribed to, by an advisory client of PML. In its response, SEBI clarified that Regulation 22A of the SEBI (Investment Advisers) Regulations, 2013 (IA Regulations), permits non-individual IAs to offer implementation services to its advisory clients without being entitled to any commission or brokerage. Further, Regulations 22A(1) and 22A(3) clearly state that an IA shall not receive any consideration, in any manner, either directly or indirectly, in relation to the financial products it had issued advice on, and cannot charge any implementation fee from its clients, for providing implementation services in relation to these products. Considering the above, SEBI clarified that PML cannot avail reimbursement of any amount from AMCs for the implementation services provided to its client.

The second query raised by PML was whether PML could seek electronic consent from its clients on the points mentioned in Annexure A to the SEBI circular on ‘Guidelines for Investment Advisers’ dated September 23, 2020 (IA Guidelines), and share the same over email to comply with the requirements under Regulation 19(1)(d) of the IA Regulations read with Clause 2(ii) of the IA Guidelines.

Responding to the above query, SEBI highlighted that as per the provisions of Regulation 19(1)(d) read with the Clause 2(ii) of the IA Guidelines, it is mandatory for an IA to enter into an investment advisory agreement with its client and cover the mandatory terms and conditions as provided in Annexure A to the IA Guidelines. Further, no investment advice shall be rendered and no fee shall be charged by the IA until an agreement is signed with the client and the client is provided a copy of the same. Based on the above reasoning, SEBI advised that merely seeking an electronic consent on the matters provided in Annexure A to the IA Guidelines and sharing the same with the clients on their registered email addresses would may not be considered as sufficient compliance with the provisions of the IA Regulations and the IA Guidelines.

The third query raised by PML was regarding the definition, and employment of a principal officer as per the provisions of the IA Regulations.  PML, in its query, requested SEBI to define an ‘equivalent management body who is responsible for the overall function of the business and operations’ and enquired whether a committee appointed by the board of directors of PML, to oversee the advisory functions, would qualify as a management body enabling a member of the committee to be appointed as the principal officer.

SEBI, in its response clarified that the head/member of the board of directors of a corporate IA is responsible for the functioning of business and operations of the IA. The term ‘equivalent management body’ is used in this context and is to be understood in respect of non-individual IA’s other than a body-corporates such as LLPs which do not have a board of directions. In such scenario, the executive chairman of the equivalent management body can be the principal officer of the IA. Hence, SEBI concluded that a member of the advisory committee or the department head, in charge of advisory business appointed by the IA’s board of directors cannot be appointed as the principal officer unless he is also the managing director or designated director or managing partner or executive chairman of the board as required under the IA Regulations.

The Guidance provides requisite clarifications on the issues of IAs receiving implementation fees from the producers of financial products, and who may be appointed as a principal officer of institutional IAs that do not have a body corporate structure.