Sebi easing compliance norms for RAs, IAs welcomed; some worry about bad actors flooding the scene

Several unregistered entities sell trading calls. In the press statement, Sebi has clarified that this activity would now fall under the RA Regulations.

The market regulator getting the go-ahead from its Board to ease compliance norms for research analysts (RAs) and investment advisors (IAs) has largely been welcomed by market participants, particularly its plan to reduce the networth and certification requirements.
Legal experts said that the clarification on entities that provide trading calls is a good move. Unregistered entities largely sell trading calls to their clients; now the regulator has given these entities an option to register as RAs, which would expand the regulated universe and ensure better investor protection, they said.
After meeting with its Board on September 30, the Securities and Exchange Board of India (Sebi) said that its proposals to review the regulatory framework for IAs and RAs and relax eligibility criteria for registration and simplify compliance requirements have been approved.

Also read: Sebi eases norms for RAs, IAs; reduces educational qualification, experience and networth requirements

While a few experts feared that lowering the threshold for entry may invite more bad actors and cause the regulator to tighten its reins over the regulated entities, others felt that this is a fine balancing act that can only be fine-tuned with time. The regulator's latest announcements are directionally good, they said, adding that it showed a willingness to work with the changing industry reality.

Networth, certification

Uday Dhoot, co-founder of Sebi-registered RIA Venn Wealth, welcomed the plan to reduce net worth requirements and do away with the need to retake the exams for NISM certifications. He pointed out that in no other profession, be it a chartered accountant or a lawyer or any other, are people/entities required to keep taking exams to keep their jobs. With RIAs, there is a constant worry that they could be without their career if they don't pass their exams every third year.

Founder of corporate compliance firm MMJC and Associates, Makarand M Joshi said that the regulator has asked that a certification based on incremental changes or developments be taken periodically by the RA and IA.  According to him, this will ensure that an IA or RA is well equipped with updated knowledge to guide investors.

Ayush Agrawal, a registered RA, said that relaxation on the net worth criterion was much needed, along with relaxation on minimum qualification, doing away with experience in the field to apply for registration, and allowing the recommendation of model portfolios by RAs. Several RAs have already been advertising their model portfolios on various platforms because of investor interest and the regulator has tried to be accommodating of this new market reality.

"These changes will help a lot of people who aspire to take this up as a full-time profession," said Agrawal.

Sebi's press statement also said that IAs will be given the flexibility to change the mode of charging fee (between fixed fee and assets-under-advice-based, or AUA mode) when needed. Venn Wealth's Dhoot said that this was much needed because the life situation of a client could change—like a loss of a job—and the client may want to change from an AUA mode to a fixed fee to tide over that particular crisis.

Part-time IA/RA

Sebi will now allow people who are engaged in other business activities and employment (other than related to securities and subject to certain conditions) to be registered as part-time IA and part-time RA.

Anand Kankani, a Practising Company Secretary who advises RAs and IAs on securities laws and compliance, termed this a very good move.

He said, "There are many experts in the market who look forward to carrying out the IA and RA activities but cannot do this because of various reasons including being engaged elsewhere. Now, anyone, be it an independent business journalist or a professor, can take up this activity in a structured and legal manner."

Trading calls

Several unregistered entities sell trading calls. In the press statement, Sebi clarified that this activity would now fall under the RA Regulations.

Kankani believes with this the regulator has closed a loophole.

Another legal expert, who did not want to be named, said people who look for trading calls are different from long-term investors. Short-term investors, often called traders, usually look for a faster turnaround in profits and may not be looking for more time-consuming investing advice that is based on individual risk appetite, investment goals, time horizon, etc. The regulator may be looking to cater to this category of investors through a regulated entity, to ensure investor protection and ease-of-doing business.

Another suggestion was to make IAs and RAs responsible for the artificial intelligence (AI) tools through which they provide service to their clients. Kankani said that RAs/IAs may have automated their services through tools and now the regulator is saying that they will be held responsible for the actions of these tools, and that they cannot take a defence that a particular advice was provided by an AI tool and therefore they should not be held responsible for it. It was earlier implied but now expressly provided, he said.

The market regulator has stated that only investment advice related to securities under the purview of Sebi will fall under IA Regulations.

Naveen Fernandes, a certified financial planner, Sebi registered RIA and public interest director and Chairman of BSE Administration and Surveillance Ltd, said that a single regulator, along with an opportunity for RIAs to provide comprehensive financial plans would be best for the consumer.

Fernandes added that he'd like to wait for the final text for clarity, but on the whole, he believes that the note seems positive and in the right direction.

Will few bad apples upset the cart?

On fear that ease of compliance may allow more bad actors into the scene, MMJC and Associates' Joshi pointed out that the monitoring of compliance has been tightened.

He said that annual compliance audit of activities of IA and RA will now be required to be made within 60 days from end of financial year, as against no timeline earlier, and a copy of audit report shall be sent to SEBI/IAASB/RAASB. Joshi added that any adverse finding, if any, along with action taken thereof must be reported within a month.

He said, "Till now a general compliance audit was done certifying overall compliance of regulations and circulars mentioned thereunder now it is stated that compliance with each specific regulation and circulars issued thereunder shall be reported."

Joshi said that the present changes will not only help increase the number of IAs or RAs to cater to needs of the market but also increase accountability of existing IAs and RAs.