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06 Feb 2018

Views on SEBI’s Consultation Paper regarding Investment Advisers

Consultation Paper issued by SEBI, proposing to bring Amendments to the SEBI (Investment Advisers) Regulations, 2013

Securities and Exchange Board of India (SEBI) has issued a consultation paper on January 02, 2018 as a precursor, before introducing amendments to SEBI (Investment Advisers) Regulations, 2013. The primarily it intends to address the issue of “conflict of interest” while “advising” on investment products and simultaneously “selling” of investment products.

Fox Mandal submitted to SEBI the below suggestions on this aspect.

Sl No. Pertains point no.SuggestionsRationale
1Para 1- Segregation of investment advice from distribution of investment products/execution of investment transactions.A complete segregation of advising and selling activities may not be desirable. execution/distribution through separately divisible structures to be allowed, probably by developing and strengthening applicable principles for arm-length practice.

a) IA regulation number 15 (General Responsibility) can be amended and the appropriate provisions can be made to avoid conflict of interest and strengthen arms-length practises. A detailed practise procedure while doing both advisory and execution services can be included in the code of conduct as well. Further it can be made mandatory that investment advisory to adhere to this practise procedure strictly by mandating a legal audit of their business by a legal practitioner on a yearly- basis in addition to the regular inspection by SEBI.

b) Disclosures may be given that the client has an option to execute the recommendations through such divisible structure and not mandatory.

c) Fee structure for both advisory and execution to be shared with clients suggesting specific amount attracted to advisory, which is independent of execution.
Investment advisory services may not be a viable option as a standalone business.

An individual investment adviser may choose distribution services over advisory for being profitable. This would vitiate the objective of providing access for quality advise to small investors.

If the investment advisory is segregated from distribution services, the investors will have to shell out first for advisory services and later spend for execution of the same with some other entity which would increase the cost for far an investor. Therefore, such segregation is not in the interest of investors especially small investors. Small investors may not be able to access advisory services at all. This will result in distributors mis-selling the products.

It is premature to segregate the services especially when the investment advisory is at a budding stage. Investors may not be in a position to appreciate the intended segregation.
2Para 2- individual registering as investment adviser shall not provide distribution service in financial products directly or indirectly, even through their immediate relatives and vice versa.A complete segregation of advising and selling activities may not be desirable. execution/distribution through separately divisible structures to be allowed, probably by developing and strengthening applicable principles for arm-length practice as discussed herein above.

Conflict of interest among individual advisor and a relative distributor cannot be addressed by ban.

If SEBI really wants to segregate the activities through relatives, it may be better to regulate percentage of reference/business that can be shared among them, rather than a whole ban.
Segregation of advisory from distribution is not desirable for reasons stated against para 1.

Relatives have fundamental right to carry on the profession of their choice. Thus, proposal is opposed to Constitution of India.
3Para 3- Segregation of advisory from distribution in respect to Banks, NBFCs, Body Corporates, LLPs and firms.A complete segregation of advising and selling activities may not be desirable. execution/distribution through separately divisible structures to be allowed, probably by developing and strengthening applicable principles for arm-length practice as discussed herein above.Segregation of advisory from distribution is not desirable for reasons stated against para 1.
4Para 5- Mutual Fund Distributors (MFDs), while distributing their mutual fund products can explain the features of products to client, and shall ensure the principle of ‘appropriateness’ of products to the client.Mutual Fund Distributors should not be allowed to advice.

It is suggested it must be made mandatory for MFDs to sell products only upon receipt of an independent and specific advisory report from a qualified investment adviser.

This will not curtail the right of an investor to choose the mutual funds as he has direct access to same.
It is as if allowing the medical shop to prescribe medicines. Role of a MFD is to sell and not advice.

The concept of appropriateness is ambiguous and lacks clarity. Allowing advice by MFDs may lead to mis-selling.

The suggestion would promote the investment advisory as a service and at the same time, it would not affect the business of MFDs.

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