Investment advisors say advertisement code restrictive, seek clarity on key aspects

Investment advisor regulation

The recent code of advertisements for investment advisers (IAs), which mandates getting prior approval for each communication, internal or external, to be issued, is “restrictive” and may lead to a higher cost and compliance burden, experts said.

The Securities and Exchange Board of India (SEBI) implemented the new code on May 1 to strengthen the conduct of IAs issuing advertisements. IAs provide investment advisory services to clients, including individuals and institutions, based on a fee structure.

While the regulations keep investor interest in mind, experts said there are grey areas where more clarity is needed. Further, they expect the regulator to provide relief on some aspects.

What’s the advertisement code?

SEBI has appointed BSE Administration and Supervision Ltd. (BASL) as the supervisory body. IAs now have to get prior approval from BASL for any form of advertisements or publications.

According to the FAQs issued by BASL, advertisements are defined as all forms of communication issued by or on behalf of or in relation to IAs that may influence investment decisions of any investor or prospective investors.

They include internal communications to registered clients that may influence investment decisions. Notably, the approval is valid for 180 days, after which the IA would need to again seek approval from the supervisory body.

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There are charges to be paid for seeking approval. Individual and sole proprietary IAs would need to pay Rs 3,000 as processing charges, partnerships would have to pay Rs 4,500, and body corporates (including LLPs) Rs 6,000, plus taxes.

To be sure, wishes or greetings on events or festivals as well as educational content are exempted from this rule.

Key concerns

The way advertisements have been defined is actually quite restrictive, said Suresh Sadagopan, managing director of Ladder7 Wealth Planners, who has been a financial advisor since 2004.

“If I am advertising my product or trying to bring clients through a mass medium, if that is going to be termed advertisement, nobody's going to object to that,” he said. “But it becomes a problem if any communication, even one-to-one, to a prospective/existing client on services we render, brochures which talk about our services (not products/returns), our website, where I am giving out information about our firm, our philosophy, services etc, without any mention of returns, is seen as an advertisement and requires approval. If that is also going to be treated as part of advertisement, then it becomes very difficult to handle.”

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Then there is the cost issue. According to experts, an IA can seek approval for up to three documents in a single application after paying the processing charges. A corporate IA would have to pay Rs 48,000 to get approval for its website of 24 pages. Plus, it would need to pay additional amounts for brochures, mails or pamphlets that it wants to issue.

Also, this would be a recurring cost because the approval is valid for 180 days, after which IAs would have to apply again.

“So today I'm paying roughly about Rs 1 lakh per annum in terms of fee to SEBI for IA registration. After the new advertisement code, the cost suddenly shoots up as we need to pay for each document approval. This cost would have to be ultimately passed on to the clients, justifying which may be difficult,” Sadagopan said.

To say or not to say

Another area of concern is what is permissible under the new advertising code. As per regulations, IAs can provide commentary, views or advice on the general investment process. They can share views on a mutual fund category, portfolio allocation, financial planning and asset allocation.

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But when it comes to specific stock tips, mutual fund schemes or insurance products, IAs would need prior approval from BASL, which means delays in relaying much-needed information to existing or prospective clients.

One SEBI-registered IA has stopped talking to the media or giving interviews because it’s not clear what IAs are allowed to say without prior approval.

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“We keep giving quotes to the media and there are articles as well as interviews. We don't know what is permitted or not, so we have put everything on hold as of now. The second thing is regarding the website – do we have to get the whole website approved? We have so many articles put up there over many years. Is there a grandfather clause? We need to have clarifications on these aspects,” the IA told Moneycontrol on condition of anonymity.

Sadagopan, too, has stopped talking on specific products until there is clarity on the matter.

What IAs want

To be sure, there is an advertisement code for other intermediaries and other financial market players such as mutual funds and stockbrokers. According to Vishal Dhawan, founder of Plan Ahead Wealth Advisors, to that extent, it is not a unique thing for IAs.

“Unlike the broker code, which specifically exempts communication to existing clients on their registered email IDs and phone numbers, our code does not have a clause to that extent, and therefore, that is something that the Association of Registered Investment Advisors (ARIA) has actually asked for clarification,” said Dhawan, who is also a board member of ARIA.

There are two elements of advertising approval – cost and time. They hope for relief from recurring charges on content that’s already been approved and for shorter approval timelines.

Then, there is also the issue of advertisements being checked.

“We should not be asked to get the advertisement vetted by somebody, we should be allowed to follow the laid-down code of conduct for advertisements, and if there's any transgression, then the regulator can step in and ask for an explanation or take action. This is what is happening in all other aspects of IA regulation. Why should it be different in this case?” said Sadagopan.

While IAs believe the new advertising code is here to stay, there must be some relaxations to ease the burden on them.

According to experts, IAs are bracing for delays in getting approvals in the initial stages as the supervisory body itself is looking at how to streamline the process. At the same time, the long-term plan by the body is to approve applications in about 48 hours, said experts.