Investment Adviser and Regulatory Environment

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I picked up a small theoretical but interesting topic for today Regulatory Environment and Ethical Issues

Now, lets get started.

Many of us might have experienced troubles with financial instruments.

For example, we might have been sold an insurance product whose features we do not know

Or perhaps a mutual fund scheme that is very risky for a low-risk taker like you.

Whom shall we approach in case of a problem?

Who are these guys - RBI, SEBI, IRDA?

What are the ethics and Code of Conduct that intermediaries have to follow?

Topics such as these are covered in this chapter.

I have not gone through the model paper but my guess is that we might get 8 questions from this chapter.

1 mark for each correct answer. Negative of 0.25 if we make an incorrect answer.

Mere listening will help you get a grip on this topic.

There are 8 sub-topics in this chapter.

Lets start

Why do we need an Investment Adviser?

Investors often lack one or more of these:

1. Expertise
2. Talent and Skills
3. Psychological makeup to fight ups and downs of the markets.

The investment adviser will do the necessary "handholding" to his client and support him by giving the right advise at the right time.

What is SEBI Investment Advisers Regulation, 2013?

There is an important SEBI Regulation.

It is called SEBI (Investment Advisers) Regulation, 2013

Any one involved with Investment Advisery activities are covered in this.

Independent Financial Advisors or IFA

Distributors

Banks

.. and other such entities

What is an Investment Advise?

There is a definition for Investment Advise

any form of advice ..

provided in relation to investment, ..

purchase, sale or dealing in securities or investment products

is an Investent Advise

The advise need not be about specific script / products.

It could be about portfolios, investment products or preparation of financial plans.

The advise can be:

Oral

Written

Email instruction

or such mode of communication

intended to the specific client

Advise given to the public at large:

such as on internet website

whatsapp groups

newspapers

magazines etc

DOES NOT CONSTITUTE to be an investment advise

So, we need to be clear of what constitutes an Investment Advise and what is not.

Hope you guys are following...

SEBI Registration gives you a Certificate that is valid for 5 years.

To get this, you need to pass the Series X A and X B (both papers)

Qualifications for Investment Advisers

The Regulations specify certain minimum qualifications for a person to be eligible to be known as an investment adviser. If an individual seeks registration as an investment adviser, or a partner or representative of an investment adviser registered under the Regulations must possess these qualifications.

A professional qualification or a post graduate degree or post graduate diploma in finance, accountancy, business management, commerce, economics, capital market, banking, insurance or actuarial science from a university or an institution recognized by the central government or any state government or a recognised foreign university or institution or association

OR

A graduate in any discipline with an experience of at least five years in activities relating to advice in financial products or securities or fund or asset or portfolio management.

Certification Requirements

An investment adviser must obtain valid certification on financial planning or fund or asset or portfolio management or investment advisory services from NISM or from any other organization or institution including Financial Planning Standards Board India or any recognized stock exchange in India provided that such certification is accredited by NISM.

Existing investment advisers seeking registration must ensure that their partners and representatives obtain such certification within two years from the date of commencement of the Regulations.

Exemptions from SEBI Registration

Certain persons are exempted from registration.

1. Any person who gives general comments on financial trends, economic situation which is not stock/product specific.

2. Insurance Agents, Mutual Fund Distributors, Advocates, CAs, Stock Brokers, Fund Managers etc.

3. An advise given to a client outside India not being a PIO or NRI.

To become a SEBI Registered IA, you need to have a:

1. Professional qualitication or a PG Degree (from finance related streams)

or

2. Any graduation but with 5 years experience

Capital Requirements

For individuals: Net worth should be Rs. 1 Lakh

For body corporate: : Net worth should be Rs. 25 Lakh

Now let us see what are the Duties of an IA

I am giving the side headings.. you might already know them

1. Conflicts of interest

2. Only Advisery income

3. Segregation of other activities

4. Confidentiality:

5. Own transactions

6. KYC compliance

7. Code of Conduct

8. Reporting to SEBI

9. Certification and Qualification

Risk Profiling

An Investment Advisor need to do a Risk Profiling of his client:

Essentially:

1. Gather Information about client

2. Risk assessment (using)

3. Risk profiling tools (questionnaires, proprietary tools, surveys) etc

Investment Advisor has to maintain documentation about the Suitability of the product suggested to the client.

IA has to give proper disclosures to the client

IA has to maintain record of all this for a period of minimum of 5 years in physical or electronic form

This is the basics related to Investment Advisor

Regulators in India

Now lets go to the next segment: Regulator

For the purpose of this lesson, 5 regulators are discussed.

