Regulatory Changes for Investment Advisers (IAs) and Research Analysts (RAs)

On September 30, 2024, the Securities and Exchange Board of India (SEBI) Board convened to discuss proposed changes to the regulatory framework governing Investment Advisers (IAs) and Research Analysts (RAs). These amendments are aimed at making it easier for professionals to enter the market while ensuring compliance and integrity within the advisory and research sectors.

1. Relaxation in Eligibility Criteria

• Qualification Requirements: SEBI now requires a minimum of a graduate degree for IAs and RAs instead of a post-graduate degree.

• Experience: Prior work experience requirements have been eliminated, allowing a broader pool of applicants to qualify. Now, there shall be no experience requirement.

• Certification: SEBI now mandates only an initial base certification upon registration. Periodic certifications will replace renewal requirements to ensure knowledge of ongoing industry updates.

• Net Worth: The net worth requirement has been replaced by a security deposit lien-marked to the stock exchange to cover any arbitration-related dues.

2. Eased Compliance Requirements

• Dual Registration: SEBI allows individuals and partnerships to register as both IAs and RAs with a necessary separation between these roles.

• Part-time Registration: Part-time registration is now available for those with other business engagements. These advisors must have a No Objection Certificate (NOC) from their primary employer, serve a maximum of 75 clients, and maintain clear service separation.

• Designation of Principal Officer: For IAs or RAs with multiple business lines, the head of the advisory division can now act as the Principal Officer.
• The requirement for corporatization by individual IAs has been relaxed. The threshold would now be 300 clients or fee collection of INR 3 crore during the financial year, whichever is earlier as compared with the existing threshold of 150 clients.

• Applicants shall be allowed to seek registration as both IA and RA.

• Independent Compliance Officers: Professionals such as CAs, CSs, and CMAs can be appointed as compliance officers to ensure SEBI regulations are met.

3. Client-Level Segregation and Fee Structure Adjustments

Flexibility in Fee Structure for IAs:

• Fee limits only apply to investment advice related to SEBI-regulated securities.

• IAs can change the fee mode for clients without any restriction on the frequency of changes.

• The maximum fee under the fixed-fee mode has been increased to ? 1,51,000 per family per year. This limit does not apply to non-individual clients.

• Under the Assets under Advice (AUA) model, AUA is defined as the net asset value of SEBI-regulated securities.

Fee Limits for RAs:

• RAs can charge individual clients, including HUFs, a maximum of ? 1,51,000 per annum per family.

• This fee cap does not apply to non-individual clients such as QIBs, accredited investors, or institutional investors.

• RAs can charge fees in advance, but not exceeding one quarter's worth of fees.

• No separation fees are allowed in the event of premature termination, and clients must be refunded for the unexpired period.

Client-Level Segregation for RAs:

• Individual RAs cannot provide distribution services, and their family members cannot offer distribution services to the same clients.

• Non-individual RAs must ensure client-level segregation between research and distribution services across the group.

• An annual audit certification is required to confirm compliance with this segregation.

4. Enhanced Transparency and Record-Keeping

• Disclosure Requirements: RAs must fully disclose service terms, conflicts of interest, and redressal mechanisms to clients upfront.

• KYC and Record Maintenance: SEBI has instituted stringent Know Your Client (KYC) procedures and mandates that all client interactions and advice be documented for audit purposes.

5. Compliance Audit Requirements:

• IAs, RAs, and research entities must complete an annual compliance audit within six months after the financial year-end.

• Any adverse findings must be reported to SEBI/IAASB/RAASB with actions taken to address them.

• IAs and RAs must maintain a certificate of compliance with segregation requirements, which will be included in the audit.

Compliance audit findings, along with actions taken, must be published on their website and shall provide the compliance audit report to their clients.

6. Aligning with Evolving Business Practices

• AI Integration in Services: SEBI mandates clear disclosure of AI tools used in advisory or research roles, emphasizing transparency.

• Definitions and Frameworks: SEBI has clarified definitions for terms like “Research Analyst” and “Research Services” to standardize compliance across advisory practices.

SEBI’s proposed changes make it easier for new talent to enter the advisory space while still upholding quality and transparency.

Disclaimer: This article is intended for educational and research purposes only. Please consult a professional before taking any action based on the information provided.