MC Exclusive| Stack Wealth may find itself in regulatory soup with its claims of SEBI registration, wealth management, say legal experts

There is an exception given to MFDs under the IA Regulations, but it is not an all-encompassing exemption.

Stack Wealth, which is in the news for a video showing an argument between its Chief Executive Officer and its employees, may find itself in regulatory hot water too.

Sources told Moneycontrol that the entity claims to be SEBI registered when it is only licensed to be a mutual-fund distributor  (distributor licence No. 171554, according to its website) and offers wealth management on its website, which is against the SEBI norms for mutual fund distributors (MFDs).

On its website, the entity claims to be SEBI registered but it does not give details on what kind of registration it holds.

Anand Kankani, a Practising Company Secretary who advises registered investment advisors (RIAs) and research analysts (RAs) on securities law, told Moneycontrol said, “All SEBI registered entities need to disclose their SEBI registration number and the category under which they are registered and the SEBI office under whose jurisdiction they are.”

When asked about this, the company cited its mutual fund distributor licence. The company stated, "Stack Wealth holds a Mutual Fund Distributor (MFD) license under the regulations of SEBI, registered through the Association of Mutual Funds in India (AMFI). Our ARN Holder Number is 171554."

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Stack Wealth's use of wealth management or terms similar to that to describe a mutual-fund distribution (MFS) service is again a violation of SEBI norms. Moneycontrol's perusal of the website showed the various instances where Stack Wealth has linked its services to wealth management.

Kankani said that Regulation 3(3) of RIA Regulations prohibits this.

The text of this section of RIA Regulations states: “On and from the date of commencement of these regulations, no person, while dealing in distribution of securities, shall use the nomenclature “Independent Financial Adviser or IFA or Wealth Adviser or any other similar name” unless registered with the Board as Investment Adviser.”

MFD's Code of Conduct too refers to this regulation, stating, “Pursuant to Regulation 3 (3) of the SEBI (Investment Advisers) Regulations, 2013, MFDs shall not use terms such as Adviser / Advisor / Financial Adviser/ Investment Adviser/ Wealth Adviser/Wealth Manager/Wealth Managers, Consultant/s, etc. or any other similar name in their name, unless registered with SEBI as an Investment Adviser".

Another compliance expert who advises investment advisors said on condition of anonymity that MFDs are allowed to give advice only to the extent of the MF products they provide, and are not allowed to provide wealth management solutions.

Moneycontrol reached out to Stack Wealth for responses and the company has said that they will make necessary adjustments to their descriptions to avoid any misrepresentation.

The company said, "Our new website was launched a couple of days back and our content team is still reviewing our website to ensure that our terminology aligns with these guidelines. Our services are focused on providing comprehensive financial advice within the scope of mutual fund distribution, and we will make necessary adjustments to our descriptions to avoid any misrepresentation."

There are other anomalies in the services offered.

On its website, Stack Wealth compares its services to other investing platforms, and Stack Wealth’s description of its own service could fall either under RIA Regulations or Portfolio Managers Regulations.

Kankani said, “A portfolio based on your investing style is a model portfolio which falls in the domain of RIA” and cited a settlement order passed by SEBI in 2022 against a registered research analyst for offering model portfolio. But depending on how this service is operated, it could fall under the domain of even portfolio management, said Kankani.

He said, “Adjusting asset allocation based on markets can be investment advice if it is executed at the client's end. But, if they (Stack Wealth) are executing this then it will be considered portfolio management”.

There is an exception given to MFDs under the IA Regulations, but it is not an all-encompassing exemption which a distributor can use to provide investment advice or portfolio management.

Kankani explained: “They (the distributors) can only offer services that are ancillary to the MF with which they are dealing. The exemption provision stated in Regulation 4 of SEBI (IA) Regulations for MFDs are restricted to activities incidental to its primary activity.”

SEBI’s FAQs on Investment Advisors say that MFDs do not have to be registered as an IA provided they limit their advice to "to investment in mutual fund schemes limited to such schemes/products being distributed by a mutual fund distributor to his clients/ investors or any other mutual fund product".