In an effort to strengthen investor safety and guarantee transparency, markets watchdog Sebi announced that it has released recommendations on the regulatory framework for investment advisers and research analysts. Following the regulator's notification of the investment adviser (IA) and research analyst (RA) rules in December of last year, these recommendations were released.
Qualification requirements, fee schedules, deposit requirements, and client segregation procedures are all covered under the new guidelines.
New compliance requirements were implemented by the government, especially for organizations that use artificial intelligence (AI) tools in their operations.
Sebi stated that under the updated framework, research analysts must keep a deposit that varies according to the number of clients they serve, from Rs 1 lakh for up to 150 clients to Rs 10 lakh for more than 1,000 clients.
The purpose of these deposits is to give investors more security.
Additionally, a graded deposit system linked to client numbers must be followed by investment advisers.
New applicants must conform to the deposit requirements immediately, while current IAs must do so by June 30, 2025. In two different circulars, Sebi stated that all research analysts must fulfill the deposit requirements by April 30, 2025.
Furthermore, as long as their advisory and research services are clearly separate, the markets watchdog has allowed people and organizations to have dual registrations as RAs and IAs.
According to Sebi, these organizations have to follow different compliance frameworks for every function. To avoid conflicts of interest, client-level segregation must be maintained by both RAs and IAs. Distribution services are not available to clients receiving advisory services from an organization, and vice versa.
Due to the increasing use of AI in financial services, Sebi has placed strict requirements on RAs and IAs to make use of these capabilities. In addition to guaranteeing data security and adherence to relevant regulations, entities must reveal the degree of AI use in their products.
The regulator also required thorough disclosures of terms and conditions for advising and research services, including fee schedules and declarations of conflicts of interest.
Additionally, yearly compliance audits are required of RAs and IAs, who then report to the appropriate regulatory organizations, the Investment Adviser Administration and regulatory Body (IAASB) and the Research Analyst Administration and Supervisory Body (RAASB), respectively.
In addition to corrective measures, any negative results must be posted on their websites.
Additionally, these organizations must have a working website, comprising required disclosures and guaranteeing all clients' KYC compliance.
As long as their principal employment do not clash with the market regulations, professionals such as teachers, architects, and lawyers are permitted to register as part-time RAs and IAs under the guidelines.
However, these persons will not be eligible for registration if they engage in advisory activities, such as offering advice, recommendations, or claims regarding securities, without first registering with or being authorized by the Sebi.
The new regulations from the markets watchdog also apply to RAs' suggestions for model portfolios, requiring thorough reporting with benchmarking, risk disclosures, and justification.
Investment advisors who offer financial planning services for products that are not subject to Sebi regulation are required to obtain client declarations recognizing the lax regulatory scrutiny.
