SEBI amends and modernizes the Investment Adviser Regulations

Securities and Exchange Board of India (“SEBI”) has notified the Securities and Exchange Board of India (investment advisers) (second amendment) regulations, 2024 (“Amendment”) on December 16, 2024. The Amendment introduces changes to the definitions, operational guidelines, qualification requirements and the responsibilities of an Investment Adviser (“IA”) under the Securities and Exchange Board of India (Investment Advisers) Regulations, 2013 (“IA Regulations”).

The following are the salient features of the Amendment and an analysis of how they affect the IA regulations:

• Introduction of Part Time Investment Advisers (“PTIA”): A new category, “part-time investment advisers” has been introduced, allowing professionals to register as advisers while engaging in other non-conflicting activities. PTIAs are permitted to offer their services to a maximum of 75 clients at a time. PTIAs must explicitly disclose their part-time status to their clients to ensure there’s transparency with respect to their availability and focus. PTIAs have the same qualification and certification standards and requirements as full-time advisers, as well as obligations with respect to risk profiling, conflict of interest disclosures, fiduciary responsibilities, etc. under the IA Regulations.
• Modifications to certain definitions:
  • “Investment Adviser”: The definition now includes PTIAs, and firms engaged in dual professional roles, thereby acknowledging diverse business models in the IA industry.
  • Phrases like “investment products” have been omitted from clauses where they provided no significant clarity or purpose, streamlining the language of the IA Regulations.
  • The term “reading calls” is excluded from the definition of ‘investment advice’. This ensures that certain general commentary or non-specific advice does not require registration as an IA.
• Artificial Intelligence (“AI”) usage disclosures: IAs are now mandated to disclose to their clients, the extent and manner of AI usage in their advisory operations. This includes transparency in how AI tools are used to process client data or generate investment advice. IAs are fully accountable for AI generated advice and must ensure compliance with all applicable data privacy and security laws relating to such advice. They must also protect client data from tampering and misuse, regardless of the level of automation or AI reliance.
• Principal Officer (“PO”) and Governance Requirements: The PO is defined as the individual responsible for the overall business operations of the advisory entity. For non-individual advisers, this includes the managing director, managing partner, or an equivalent senior executive. POs are responsible for ensuring compliance with the IA Regulations, including qualification and certification standards, and overseeing the firm’s IA operations. To ensure regulatory accountability and oversight within the domestic framework, foreign entities providing IA services in India must appoint a PO who is based in India. The Amendment requires the firms offering both advisory and other financial services to segregate their operations and their respective POs must ensure that conflicts of interest are managed and disclosed transparently.
• Deposit Requirements: IAs are now mandated to maintain deposits with SEBI-recognized banks. These deposits are required to be marked in favour of oversight entities designated for supervising and enforcing compliance within the IA industry. These deposits can be used to cover penalties or settle disputes arising from advisory services, ensuring that clients are not left uncompensated in cases of non-compliance or grievances. These funds also act as a safeguard for SEBI to enforce adherence to regulatory norms. The Amendment does not provide for an exact amount for the deposit, The deposit amount varies depending on the size and nature of the advisory entity, ensuring proportionality to their operational scale and risk exposure.

• The introduction of the concept of PTIA opens the doors for professionals, such as accountants, lawyers, or other domain experts, to offer investment advice without committing full-time to the field. This could democratize access to advisory services, especially in underserved markets, by allowing knowledgeable individuals to participate with flexibility. However, the part-time designation may raise concerns about the depth of focus and dedication these advisers can provide to their clients. Further, managing dual roles may lead to potential conflicts of interest.
• The new mandatory deposit serves as a financial buffer, ensuring that clients have recourse in case of disputes or violation. It also acts as an additional mechanism to ensure compliance by directly linking financial consequences to regulatory breaches. The burden of such a mandatory deposit is going to be faced primarily by small-scale advisers with limited resources, potentially driving some of them out of the market.
• SEBI’s focus on AI reflects its commitment to addressing the increasing integration of advanced technologies in financial services. Transparency in AI usage will build client trust, particularly in light of growing concerns around data privacy and automated decision-making. However, holding IAs solely accountable for AI-related compliance could discourage the adoption of innovative technologies, especially for smaller firms with limited resources to invest in secure AI infrastructure.

We trust you will find this an interesting read. For any queries or comments on this update, please feel free to contact us at insights@elp-in.com or write to our authors:

Vinod Joseph, Partner – Email – vinodjoseph@elp-in.com;   

 Zaynali Badami, Advocate – Email –  zaynalibadami@elp-in.com

Akhil Ganatra, Advocate – Email – akhilganatra@elp-in.com