SEBI, on payment of fees under its informal guidance scheme, gives clarity with respect to interpretation and applicability of act, rule, regulation, guideline, circular, etc.

Various organisations till date have sought guidance from SEBI, with respect to various clauses of IA Regulation. IA regulation has undergone many changes in the recent past, resulting in difference of opinion and interpretation among professionals and industry participants.

In continuation of our email updates and alerts, this article provides an analysis of the Informal Guidance given by SEBI with respect to various provisions of SEBI IA Regulations.

1. Informal Guidance dated April 09, 2021

Applicant: PAYTM Money Limited (“PML”)

Guidance sought (queries of the applicant)

1. As per Reg. 22A of the SEBI (Investment Advisers) Regulations, 2013 (“IA Regulations”), SEBI permits a non-individual Investment Advisers (“IA”) to offer execution services for its advisory clients without getting any commission or brokerage. Currently PML does not charge advisory or execution fees, and intends to avail of reimbursement of the service related out-of-pocket expenses such as KYC, PG, technology hosting, platform maintenance etc. form Asset Management Companies (AMC) whose direct plans they are selling, as PML is bearing the cost that the AMC would have borne in case the investments were directly routed through them. SEBI may clarify that this is not in violation of the aforesaid regulation.
2. As per Reg. 19(1)(d) of the IA Regulations and Point 2(ii) of SEBI Circular dated September 23, 2020 , there has to be a mandatory agreement between IA and customers. SEBI may please clarify on whether PML can seek electronic consent of the clients on all the points mentioned in Annexure A of the circular and share the same with the client on their registered email address for their records and reference. It would not only save expenses, it would also expedite the entire process. PML would maintain all relevant records in this regard.
3. Principal Officer has been defined as per Reg. 2(1)(s) of the SEBI (Investment Advisers) Regulations, 2013. In this regard, PML have requested SEBI to define as what would be considered as, equivalent management body who is responsible for the overall function of the business and operations, whether a committee appointed by the Board of PML to oversee the advisory functions and operations can be considered as a management body and a member of the said committee can be appointed as a Principal Officer. Whether the Department Head in charge of Advisory business who is a member of management advisory committee appointed by the board can be appointed as Principal Officer as such a person would be responsible for the overall function of the advisory business.

Informal Guidance by SEBI

Interpreting the provisions involved, SEBI in its informal guidance stated that:

1. IAs cannot receive any consideration, by whatever name called and whether directly or indirectly, at the IA’s group or family level for the said implementation service given. In view of the same, PML cannot avail reimbursement of any amount for the services given to its clients, from the Asset Management Companies whose direct plans are being sold by them to clients.
2. Merely seeking an electronic consent and sharing the same with the clients on their registered email addresses may not be considered as sufficient compliance with IA Regulations and circular.
3. A member of committee (including a Department Head in charge of Advisory business) appointed by the board of IA to oversee the advisory functions and operations cannot be the Principal Officer of the IA, unless he is also the managing director or designated director or managing partner or executive chairman of the Board or equivalent management body of the IA.

The letter of SEBI can be read at:

https://www.sebi.gov.in/sebi_data/commondocs/apr-2021/sebi_let_IG_paytm_p.pdf

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2. Informal Guidance dated January 08, 2021

Applicant: HDFC Securities Limited

Guidance sought (queries of the applicant)

1. ‘‘Can a trading member receive broking income from Advisory clients for execution services?”

Informal Guidance by SEBI

The client has signed up with the same entity for both broking services and investment advisory.

As per the aforesaid provisions of Regulation 22A, an Investment adviser may provide implementation services to the advisory clients in securities market. However, the client shall not be under any obligation to avail implementation services and thus, only after the advisory client has given consent to receiving implementation services in securities market, Investment Adviser or group or family of Investment Adviser can provide implementation services. Further, the Investment adviser or group of the Investment Adviser shall not charge any implementation fees from the advisory client.

Hence, a trading member or its group entity cannot receive any broking income from advisory clients while providing execution services whenever such execution is emanating from advice offered by the trading member as an Investment Adviser.

The letter of SEBI can be read at:

https://www.sebi.gov.in/sebi_data/commondocs/jan-2021/IG_let_SEBI_HDFC_p.pdf

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3. Informal Guidance dated December 22, 2016

Applicant: Market Magnify Investment Adviser and Research Private Limited.

Guidance sought (queries of the applicant)

1. Whether MarketMagnify can charge variable fees (profit sharing) on post profit model. If yes, whether is it compulsory to enter into an agreement in writing or mentioning the terms in email shall be sufficient.
2. Whether MarketMagnify can charge variable fees (profit sharing) on prepaid model without fixed tenure.
3. Whether MarketMagnify can charge variable fees (profit sharing) on prepaid model within fixed tenure. If yes, whether MarketMagnify can also provide for refund of a certain proportion of fees charged in case of failure to provide specified profit within limited time frame thereby limiting their responsibility.
4. Would an investment adviser be responsible to make good losses incurred by the client in case of fixed fee (subscription based model), assuming such losses is not caused due to negligence on the part of the adviser but due to inherent market risks?

Informal Guidance by SEBI

1. In terms of clause 6 of code of conduct provided under sub- regulation 9 of regulation 15 of IA Regulations, an investment adviser advising a client may charge fees, subject to any ceiling as may be specified by the Board, if any. The investment adviser shall ensure that fees charged to the clients are fair and reasonable.
2. Further, as per sub- regulation 1 of regulation 18 of IA Regulations, the investment adviser should disclose all the material information including terms and conditions on which it offers advisory services. Further, entering into an agreement with the client is not mandatory. However, as per sub­ regulation 1 of regulation 19 of IA regulations, investment advisers are required to maintain copies of agreements with the clients, if any.
3. With regard to your query mentioned at (3) and (4) above, it is stated that, linking of advisory fees being charged to the profit/loss generated by assuming that the clients have acted upon the advice, is not envisaged by the sting framework of IA Regulations.

The letter of SEBI can be read at:

https://www.sebi.gov.in/sebi_data/commondocs/sebimagnifyletter_p.pdf

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Our interpretation of the guidance:

1. Agreement has to be mandatorily signed, either physically or using digital/ Adhaar OTP based signatures
2. Principal officer has to be a Key Management Person
3. Execution / implementation services may be provided only after consent from client without charging any fee or deriving any benefits out of it. Therefore, Advisory client can be a broking client as well, if you are not charging any brokerage from the advisory client.
4. Fees based on profit sharing are not envisaged by the sting framework of IA Regulations, so it is also not disallowed in that sense. Only thing to remember is to keep it within the ceiling as specified by SEBI.

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Disclaimer: The views and opinions expressed herein are my personal views and opinions and do not necessarily reflect the official policy and position of any other agency, organization, employer or company. Assumptions made in the analysis are not of the position of any entity other than me. I make no representations as to accuracy, completeness, correctness, suitability or validity of any information and will not be liable for any errors, omissions or damages arising from its use. It is reader’s responsibility to verify their own facts.