How a wrong font size led to violation by an investment advisor, contributed to cancellation of its registration

The other violations included failure to comply with qualifications and certifications requirements, failure to follow the prescribed format of agreement, failure to maintain proper records, failure to maintain proper client samples and doing fraud by promising assured returns. The IA also failed to follow proportionate fee structure, even charging nearly 6x the permitted limit of Rs 1.25 lakh annually in one instance. The IA was found to have collected Rs 6.25 lakh, though it returned Rs 5 lakh later.

Thus, through the enquiry order dated April 24 from the Securities and Exchange Board of India (Sebi) cancelled the IA's registration.

An IA's agreement with its client is meant to capture a few details, including the details of the client and fees structure, on the first page. But the Sebi officials found that these details had been placed in the second page.

The IA said that this had happened because the font size did not permit all of the details to be included in the first page. It added that no requisite information was missing from the agreement.

To this, the Sebi order stated that the agreement not only captures the responsibilities of the IA but also protects the interests of the investors in the securities' market.

It added, "It is therefore such agreement must be enforceable and binding on both a parties to the agreement as per applicable rules and
regulation."

It stated, "In this case it is clearly established that the Noticee did not executed a legally binding agreement in the specified format as prescribed in the aforesaid circular (Sebi circular dated September 23, 2020) provision."

Another pecularity

The order was also unusual for taking a more severe stand than what the Sebi's Designated Authority (DA) had recommended. While the officer passing the order is under no no obligation to follow the DA's recommendation, what usually happens is that they either give the same recommendation or give a less-severe recommendation.

In this case, it has happened otherwise.

The DA had recommended disposing off the case without any adverse action.

Also read: IA shows ‘casual approach’ to regulations, registration suspended for 3 months

When there is a concern about non-compliance by an intermediary, the regulator appoints a DA who issues a showcause notice to the intermediary. Then, after receiving the noticee's responses, recommends a course of action. This recommendation is then passed on to either another officer, who then asks the noticee to make his/her submissions or come for a personal hearing.

This officer then passes the order, after taking the findings in the initial SCN, the DA's recommendations and the noticee's submissions.