SEBI Proposes Changes to Investment Advisor Guidelines in New Consultation Paper

The Securities Exchange Board of India (SEBI) recently 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.
 
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. Also, SEBI has proposed that IAs can only collect advance fees for up to two quarters. 
 
2. Client segregation
 
SEBI would now allow investment advisors to offer advisory as well as distribution services within the same outfit, which is a departure from its earlier stance of having a clear line of separation.
 
The proposal states that both individual advisers and corporate entities can offer both distribution and advisory services, but cannot provide both services to the same client. To prevent companies from circumventing the rule through group entities, the entire corporate group within the meaning of the Companies Act, 2013 will be considered as one entity for this purpose.
 
3. 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.
 
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.

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