SEBI’s Guidelines For Investment Advisors: Key Changes

Posted On - 29 January, 2025 • By - Sindhuja Kashyap

Introduction

The Securities and Exchange Board of India (SEBI) has recently issued a circular outlining new guidelines for Investment Advisors (IAs).[1] These guidelines aim to enhance investor protection and regulate the securities market by introducing key changes, including revised fee structure, stricter compliance requirements, and increased transparency for clients.

Deposit Requirement

IAs now face a new requirement, which is to maintain a deposit with a scheduled bank. The amount of this deposit depends on the number of clients served by the IA in the previous financial year.

The breakdown for the same is as follows:

  • Up to 150 clients: ₹1 lakh
  • 151 to 300 clients: ₹2 lakh
  • 301 to 1,000 clients: ₹5 lakh
  • 1,001 clients and above: ₹10 lakh

This deposit must be held with a lien in favor of the Investment Adviser Administration and Supervisory Body (IAASB). To ensure that changes are reflected in the client base, IAs are required to adjust their deposit by 30th April of the following year.

Pertinently, SEBI has taken upon itself the task of periodically reviewing these deposit requirements.

The deadlines for compliance are as follows:

  • Existing IAs: June 30, 2025
  • New applicants: Immediate compliance is required

It seems like this deposit requirement has been introduced to enhance investor protection as well as the financial stability of IAs.

Registering as an IA and a Research Analyst

SEBI has allowed Research Analysts registered with it to also become IAs. However, it has provided specific conditions that must be met to qualify for this dual role.

  • Firstly, such individuals or firms are required to comply with the regulations for both research analysts and IAs, which means compliance with both sets of rules.
  • Secondly, it is crucial for such entities to maintain independence. They must have a clear separation between their research and advisory activities. This approach, referred to as the “arms-length” approach, has been introduced to ensure objectivity and prevent any potential conflicts of interest.
  • Lastly, a formal undertaking is a must to qualify for this dual role. Such an undertaking serves as proof of the commitment of these entities to comply with all the regulations and maintain the level of independence that is required.

The introduction of this provision provides flexibility to entities that have expertise in both research and analysis. It allows them to use their knowledge in both fields.

Understanding Part-Time IAs

Who is a Part-Time IA?

A part-time IA is an individual or a form that is engaged in a profession outside the securities market. This includes roles that are permitted by financial regulators or self-regulatory organizations like ICAI, ICSI, or ICMAI. Essentially, part-time IAs combine investment advisory work with other professional pursuits that are unrelated to securities.

What Makes Someone Eligible?

To qualify as a part-time IA, applicants must meet the same educational and certification standards as full-time investment advisers. But there is an added layer, they need to ensure that their investment advisory services are kept entirely separate from their other professional activities. This means that they must create clear boundaries between their professional activities and their investment advisory services to ensure that there is no overlap or conflict of interest.

The Importance of Transparency

Part-time IAs must be upfront about their dual roles:

  • Client Awareness: It is crucial to disclose all other business activities to clients to ensure that there is no room for any confusion.
  • Clear Segregation: Investment advisory services should stand differently from any other services provided by such part-time IAs.
  • Disclaimers: Whenever such part-time IAs engage in non-SEBI-regulated services, they must clearly display a disclaimer.

What Does Eligibility Look Like?

  • Who qualifies: Professionals like chartered accountants offering statutory services, doctors, lawyers, and even teachers or professors. Their main work must steer clear of securities-related advice or recommendations.
  • Who does not qualify: Professionals advising on assets like gold, real estate, or cryptocurrency would not qualify as part-time IAs. SEBI has drawn a firm line here to maintain clarity.

Principal Officer Designation

If a partnership firm is registered as an investment adviser but none of its partners meet the necessary qualifications and certifications, it must switch to a Limited Liability Partnership (LLP) or a body corporate by September 30, 2025. One partner in the firm must be appointed as the principal officer.

Appointment of Compliance Officer

  • Non-individual investment advisers can hire an independent professional, such as a member of ICAI, ICSI, or ICMAI, to serve as the compliance officer.
  • This professional must hold relevant certifications from NISM.
  • The principal officer remains responsible for ensuring that the firm complies with the IA Regulations and SEBI guidelines.

