Research analysts cannot provide research for products that they distribute due to potential conflict of interest: SEBI

Research analysts cannot provide research for the products which they distribute, SEBI cites conflict of interest

To avoid conflict of interest, market regulator Securities and Exchange Board of India has proposed that research analysts (RAs) cannot provide research services for products for which they are a distributor. SEBI published a proposed frequently asked question (FAQ) in which the issue has been clarified. As per the FAQ “in terms of the regulatory intent, RA/research entity cannot  provide research services for the securities/products in case it also provides distribution services for such securities/products”.

SEBI is of the view that research analyst is expected to provide independent, unbiased, and objective research on securities. It is important to ensure that there is no conflict of interest between the research activity and other activities of the research analyst. SEBI FAQ says the purpose of the regulation 26C of Research Analyst Regulations is to address the inherent concerns on potential conflict of interest of RA when it provides both the research and distribution services to their client that may not be in the interest of client.

SEBI clarified that research analyst or research entity can provide distribution services on products or securities if they are not providing research services on such products or securities being distributed. But, such distribution services should be through separately identifiable department or division or business unit within the same entity or through a separate entity on an arms’ length basis.

Also read: Sebi considering easier onboarding in push to add more accredited investors

SEBI has also clarified that client level segregation of research and distribution services is not required in case research analyst or research entity distributes mutual funds, PMS schemes, AIF products but provides research services only on individual stocks and is not providing research services on the products mentioned above.

Also, research analyst or research entity is required to maintain client level segregation at family or group level in case it is engaged in providing research services on mutual funds and is also engaged in distribution of mutual funds.

Research analyst or research entity may carry out distribution of other products, such as banking products not under purview of SEBI to their clients at family or group level. But any grievances related to such products shall not come under purview of SEBI.

SEBI has clarified that intermediaries like brokers or merchant bankers, who provide research services to their clients as value added services, will also be covered under research services, though separate fee consideration from clients may not be identifiable as per Research Analyst Regulation.

ALSO READ: SEBI allows clearing corps to adjust core SGF from currency to equity derivatives

SEBI has re-iterated that sales person or relationship manager or other client-facing staff, even though not involved in research, are required to obtain NISM Certification. Persons associated with research services shall obtain the relevant certification from NISM as specified by SEBI within one year from the date of this circular or within the timeline as may be specified by SEBI.