Assessment of the Regulatory Framework for Investment Advisers and Research Analysts

In recent years, the growth of the Indian securities market and related technological advancements have led to a significant increase in the domestic investor base, surpassing the 9 crore mark. However, the current number of Investment Advisers (IAs) and Research Analysts (RAs) is not proportionate to this large investor base.

The ratio of investment advisers per million population remains very low in India compared to countries like the United States, where there are over 15,000 Registered Investment Advisers (RIAs).

This imbalance has contributed to the rise of unregistered entities acting as IAs and RAs. To ensure that a broader range of investors can access the services of qualified IAs and RAs, enabling them to make informed investment decisions, a significant increase in the number of registered advisers and analysts is necessary to meet the growing demand and potential for wealth creation in India.

In light of the above, SEBI deemed it essential to establish a regulatory framework that aligns with and supports the continually evolving business environment of Investment Advisers (IAs) and Research Analysts (RAs).

The proposed framework by SEBI aims to simplify, streamline, and reduce the cost of compliance for IAs and RAs, as envisioned in the budget announcement, while simultaneously enhancing investor confidence.

To this end, SEBI has published a Consultation Paper on the Review of the Regulatory Framework for Investment Advisers and Research Analysts and is inviting public comments on the matter.

We are outlining the five major proposed changes that could be transformative for the industry.

Relaxation in eligibility criteria for IAs and RAs:

• Despite the distinct nature of their activities, there is perceived similarity in the skills and knowledge required by IAs and RAs to discharge their respective roles.
• SEBI proposes to relax the qualification requirements for IAs and RAs from a postgraduate degree to a graduate degree.
• Initial certification is required only at the time of registration, with subsequent certifications based on updates from the last three years.

No prior experience will be required for registration.

• NISM certification will ensure IAs and RAs possess necessary skills and knowledge.
• IAs must register as non-individual IAs upon reaching either 300 clients or ?3 crore in fees during a financial year.
• Instead of net worth requirements, IAs/RAs must maintain a deposit lien marked to stock exchange, linked to client count and revenue, for arbitration purposes:

Up to 150 clients: ?1 lakh

150 to 300 clients: ?2 lakh

300 to 1,000 clients: ?5 lakhs

1,000+ clients: ?10 lakhs

• IAs can switch fee modes (fixed or percentage of Assets under Advice) without restriction.

Registration as Part-time investment adviser/research analyst:

• SEBI proposes allowing individuals or partnership firms engaged in other non-securities related businesses or employment to register as part-time IAs/RAs.
• Eligible roles include professors, teachers (with a no-objection certificate from their employer), education-related professionals, and other professionals like architects, lawyers, and doctors.
• However, individuals providing advice on assets like gold, real estate, or cryptocurrency are not eligible for part-time IA/RA registration.

Proposed Regulatory Changes for Research Analysts (RAs):

• SEBI suggests that individuals or partnership firms be allowed to register as both IA and RA, provided they comply with the separate rules and reporting requirements for each.
• RA Regulations, does not particularly mention the aspect of payment of consideration for the services provided by RA and thus is open to arbitrary interpretation of the scope of research services.

To avoid ambiguity, SEBI proposes clarifying that RAs can charge a maximum fee of ?1,25,000 per annum per family for individual clients, with no fee cap for non-individual clients.

• Like IAs, RAs should segregate their research and distribution services at the client level and adhere to similar regulatory provisions.
• RAs are required to follow KYC procedures and maintain KYC records for their fee-paying clients as per SEBI's specifications.

Guidelines for recommendation of ‘model portfolio’ by RAs:

• Model portfolios must be issued via a research report, with all included securities covered within it.
• The report should detail the methodology used for selecting securities, including fundamental or technical analysis.

The investment horizon of the model portfolio must be clearly stated to align with investors' timelines.

• Performance of each model portfolio must be disclosed, validated by a Performance Validation Agency (PVA), and benchmarked against a relevant index.

Use of Artificial Intelligence (‘AI’) tools in IA and RA services:

• IAs/RAs using AI tools must fully disclose the extent of AI involvement to prospective clients, enabling informed decisions.
• The responsibility for data security and regulatory compliance remains solely with the IA/RA, regardless of AI usage.

I'd be delighted to hear your perspectives on the IA/RA industry.

Please share your thoughts on the proposed changes by SEBI in the comments section.