New Guidelines for Research Analysts and Investment Advisers
The Securities and Exchange Board of India (SEBI) has introduced new guidelines aimed at enhancing investor protection and ensuring transparency in the financial advisory sector. These guidelines, announced on Wednesday, follow the notification of research analyst (RA) rules and investment adviser (IA) norms in December of the previous year. The updated framework is designed to address the evolving landscape of financial services, particularly with the increasing use of technology and artificial intelligence (AI) in investment advice.
Strengthening Investor Protection
The new guidelines set forth by SEBI include a comprehensive regulatory framework for research analysts and investment advisers. One of the key components is the introduction of qualification standards and fee structures. These measures are intended to ensure that both RAs and IAs meet specific educational and professional criteria before offering their services. Additionally, the guidelines mandate that these professionals maintain a deposit based on their client base. For instance, RAs must hold a deposit ranging from ₹1 lakh for up to 150 clients to ₹10 lakh for over 1,000 clients. This deposit acts as a security measure for investors, providing them with an added layer of protection.
Investment advisers are also required to follow a graded deposit system linked to the number of clients they serve. Existing IAs must comply with these deposit requirements by June 30, 2025, while new applicants must adhere to them immediately. Similarly, all research analysts must meet the deposit requirements by April 30, 2025. These measures aim to enhance accountability and ensure that advisers have a vested interest in the well-being of their clients.
Compliance and Transparency in Advisory Services
In an effort to promote transparency, SEBI has introduced stringent compliance mandates for entities utilizing AI tools in their advisory services. These entities must disclose the extent of AI usage in their offerings and ensure that they adhere to data security protocols. This requirement is particularly relevant as the financial services sector increasingly adopts AI technologies to enhance decision-making and client engagement.
Moreover, both RAs and IAs are now required to provide detailed disclosures regarding their terms and conditions, including fee structures and conflict-of-interest declarations. This transparency is crucial for clients to make informed decisions about the services they choose. Additionally, the guidelines mandate that RAs and IAs conduct annual compliance audits, submitting reports to their respective supervisory bodies. Any adverse findings from these audits must be published on their websites, along with corrective actions taken. This level of accountability is expected to foster trust between clients and their advisers.
Dual Registrations and Client Segregation
The new guidelines also allow individuals and entities to hold dual registrations as research analysts and investment advisers, provided they maintain clear segregation between their advisory and research services. This flexibility enables professionals to offer a broader range of services while ensuring that clients receive unbiased advice. However, these entities must adhere to separate compliance frameworks for each function to prevent conflicts of interest.
Client-level segregation is another critical aspect of the guidelines. Clients availing advisory services from an entity cannot access distribution services within the same group, and vice versa. This measure is designed to eliminate potential conflicts of interest and ensure that clients receive impartial advice tailored to their financial goals.
Provisions for Part-Time Advisers and Model Portfolios
The guidelines also introduce provisions for part-time research analysts and investment advisers. Professionals such as teachers, architects, and lawyers can register as RAs or IAs, provided their primary occupations do not conflict with market rules. However, individuals involved in advisory activities without proper registration will remain ineligible for registration.
Additionally, the guidelines extend to model portfolio recommendations made by RAs. These analysts must provide detailed reports that include benchmarking, risk disclosures, and rationale for their recommendations. Investment advisers offering financial planning services that cover non-SEBI regulated products must secure client declarations acknowledging the limited regulatory oversight. This ensures that clients are aware of the risks associated with such products.
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