Sebi allows exchanges to regulate registered investment advisers

Advisors say move can help curb mis-selling through stock tips
The Securities and Exchange Board of India (Sebi) has allowed stock exchanges to set up subsidiaries to regulate registered investment advisors (RIAs). The market regulator in a circular said the decision was taken considering the growing number of RIAs, which numbered 1,136 as on March 19, 2019.

Existing RIAs say the move could help control the misuse of the RIA model by stock tippers, as there have been a number of cases where clients have been charged exorbitant fees and promised unrealistic gains from stock tips.

“This move has primarily come because of tip-based mis-selling. This is a good move for genuine RIAs, as those misleading clients will now be under tighter scrutiny,” said Tarun Birani, founder of TBNG Capital Advisors. “Roping in an exchange will help, as it was not possible for Sebi alone to control these malpractices on a day-to-day basis,” he added.

Industry participants say they’d need more clarity on whether the exchange’s regulatory role would be restricted to controlling stock-tip mis-selling or if it would also include other aspects of the RIA business.
“Exchanges are transaction-focused organisations, which are well-equipped to handle very high quantity of transactions. Their functions are not advise-based,” said Suresh Sadagopan, founder and principal planner at Ladder7 Financial Advisories.

Advisors say their business is not transaction-based, but fee-based. So, an exchange-backed body might not fully understand the various aspects of the RIA model. They say Sebi’s proposed norms have also been found wanting in covering the nuances of financial planning and the related fee structures.


In a consultation paper, Sebi had proposed two options for RIAs: Either they charge a maximum fixed fee of Rs 75,000 “per family across all schemes/products/services provided”, or they charge a maximum of 2.5 per cent of assets under advisory through a variable-fee model. RIAs say the proposed norms don’t take into account that several players operate on a hybrid model.

It was also proposed that RIAs could charge advance fee for up to two quarters.

“The proposed norms seem to have assumed that RIAs will have clients on an ongoing basis. A lot of clients come for a specific engagement, make their payment and then there is no further engagement,” an RIA said.
The stock exchanges will have 30 days to send in their bids to Sebi, explaining how they will be able to discharge the responsibilities and put in place the requisite systems.

The responsibilities of the regulatory body would include supervision of RIAs both on-site and offsite, grievance redressal of clients and IAs, administrative action that would include issuing warning and referring to Sebi for enforcement action, monitoring activities and maintaining a database of RIAs, obtaining and submitting periodic reports.

Stock exchanges with a minimum existence of 15 years, net worth of Rs 200 crore, nationwide terminals with investor grievance mechanism, including arbitration and investor service centres in at least 20 cities, can bid for the proposed regulatory body.

Advisors say that putting experienced RIAs on the board of the body would ensure that their interests are represented. “We need to see how many takers there are for the proposed regulatory body,” said an advisor. 

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