SEBI Eases Norms for Investment Advisers: Enables Second Opinion on Assets under Pre-existing Distribution Arrangements

Introduction

To increase the ease of doing business and the choices investors have, the Securities and Exchange Board of India (“SEBI”) has released a circular permitting Investment Advisers (“IAs”) to offer second opinions to clients regarding assets held under pre-existing distribution arrangements. This circular adjusts Clause 1(iii)(f) of the Master Circular for Investment Advisers. It hopes to address the concerns of the industry while expanding the advisory services offered, and also to protect investors through transparency and the Self Disclosure Mechanism and consent.

Explanation of the Circular

Before, Clause 1(iii)(f) of the Master Circular for Investment Advisers stated that any portion of the assets under advice (“AUA”) held by a client under a pre-existing distribution arrangement was to be considered excluded from the AUA for the purposes of fee calculation. This provision was effectively a blanket inhibition on IAs charging AUA based fees on such assets, which also restricted their ability to offer a second opinion to clients with distributors.

More recently, IAs have stated that they have clients who want to have their portfolios evaluated, even if they do not wish to change the current distribution arrangements. To this end, the previous legislation greatly inhibited IAs from providing any meaningful service to such clients. In response to this, IAs have been able to charge fees on such assets, which is now subject to the following conditions:

• Fee Cap:
  IAs may charge an AUA-based fee of up to 2.5% per annum on the value of assets under a pre-existing distribution arrangement when providing a second opinion.

• Disclosure and Consent:
  IAs must disclose and seek annual consent from such clients, clarifying that in addition to the advisory fees payable to the IA, the client will continue to incur distributor consideration costs for those assets.
• Amendment to Master Circular:
  The revised clause now reads: “For clients seeking second opinion on assets under pre-existing distribution arrangement with other entity, IAs may charge fee on the assets under pre-existing distribution arrangement under AUA mode, subject to a limit of 2.5% of such assets value per annum. IAs shall, on annual basis, disclose and seek consent from such clients that apart from the advisory fees payable to the IA, the clients will be incurring costs towards distributor consideration for such assets.”
• Effective Date and Legal Authority:
  The provisions of this circular take effect immediately and have been issued under Section 11(1) of the SEBI Act, 1992 read with Regulation 15A of the SEBI (Investment Advisers) Regulations, 2013, to safeguard investor interests and promote orderly development of the securities market.

Conclusion

The advisory ecosystem in India has grown with this amendment, allowing investors to seek independent professional advice on their current portfolios without any regulatory friction. It also enhances the business flexibility of Investment Advisers, acknowledging their function in providing unbiased second opinions. Meanwhile, transparency and investor protection are still priorities with mandatory disclosures and annual client consent. There is regulatory balance and investor empowerment coupled with an evolved and trusted investment advisory ecosystem.