compliance simplified

Informal Guidance – Guardian Capital

SEBI/HO/IMD/DF1/OW/P/2022/21437/1                 May 20, 2022

 

Queries

(1) (a)

SEBI Provision: Any portion of AUA held by the client held under any pre existing distribution arrangement with any entity shall be deducted from the AUA for the purpose of charging fees by the IA [SEBI Circular September 23, 2020 – Clause (2) (iii) (A) (c)]

 

Before the change in regulations, if there were both financial planning and distribution clients being managed by the RIA under the regular mode of MF Investments, then as per the new regulations, all those wishing to continue financial planning were to be moved to direct mode of MF before April 1, 2021.

(i) If a distribution client in the future (post April 1, 2021) wants to also get financial planning advice from us and wants to move to an Advisory arrangement, are we allowed to do that?

(ii) In that case, additional money invested by the client will be in direct mode while the older investments will continue to be as the pre-existing distribution arrangement. Please let us know if that is allowed?”

 

 

(b) SEBI Provision – IA shall, where ever applicable, advice direct plans (non commission based) on products only. [SEBI Circular September 23, 2020 – Clause (2) (i) (h)]

 

Given the current interest rate scenario, we find that Fixed Deposits (FDs) of certain banks and NBFCs offer better interest rates as compared to debt based MFs. They make better investment recommendations for clients looking for debt investments, But currently no such FDs are available in regular mode of investing. 

In this scenario, it makes more sense for us to advice FDs with the regular mode of investment so that the client of not charged excessively (as there is no option of lower direct fees being charged by the bank / NBFC).

Our question is – “For such products, can we advice an advisory client with regular mode and earn commission from the product manufacturer, as that is more favourable to the client?”

 

(c) SEBI Provision – “IA shall charge fees from a client under any one mode i.e. (A) or (B) on an annual basis. The change of mode shall be effected only after 12 months of onboarding / last change of mode” [SEBI Circular September 23, 2020 – Clause (2) (iii) (B) (b)]

Our question is – “that in case add on services are provided to clients (for example tax filing, expense management services, etc. provided by the RIA) can a separate fixed fee be charged for the same along with the AUA based fee being charged for investment advisory?”

 

also additionally – “for a distribution client, can we provide advisory services such as financial planning and not charge them? Example taxes, financial plans” 

 

SEBI Responses

(1) With respect to queries (1) (a) and (b) the following is informed:

(i) Regulation 22 of the SEBI (Investment Advisers) Regulations 2013 (the IA Regulations) states as under – 

     22 (3) A non-individual investment adviser shall have client level segregation at group level for investment advisory         and distribution services. 

     Explanation. — 

     (i) The same client cannot be offered both advisory and distribution services within the group of the non-individual           entity. 

     (ii) A client can either be an advisory client where no distributor consideration is received at the group level or                 distribution services client where no advisory fee is collected from the client at the group level.

(ii) Further, relevant provisions of the SEBI Circular dated September 23, 2020 states as under: 

     (a) Existing clients, who wish to take advisory services, will not be eligible for availing distribution services within the       group/family of IA. Similarly, existing clients who wish to take distribution services will not be eligible for availing             advisory services within the group/family of IA. 

     (b) A new client will be eligible to avail either advisory or distribution services within the group/family of IA. However,       the option to avail either advisory services or distribution services shall be made available to such client at the time of       on boarding. 

     (c) Client under these guidelines shall include individual client or non-individual client.

     (d) The client shall have discretion to continue holding assets prior to the applicability of this segregation under the           existing advisory/distribution arrangement. However, the client shall not be forced to liquidate/switch such existing           holdings.

(iii) Thus, in terms of the IA Regulations, it is mandatory for the non individual investment adviser (the “IA”) to maintain a client level segregation and the same client cannot be offered both advisory and distribution services within the group of non individual IA in view of Regulation 22 (3) of the IA Regulations. Further, clients shall have the discretion to continue to hold assets prior to the applicability of the aforesaid provision, under the existing advisory / distribution arrangement with the IA.

 

(2) With regard to query at (1) (b), in view  the SEBI Circular dated September 23, 2020 which, inter alia states that, “IA shall, wherever available, advice direct plans (non-commission based) of products only.”, it is informed that the extant provisions envisage IAs advising its clients only in direct plans on products and not on regular mode. Thus, you may advise your clients only in respect of products where direct plans are available.

 

(3) With regards to query (1) (c) (i) & (ii) , the following is informed – 

(i) with regard to query (1) (c) (i), while you have quoted Clause (2) (iii) (B) (b) of the SEBI Circular dated September 23, 2020 which mentions that an IA can charge fee from a client in either AUA mode or fixed fee mode, your query does not pertain to the same. Thus, you have not cited the correct legal provision for interpretation purposes. Therefore the same is not addressed in view of guideline 8 (iv) of SEBI (Informal Guidance) Scheme, 2003.

 

(ii) with regard to query (1) (c) (ii), as per the IA Regulations and circular dated September 23, 2020, an IA is required to ensure clear segregation of advisory and distribution clients. Thus, a client can be provided either of advisory or distribution services by the IA.