Scope of Investment Advice

  • Investment advice related to securities regulated by SEBI falls under the IA Regulations.
  • Investment advisers are also allowed to offer financial planning services that may include advice on products not regulated by SEBI.
  • When advising on these non-SEBI products, advisers must clearly inform clients that such services are outside SEBI’s jurisdiction and that no complaints related to them can be taken up with SEBI.
  • New clients must sign a declaration during onboarding, while existing clients must comply by April 30, 2025.

Use of Artificial Intelligence (AI) in IA Services

  • IAs who use AI tools have the full responsibility to maintain the security, confidentiality, and integrity of their clients’ data.
  • When they provide investment advice, they must disclose the extent of AI usage. This should be done both at the start of the agreement and whenever else necessary.
  • For current clients, these disclosures must be made by April 30, 2025.

Fees and Flexibility in Charging

IAs have two ways to charge their clients:

  • AUA Mode: Up to 2.5% of Assets under Advice per year for each family.
  • Fixed Fee Mode: The maximum fee has been updated to ₹1,51,000 per year per family.

IAs now have the flexibility to switch between these two fee models whenever they choose. For doing this, they are no longer bound by the previous 12-month waiting period. However, the fee can never exceed the higher of the two limits.

These fee limits apply only to individual and Hindu Undivided Family (HUF) clients. For non-individual clients or accredited investors, the fee structure is more flexible and will be determined by the contract between the IA and the client.

Transition to Non-Individual IA

If an individual IA exceeds 300 clients or earns over ₹3 crore in fees in a year, they must apply for an in-principle registration as a non-individual IA. They are required to complete this process within three months.

Once this process is complete, IAs will receive full registration as a non-individual IA. However, if they do not fulfill the transition requirements, they are required to continue to operate within the limits for individual IAs.

Segregation of Advisory and Distribution Activities

IAs are required to keep their advisory and distribution activities separate, at the family or group level. However, IAs working with institutional clients or accredited investors can bypass this requirement if the client signs a waiver.

It is crucial to note that stock broking does not fall within the definition of “distribution” in this context.

Client Agreement

IAs are required to conclude an investment advisory agreement with their clients. This agreement must include the Most Important Terms and Conditions (MITC). This agreement will also clarify that IAs cannot execute any trades without the client’s specific consent for each transaction.

Clients can sign the agreement in person or digitally using an Aadhaar-based e-signature (via DigiLocker). Existing clients must give their consent to these terms by June 30, 2025.

Maintenance of Records

Any IAs providing implementation or execution services are required to record consent for every trade they conduct over the phone. All such recorded communication should be time-stamped to ensure that there is a clear audit trail. IAs are required to comply with these requirements by June 30, 2025.

Audit Requirements

Mandatory Audits

These guidelines mandate IAs to conduct annual compliance audits. This is to ensure that they are adhering to all SEBI regulations, including the circulars and guidelines issued.

These audits are important to maintain transparency and accountability in the investment advisory industry.

Audit Report Requirements

  • The audit report must provide a comprehensive assessment of delineating how IAs have complied with all the relevant regulations.
  • This audit report is to be submitted to the IAASB or SEBI. The deadline for submitting it is within one month of its completion.
  • If the audit identifies and reveals any adverse findings, the IA is required to submit such findings, along with the corrective actions taken by the IA. This has to be submitted to the authorities within a specific timeframe.

Client Segregation Certification

  • One of the key aspects of the audit is to ensure that IAs comply with the client-level segregation requirements. These requirements aim to prevent conflicts of interest and hence, must be complied with.
  • Such compliance with these segregation rules must be shown by obtaining an annual certificate from a qualified auditor. Examples of such auditors are members of ICAI, ICSI, or ICMAI.

Conclusion

SEBI has taken an important step by issuing these guidelines for IAs as they reflect its commitment to strengthening the regulatory framework for IAs in India. These guidelines provide for revised deposit requirements, ensure clearer client agreements, and mandate stricter compliance and audits.

This enhances the trust of investors in the system and also improves the market discipline. The guidelines further provide dual role provisions while segregating advisory and distribution activities. This ensures the mitigation of conflicts of interest. The flexibility in the fee structures also provides scope for servicing clients in a better and fair manner. As a result, the guidelines collectively ensure that the market participants are provided a more secure and well-regulated environment.

[1] https://www.sebi.gov.in/legal/circulars/jan-2025/guidelines-for-investment-advisers_90632.html

King Stubb & Kasiva,
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