Coming down hard on fraudulent investment advisers, regulator Sebi on Friday proposed to ban unauthorised trading tips through SMSes, WhatsApp, Twitter, Facebook and other social media platforms, as also games, competitions and leagues relating to securities market.
Proposing an overhaul of regulations governing investment advisors, Sebi also proposed to curb unsolicited investment advice and promotion of investment products through electronic and broadcasting media platforms and has sought greater checks and balances for online investment advisory services and use of automation or robotic tools.
In a detailed consultation paper, Sebi also proposed to ban ‘free trial’ offers by investment advisors for their prospective clients and sought to make it mandatory for even registered research analysts to provide their research reports for all class of investors at the same time.
The proposal for wide-ranging changes to existing rules follow mushrooming of several unauthorised entities luring gullible investors through their trading tips — including through bulk SMSes, WhatsApp, Facebook, Twitter, email, blogs and various other internet and mobile-based platforms — while a number of trading leagues have also come up in recent past.
Sebi has also proposed a detailed ‘advertisement code’ for those providing investment advice to check misleading advertisements promising unrealistic returns in the securities market or to influence people’s investment decisions, as also for those organising schemes, competitions, games and leagues on securities or related to securities market.
Some of these trading leagues are backed by Bollywood celebrities and others, but are facing the regulatory heat as they are not registered under relevant Sebi regulations. In the consultation paper, on which Sebi has sought comments from the general public and all stakeholders till November 4, Sebi has also proposed a re-look on the exemption from registration as an investment adviser, provided to mutual fund distributors and other registered market intermediaries.
Besides, banks, NBFCs and various corporate bodies would have to set up a separate subsidiary for investment advisory services. Under current rules, such services can be provided through a separate division or department.
Sebi has proposed a time period of three years for existing entities offering investment advisory services through separate department or division to set up a separate subsidiary. Similar time period can be provided to the mutual fund distributors and other registered market entities currently exempted from registration as investment advisors.
These proposals, which were approved by the Sebi board last month, are aimed at having “uniform standards” and addressing the gaps or overlaps in legal or regulatory standards governing all the intermediaries or persons engaged in providing investment advisory services. The watchdog would make efforts to provide more clarity about the activities carried out by investment advisers and research analysts.
In order to clearly define the terms and conditions of service, Sebi has proposed that an investment adviser would have at least two days prior to onboarding the clients to provide ‘Rights and Obligations’ document to them. The document would state the inter se relationship and terms and conditions of investment advisory services offered, which would be binding on investment adviser and its clients.
The investment adviser would have to provide the client with the relevant contact details of the designated person who is responsible for dispute resolution, as per the draft paper. Sebi has proposed that assessment of risk profile and suitability of the advice being provided is mandatory for individual investors.
For non-institutional investors, risk profiling and suitability of the advice being provided would be mandatory only when the investment advice is related to complex financial products such as investment in derivatives. In order to provide clarity in respect of compliance audit requirement, Sebi has proposed that the compliance audit would be completed within three months after the end of financial year and adverse observances or comments, if any, would be brought to the notice of the markets regulator.
It is proposed that an investment adviser would accept fees strictly by account payee crossed cheque, demand draft or by way of direct credit into the bank account allowed by RBI. The regulator had notified the Sebi (Investment Advisers) Regulations, 2013 in January that year. Under those norms, exemption from registration as an investment adviser were provided for certain entities who were providing investment advice as an incidental activity to their primary business.
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