As per Reg. 22A of the SEBI (Investment Advisors) Regulations, 2013 (“IA Regulations”) . SEBI permits a non-individual Investment Advisors (“IA”) to offer execution services for its advisory clients without getting any commission or brokerage. Currently PML does not charge advisory or execution fees, and intends to avail of reimbursement of services related out-of-pocket expenses such as KYC, PG, Technology hosting, platform maintenance etc. form Asset Management Companies (AMC) whose direct plans they are selling, as PML is bearing the cost that the AMC would have borne in case the investments were directly routed through them. SEBI may clarify that this is not in violation of the aforesaid regulation.
Regulation 22A (3) of IA Regulations restricts the registered IA or its group or family to charge any implementation fees from its client. Further, Regulation 22A (1) states that IAs cannot receive any consideration, by whatever name called and whether directly or indirectly, at the IA’s group or family level for the said implementation service given.
In the view of the above, PML cannot avail reimbursement of any amount for the services given to its clients, from the Asset Management Companies whose direct plans are being sold by them to clients.
As per Reg. 19 (1)(d) of the IA Regulations and Point 2(ii) of SEBI Circular dated September 23, 2020 there has to be a mandatory agreement between IA and customers. SEBI may please clarify on whether PML can seek electronic consent of the clients on all the points mentioned in Annexure A of the circular and share the same with the clients on their registered email address for their records and reference. It would not only save expenses, it would also expedite the entire process. PML would maintain all the records in this regard.
As per Reg. 19 (1)(d) of the IA Regulations and the SEBI Circular dated September 23, 2020 SEBI/HOI/IMD/DF1/CIR/P/2020/182, an IA is required to enter into an investment advisory agreement with its clients which cover mandatory terms and conditions as per the specified format and maintain copies of the same. Further, the IA’s are required to ensure that neither any investment advice is rendered nor any fees is charged until the client has signed the aforesaid agreement and has been provided a copy of the signed agreement. In this regard it is envisaged that a registered IA shall not render any investment advice until consent is received from its clients on the terms and conditions. Further, in order to ensure enforceability, an agreement was mandated between IA and client incorporating the terms and conditions in the document as specified by the SEBI.
Considering the same, it is stated that merely seeking an electronic consent and sharing the same with the clients on their registered email address may not be considered as sufficient compliance with IA Regulations and circular.
Principal officer has been defined as per Reg 2(1)(s) of the SEBI (Investment Advisors) Regulations, 2013. In this regard , PML have requested SEBI to define as what would be considered as, equivalent management body who is responsible for the overall function of the business and operations, whether a committee appointed by PML to oversee the advisory functions and operations can be considered as a management body and a member of the said committee can be appointed as a Principal Officer . Whether the Department Head in charge of Advisory business who is a member of the management advisory committee appointed by the board can be appointed as Principal officer as such a person would be responsible for the overall function of the advisory business.
Regulation 2(1)(s) of IA regulations defines the term “Principal Officer ” as under :
“principal officer” shall mean the managing director or designated director or managing partner or executive chairman of the board (or equivalent management body) who is responsible for the overall function of the business and operations of non-individual investment adviser. In terms of the definition of Principal Officer (PO) under the IA Regulations, only a person who is the managing director or designated director or managing partner or executive chairman of the Board or equivalent management body of the IA can be appointed as a PO.
Thus, Regulations mandates the head / member of the Board of directors of a corporate IA to be responsible for the functions of the business and operations of the IA. In the context of the use of the term “equivalent management body” , the same is understood to be in respect non- individual IAs other than a company, such as a Limited Liability Partnership which do not have Board of directors. In such instances, the Executive Chairman of the aforesaid equivalent management body can be the Principal Officer for the IA.
In view of the above, a member of committee (including Department Head in charge of Advisory business) appointed by the board of IA to oversee the advisory functions and operations cannot be the Principal Officer of the IA , unless he is also managing director or designated director or managing partner or executive chairman of the Board or equivalent management body of the IA.
The informal guidance can be accessed here.
Note – emphasis added.