The Securities and Exchange Board of India’s (Sebi) guidelines to restrict registered intermediaries’ tie-up with unregistered finfluencers have created a lot of confusion.
On August 5, Sebi released a consultation paper that seeks to restrict the association of Sebi-registered intermediaries with unregistered entities, such as finfluencers.
While suggestions have been made to empower investors, the paper has raised a lot of questions among unregistered finfluencers and brokerages, including on the kind of registration required to continue their association.
We have tried to answer a few of them, with inputs from brokerage heads and compliance experts.
Should a finfluencer register as an RA or IA?
No, a finfluencer does not have to be registered as a Research Analyst (RA) or Investment Advisor (IA). He/she can be registered even as an authorised person (AP).
Tejas Khoday, co-founder and CEO of FYERS, and governing body member of Bombay Stock Exchange Brokers’ Forum (BBF), said: “Unregistered entities (including finfluencers) who wish to associate with broking firms should obtain prior approval from Sebi and register themselves as authorised persons. They should also comply with the relevant provisions of the SEBI Act, 1992, and the regulations made thereunder.”
All APs have to get a Certificate of Registration from an exchange.
Khoday added, “Alternatively, they (finfluencer associates) can register themselves as investment advisers or research analysts under the SEBI (Investment Advisers) Regulations, 2013, or the SEBI (Research Analysts) Regulations, 2014, respectively, if they are engaged in providing investment advice or research reports to investors.”
As an AP, can an influencer work with multiple brokerages?
No, even the current regulations say that a person cannot be appointed as an AP by more than one brokerage, said a compliance expert who did not want to be named. The person can be paid the fee/commission only by this brokerage and he cannot charge clients for anything. The AP enters into an agreement with a stock brokerage, in the form prescribed by the exchange and with various details, including scope of activities, commission-sharing and termination clause. The stockbroker will be held responsible for the actions of the AP.
Can an RA or IA promote a service or a product?
Yes, subject to conditions. FYERS’ Khoday said, “Registered advisers or analysts are allowed to promote any product or service that is related to their area of expertise and competence, subject to certain conditions and restrictions.”
“According to the Sebi consultation paper, they should disclose their relationship with the registered/regulated entities whose products or services they are promoting, and avoid any conflict of interest or bias. They should also adhere to the respective code of conduct and ensure that their promotion or advertisement is fair, transparent, accurate, and not misleading.”
What should APs’ promotional content adhere to?
An AP will need to abide by the advertising code released by the exchanges, according to Pravin Jadhav, founder of brokerage Dhan.
This is from a Twitter thread he had posted, explaining some of the changes.
On February 2, 2023, the exchanges had released a revised advertising code for stock brokerages, which defined what would be considered advertising, gave broad guidelines to be followed with advertising, specified what advertisements should contain and should not contain, among other things.
The compliance expert, who was quoted earlier, said that every instance of a registered influencer sharing a referral link will need to be cleared by the exchange, even if the content supporting the referral link does not discuss the stock market. Brokerages will have to share with stock exchanges details of the influencer and his/her various social media handles to get permission.
Will it mean the end of the account-opening incentive programme, through which unregistered finfluencers are paid per new account?
It will not stop entirely but will be greatly limited. According to Khoday, the suggested regulations may not put an end to the programme, but they may limit the compensation that can be earned through this.
“The consultation paper proposes that any association of Sebi-registered intermediaries/regulated entities with unregistered entities (including finfluencers) for promotion or advertisement of their services/products shall be subject to prior approval from Sebi. It also proposes that Sebi may prescribe a cap on the compensation or benefit that can be paid or received by the unregistered entities for such association,” he said.
How will it affect referral income?
There are some differing opinions here. While some believe that everyone will have to be rewarded with the same percentage of brokerage fee, others believe it has not been clearly stated.
Dhan’s Jadhav wrote in his Twitter thread that many finfluencers earn lakhs and crores a month from referral/affiliate incomes.
While brokers usually share 10 percent of the brokerage fee with those who bring in new clients, they may give influencers a much higher percentage. According to Jadhav, it is regular for finfluencers to be given more than 50 percent of the brokerage fee and the share can even go up to 70 percent.
With the proposed regulations, this will stop. “No differential sharing via referral,” he wrote.
That is, a person who brings in one client and a person who brings in 10 will be given the same percentage.
Khoday said that the consultation paper has not been specific about sharing the brokerage with unregistered entities. “However, Sebi has suggested limited referrals from retail clients and payment of fees for such limited referrals,” he said.
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