Reserve Bank of India or RBI: Regulates commercial and primary co-operative banks

Securities and Exchange Board of India (SEBI) regulates securities markets

Insurance Regulatory and Development Authority (IRDA) regulates insurance companies

Pension Fund Regulatory and Development Authority (PFRDA) regulates the pension sector

Forward Markets Commission (FMC) regulates the commodities futures sector

Update: FMC is merged with SEBI

Functions of all these regulators are given in the material but I guess most of you would already be knowing.

Self-Regulatory Organizations (SRO)

One topic that requires mention is Self-Regulatory Organizations (SRO)

These are bodies that work under an existing regulator

They will be entrusted with specific and particular segment of the securities market and which is duly recognized by SEBI.

The parent body specifies the broad policy framework and leave the micro-regulation to the SRO.

PMLA

Then, a broad overview on Prevention of Money-Laundering Act, 2002 (PMLA) is given.

Remember this punishment for money laundering:

The offence of money laundering is punishable with ..

rigorous imprisonment for a term which shall not be less than 3 years but which may extend to 7 years and

shall also be liable to fine, which may extend to Rs.5 lakhs.

Anti Money Laundering (AML) Measures

So, Investment Advisors and Regulators are indirectly responsible for taking Anti Money Laundering (AML) Measures

Includes:

Vertification of documents

Interviewing clients.. particularly clients who have declared wealth above Rs.10 lakhs or intend to trade (intraday) above Rs.2 crore in a month or who have given initial margin of Rs.4 to 5 lakhs and above in the form of monies or securities

Interviewing NRI clients etc

In MF, this is done at three layers:

1. KYC for investors (Know your Client)

2. KYC Registration Agencies (such as CAMS KRA)

3. KYD for distributors (Know your Distributor)

Investor Complaint redressal systems

I feel, one question on Investor Complaint redressal systems will surely be asked.

SEBI developed SCORES

SCORES = SEBI Complaint Redress System

Complaints against companies, brokers etc can be given using this online system.

After a complaint is raised, the entity has to redress it within 30 days.

Stock exchanges have been directed by SEBI to resolve disputes at their end within 15 days,

If a stock exchange does not resolve in 15 days, the issue automatically goes into conciliation process.

The Investor Grievance Redressal Committee (IGRC) shall be allowed 15 days to amicably resolve the issue

If issue is not resolved, temporary monetary relief from the investor protection fund will be given

IRDA uses its own redressal system.

Integrated Grievance Management System (IGMS)

National Pension System (NPS) has a multi-layered Grievance Redressal Mechanism.

For the subscriber, it is called the Central Grievance Management System (CGMS)

For Bank depositors, they have to use the Banking Ombudsman Scheme system failing which the issue has to be taken to RBI.

In this way, all regulators have their own grievence redressal systems.

Overview

The topics that are covered in this chapter are like this.

1. Regulation of Investment Adviser

2. Regulatory System and Environment

3. Regulator and SROs

Example of an SRO is the ICAI.. the Institute of Chartered Accountants who have their own rules and functions as a self-regulating organization.

4. PMLA or Prevention of Money-Laundering Act, 2002

5. Separate Code of Ethics given by SEBI as well as by AMFI

6. Ethical Issues in providing financial advice

and finally

7. Complaint redressal mechanism

I hope you guys got a fair overview on the subject.

Questions

1. What is KYD?

Answer: Know Your Distributor

2. I am the sole owner of a financial Advisery firm. What should be my minimum networth to get SEBI registration?

Answer: Rs. 1 Lakh

3. Who regulates pension funds?

Answer: PFRDA

4. What is the tool using which we can complaint against a company who has not paid dividend? Assume the company has announced dividend but one particular investor did not get it. He wants to complain. Where should he do?

Answer: Complain at SCORES

5. What is the tool for complaints redressal of IRDA called?

Answer: Integrated Grievance Management System (IGMS)

6. Assume that a financial advisor charged his clients for the following:

1. Portfolio design

2. Mutual Fund distribution

Does he require SEBI Registration?

Answer: A mutual fund distributor is exempted from registration. However, if he is charging for portfolio design services, he has to get registration.

7. What is KRA?

Answer: KYC Registration Agency

8. Prevention of Money Laundering Act came in the year ______

Answer: 2002

9. Can the fee of a client be paid by someone else? such as his relative?

Answer: No. As per Code of Ethics.

Last question.

10. A gap of minimum how many days is an IA required to take before he can take an adverse position being suggested to his client.

For example, IA gave a BUY call to his client. IA wants to do a SELL transaction. How many days gap should be maintained before he can do the SELL transaction.

Answer is 15 days.

Related Lessons

• Introduction to Mutual Funds
• Securities and Exchange Board of India (SEBI) and Mutual Funds
• Association of Mutual Funds in India (AMFI)
• Introduction to Insurance
• Bank Deposits
• Employees Provident Fund (EPF)
• Gratuity
• National Pension Scheme (NPS)

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