SEBI has also set a cap on the fee that investment advisers can charge clients.
The markets regulator Securities and Exchange Board of India (SEBI) has presented detailed guidelines for investment advisers asking them to ensure the segregation of advisory and distribution activities at the client level.
SEBI has set a limit on the fee that investment advisers (IAs) can charge clients. It has also established a procedural framework for auditing and record keeping.
Under the rules, an individual IA will apply for registration as a non-individual investment advisor when onboarding 150 clients, and the IA must enter an investment advisory agreement with their clients.
In a circular Wednesday, the regulator said investment advisers will need to ensure compliance regarding client-level segregation of advisory and distribution activities.
To ensure segregation at the client level at the AI group level, SEBI said that existing clients who wish to take on advisory services will not be eligible to take advantage of distribution services within the AI group / family, and vice versa for those who provide consulting services.
In addition, he said that a new client will be eligible to take advantage of advisory or distribution services within the group or family of investment advisers and this option must be available at the time of boarding.
“IA will enter into an investment advisory agreement with its clients, including existing clients, no later than April 1, 2021, and submit a report, confirming the same to SEBI, no later than June 30, 2021.” noted the regulator.
Regarding fees, SEBI said the AIs will charge fees to clients in either of two modes: Assets under advice (AUA) and fixed fee. Under the AUA mode, the maximum rates that can be charged will not exceed 2.5% of AUA per year per client in all services offered by the AI.
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With flat rate mode, the maximum rates that can be charged will not exceed ₹ 1.25 lakh per year per customer on all services.
The AI will charge fees to a customer in any mode on an annual basis and the mode change will take place only after 12 months of onboarding. If agreed by the customer, IA may collect fees in advance. However, the advance will not exceed rates for two quarters, the regulator said.
Regarding qualification, SEBI said that existing individual AIs over the age of 50 as of September 30, 2020, will not be required to meet the qualification and experience requirements. However, such AIs must have a certification accredited by NISM.
According to the regulations, the IA must have a graduate degree in specific subjects and five years of work experience related to advising on financial or securities products or portfolio management.
An employee associated with investment advice must also have a graduate degree and two years of experience. Regarding registration as a non-individual investment advisor, SEBI said that an individual IA can apply for registration as a non-individual investment advisor before reaching 150 clients.
Once the number of clients reaches 150 and until registration as a non-individual AI is granted, SEBI said the individual AI will not onboard new clients.
However, during the SEBI review period of the application, the individual IA will continue to serve existing clients. In the event that the IA does not obtain the registration, the IA will continue with the advisory activities.
“The existing individual IA that has more than 150 clients as of September 30, 2020 should not incorporate new clients and said individual IA must request registration as a non-individual IA no later than April 1, 2021,” the regulator said.
The IA must keep records of interactions with all customers, including potential customers (before boarding), where there has been any conversation related to the advice in the form of SMS or telephone conversation, among others.
Such records will begin with the first interaction with the client and will continue until the completion of the client advisory services. They need to keep these records for a period of five years.
However, in the event of a dispute, such records will be retained until resolved, or if SEBI wishes specific records to be retained, such records will be retained until the regulator