Sebi regulations finally amended to restrict association of registered entities with unregistered advisors

Besides transfer of money, the definition of "association" includes referral of a client, interaction of information technology systems, and any other association of a similar nature or character.

Regulations governing registered intermediaries in the capital markets have finally been amended to restrict registered/regulated intermediaries' association with unregistered entities who directly or indirectly give investment advice.

The definition of association covers "referral of a client", which was a big source of revenue for finfluencers and a significant source of new clientele for big brokers.

The amended regulations also restrict the association with entities who make any claims about returns or performance unless the entities are permitted to do so by the regulator. The new  regulations also ask registered entities to ensure that their associated persons are in compliance.

The Securities and Exchange Board of India (Sebi) had been given the clearance for this by its Board in their June 27 meeting. The regulator announced the amendment through a gazette notification on August 26 and through a public notice on its website on August 29.

Also read: Jainam Broking's APs found to be using 'wealth', 'advisory' in names; Sebi fines Rs 6 lakh

Under the new Sebi (Intermediaries) Regulations, regulated entities or its agents cannot have direct or indirect association with another unregulated person who provides investment advice or with any entity (registered or otherwise) to make claims about performance explicitly or impliedly unless this other entity is permitted by Sebi to make such claims.

Regulated entities include entities registered with Sebi under Section 12 of the Sebi Act such as stock brokers and merchant bankers, asset management companies, investment managers and managers of real-estate investment trust (REITs).

Besides transfer of money, the definition of "association" includes referral of a client, interaction of information technology systems, and any other association of a similar nature or character.

Two exceptions have been given in the new regulations. One is that registered entities are allowed to associate with unregistered entities if the association is through a platform which is "specified" by Sebi and which has mechanisms in place to take preventive and curative actions, to ensure that the platform is not being used for the providing unregistered advisory or giving assurances on performance without permission.

The second exception is for associating with people who are engaged only in investor education, provided that such a person/people do not indulge in providing unregistered advisory services or making assurances of performance without permission.

On the digital platform

At a conference conducted by FICCI on August 2, Sebi's Whole-Time Member Kamlesh Varshney had said that any of the commonly used digital platforms could soon be notified as the one through which registered entities can associate with unregistered entities.

He had said that the market regulator had already seen success by collaborating with a few platforms, who had the ability to detect and take down content that is in violation of the Sebi regulations.

"Some of the digital platforms have said that they have the capability to identify such content... if we say that these platforms have the ability, then you (as a registered entity) won't have a problem associating with such platforms," he said.