Festive greetings to all my dear clients. Wishing those of you who celebrate Diwali, a joyous and prosperous year ahead and for the others I hope you are thoroughly enjoying the long weekend that the festival has provided us.

As much as I use this blog to communicate to my clients, I also use this as a platform to voice my opinions on a variety of regulatory issues that touch Aroha. SEBI has sought public feedback on a recently released Consultation Paper on Amendments/Clarifications to the SEBI Investment Advisers (IA) Regulations 2013. This blogs captures what our opinions are on a variety of matters concerning the same.

Section 4.1.4:

a. Barring distributors from providing advice : In the current IA Regulations of 2013, mutual fund distributors have been exempted from registration under the IA Regulations. However the recent consultation paper recommends that this exemption be removed and that distributors who wish to continue giving advice will be given a 3 year window to register themselves under IA Regulations and thereafter they will be barred from collecting any commissions except trail commissions of earlier client investments.

This is an excellent suggestion and helps to plug a wide hole in the idea of providing investment advice “incidental” to distribution. This is a clear realization on the part of the regulator that the current lack of enthusiasm for registering under the IA regulations, can only be reversed through push rather than cajoling. I am delighted with this proposal and would only wish the window of 3 years for transitioning be reduced to 1 year.

b. Those who collect commissions MUST use the term “Mutual Fund Distributor”: As I have many a time alluded to, the consultation paper laments the fact that distributors have consistently obfuscated the fact that they make income through commissions and have called themselves by many fancy sounding terms such as “wealth adviser”, “independent financial adviser” etc… The consultation paper bars anybody who earns commissions from using such terms to describe themselves and must register themselves under IA regulations within a 3 year period if they wish to continue to be called by such terms.

This is an excellent suggestion and will remove a lot of confusion in the public mind on who is a distributor (earns commissions) and who is an investment adviser (earns fee from client directly). I am delighted that SEBI is serious about bringing this change and I only wish that again the window for the transition be reduced from 3 years to 1 year.

My overall comment on section 4.1.4 is that they are all excellent suggestions. However one major regulatory loop-hole still remains to be closed. This is the sale of investment linked insurance products such as ULIPs, endowments, whole life policies and the like. As these do not fall under SEBI, it is unclear whether Investment Advisers can continue to act as distributors for these products. If they are allowed, then there exists a regulatory arbitrage, which needs to be eliminated how can they be distributors and collect commissions under one regulation and not under another?. If they are not allowed then it must be explicitly said so. I strongly recommend that no Investment Adviser be allowed to collect commissions on ANY product irrespective of the regulatory domain under which the product falls. This action surely falls within SEBI’s regulatory domain.

Section 4.2.2:

a. Anyone giving advice for a consideration must be registered under IA regulations: The current IA regulations exempts Chartered Accountants, Brokers and Portfolio Managers from registration. The concept paper removes this exemption – and this is a welcome move.

Section 4.3.1:

a. Client under no obligation to avail distribution services offered by investment adviser: This is a good amendment – but it must be explicitly stated to the client that he indeed has this option.

Section 4.13.c.:

a. Ban on circulating advertisements that refer to any testimonials: Does this mean that Investment Advisers cannot place client testimonials on their websites? A big source of clients for Investment Advisers is client testimonials. Kindly clarify if it is indeed proposed to not allow client testimonials.

Section 4.17

Recognizing the CFA qualification and exempting CFA charter holders from NISM Series Investment Adviser Level 1 and 2 examinations: Being a CFA charter holder myself and a signatory to the code of ethics of the CFA institute, I am delighted