CONSULTATIVE PAPER ON REGULATION OF INVESTMENT ADVISERS

1.             INTRODUCTION

Section 12 of the SEBI Act, 1992 provides for registration and regulation of investment advisers. This note discusses the various issues involved in regulation of investment advisers.  

2.             CURRENT SCENARIO

In India, presently SEBI does not register and regulate investment advisers as a separate class of intermediary. However, investment advisory services rendered by market intermediaries such as portfolio managers, stock brokers, merchant bankers and credit rating agencies are regulated by SEBI through separate regulations. Portfolio Managers regulations, in particular, cover investment advisers who have discretion over and hold custody of client assets.

The entities involved in investment advice and not covered by SEBI regulations are:

a.        Very large number of entities not registered with SEBI, rendering investment advice to specific clients, without any formal contract and not having discretion over and custody of client assets. These include :

(i)     one stop shops calling themselves financial/investment consultants or advisers, who are engaged in distribution of retail financial products,

(ii)   Banks, Certified Financial planners, Chartered Accountants, Tax Consultants, etc.

b.        Entities not registered with SEBI and rendering investment advice on publicly accessible media like television, newspapers, radio, internet, mobile phone services, etc.

3.             SCOPE OF REGULATIONS

SEBI’s concerns regarding regulation of investment advisers are given below:

Entities Not Registered with SEBI and Rendering Investment Advice to Specific Clients

Regulation of all non-registered entities rendering investment advice to specific clients mentioned above will require enormous resources and reach. There are likely to be lakhs of advisers and distributors in India.  It is not feasible for SEBI to regulate such a large number directly as a frontline regulator within its current resources or even with resources likely to be available to it in foreseeable future even after taking into account its expansion plans.

One view is that a private sector self-financing Regulatory Organization (RO) should be created to be the first level regulator for investment advisers. The RO should develop principle based regulations with risk based examinations and implement regulation of discrete market segments in phases. The RO should publish regulations defining the process for regulation and registration, entry and exit, reporting and market conduct. These should include regulations on advertising, performance reporting and presentation, disclosure of conduct, experience and conflicts, disclosure of services and fees, prices and commissions and fair dealing.

Typically, investment advisers deal not only in securities but also other products such as insurance, commodities, pension products and government products including bonds and postal deposits, Company deposits, NBFC deposits and mortgages. It has also been suggested, therefore, that for effective regulation of investment advice, the RO should regulate investment advice relating to all the products. However, these products fall under the jurisdiction of different regulators/agencies. While it is legally not possible for any of the regulatory bodies/agencies to regulate a product outside its jurisdiction, same RO reporting to various regulatory bodies/agencies would lead to undesirable multiplicity of authorities over the RO.

It is understood that in the USA, there is no separate RO for investment advisers. The work relating to regulation of investment advisers is split between Securities and Exchange Commission (SEC) and State Governments.

Entities Not Registered with SEBI and rendering investment advice on publicly accessible media

There have been concerns in India regarding misuse of investment advice particularly in publicly accessible media like the electronic and print media. SEBI has had to take regulatory action against some investment advisers found to be misusing the media. Presently, all the registered intermediaries mentioned above, while rendering such advice on publicly accessible media, are required to make disclosure of their long and short positions in the securities held by them, their dependent family members and employer.

There is a view that all entities including the journalists/media persons which are not registered with SEBI and are rendering investment advice on publicly accessible media should be registered and be made to abide by a Code of Conduct and disclosure requirements. However, there is also a view that this may constitute denial of freedom of press and may not be constitutional.

It is understood that in the USA, the publisher of any bonafide newspaper, magazine or business or financial publication of general and regular circulation is excluded from the definition of Investment Adviser. This exception reflects concern of the Congress that Advisers Act, 1940 of USA does not impinge on publishers First Amendment Rights.   

4.             OTHER IMPORTANT ISSUES

Some other issues relating to regulation of investment advisers are:

a.      Whether all investment advisers should be regulated or only those who get compensated directly (in the form of fee) or indirectly (in the form of commissions, etc.) should only be regulated?

b.      Whether all categories of currently registered intermediary investment advisers such as portfolio managers, brokers, etc. and the non-registered investment advisers mentioned above should be subject to one umbrella regulation in respect of their investment advice function?

c.      Whether the investment advisers should be subject to requirement of certification?

d.      Whether certain norms are required to be laid down for employees of investment advisers?

Public comments and suggestions are invited on the issue of regulation of investment advisers. Comments/suggestions may be sent to the address mentioned below or through email to [email protected] on or before 30th April 2007.

Division of Policy and Supervision-III

Market Intermediaries Regulation and Supervision Department

SEBI Bhavan, 2nd Floor, A- wing,

Plot No: C – 4A, G Block,

Bandra Kurla Complex,

Mumbai 400 051.