SEBI issues framework for supervisory body for investment advisors

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The Securities and Exchange Board of India (SEBI) on 18 June 2021 released a framework for the administration and supervision of investment advisors. As per SEBI’s definition, anybody or corporate body for the purpose of regulating Investment Advisers (“IA”) and delegate administration and supervision of the IAs would be designated as “Investment Adviser Administration and Supervisory Body” (“IAASB”).

In this regard, SEBI has appointed BSE Administration & Supervision Limited (BASL), a wholly-owned subsidiary of BSE ltd as IAASB for a period of three years from June 01, 2021.

IAASB responsibilities include supervision of IAs, grievance redressal from investors as well as from IAs, also monitoring activities by obtaining periodical reports from IAs. Further maintenance of IAs database and also taking and issuing warning by alerting SEBI for enforcement plan.

That said, IAASB would be subject to periodic inspection by SEBI. Also, in order to ensure compliance with the regulation of the IA Regulations and also to keep their registration in force, the existing IAs would require to seek membership of IAASB. This should be done within three months of the recognition of IAASB by SEBI.

“Accordingly unless specified otherwise by SEBI, existing IAs shall be required to pay membership fees to IAASB in a manner prescribed by IAASB, at the time of payment of fees to SEBI as per Second Schedule to the IA Regulations, to keep their registration in force,” SEBI said.

What does this mean to investors?

This initiative is to protect the interests of investors in the securities market and to boost the development and regulate the securities market.

A wrong purchased financial product might sabotage an individual investor’s confidence in the capital markets. The financial industry’s commission-based business model is frequently blamed for misselling.

Financial advisors and distributors are notorious for recommending products with large commissions above those that are suitable for their client’s risk profile and investment goals.

To avoid a conflict of interest arising from this structure, the market watchdog has been consistently amending the Investment Advisers Regulations 2013 act. In October 2016, SEBI also made the industry’s investment advisory and distribution activities more explicit thereby bringing more transparency in the system.

To prevent the conflict of interest arising out of this structure, the regulator, in October 2016, had proposed to amend the Investment Advisers Regulations of 2013 to clearly the industry’s investment advisory and distribution activities.

After clarifying certain issues with market participants, SEBI had issued a revised consultation paper in June 2017. Based on the feedback received, it has also released yet another consultation paper on January 02, 2018.  Further in September 2020, Sebi made new amendments to the existing guidelines of IAs.

Since then, SEBI has been on a mission to bring more changes every now and then to bring more clarity and transparency for the investors. This year in January, SEBI had banned three stockbrokers and their directors from providing unauthorized investment advisory services to investors.

The three businesses were found to be acting as investment advisors and collecting subscription fees from investors for stock recommendations without acquiring a registration in their own names as required by the Investment Advisers (IA) standards, according to SEBI.

Such kind of activity will be prevented with IAASB coming into the picture to supervise IAs. This is yet another good initiative taken by SEBI, but only time will reveal to what extent this would be successful in preventing fraudulent activities carried by IAs.