SEBI has invited comments to its recently published “Consultation Paper on Amendments to SEBI (Investment Adviser) Regulations 2013”. It is not clear whether the contents of this consultation paper released on the 2nd January 2018 is over and above the contents of the two earlier consultation papers put out on the same subject in October 2016 and June 2017 respectively. Nevertheless we felt it prudent to put our comments to the consultation paper and the same is shared herewith.

Comment 1: In the latest consultation paper, SEBI has gone through the pain of clarifying that there must be a clear segregation of Investment Advisory activity and Distribution activity. They have given detailed ground rules of who the Investment Adviser cannot engage for distribution and execution. While the intent of the paper is well received, the paper runs into the typical problem of becoming rule based rather than principal based. Our response is as follows :

Start with rule that ALL COMMISSION based SELLING be explicitly banned. Bar manufacturers of financial products from giving out commissions to distributors. All confusion is then eliminated. Let distributors explicitly charge clients for their distribution services without giving advise. For example - an online execution platform providing a distribution service akin to a broker who charges the client directly for the execution of the transaction. This is simple and clear – no grey areas and distributors who add value can thrive.

Comment 2 : The paper says that Investment Advisers shall not engage in distribution or execution services of financial products. Our response is as follows :

Investment Advisers must be barred from ALL commission related activity whether the product involved comes under the ambit of SEBI or not. Insurance products for example are riddled with commissions making it a ripe area for conflicts of interest. Currently Investment Advisers can recommend insurance products and collect the embedded commissions with impunity since the products do not fall under SEBI.

Comment 3 : The paper says that Distributors cannot advice but must recommend ‘’’appropriate’’ investments.

Our response is that the term “appropriate” is a grey area. Keep it simple. Allow Distributors to distribute for a fee (which they can charge like a broker to the client directly). Bar Distributors from giving advice. Bar manufacturers from embedding commissions in ALL financial products and leave the fiduciary responsibility to the Investment Adviser. This clearly demarcates who does what and the client is clear what she is paying for.

Comment 4 : Mandate that all financial products MUST have a DIRECT investment route where commissions are not involved and the reduced cost must be accrued to the NAV of the investment vehicle – akin to DIRECT mutual funds. For example currently PMS and AIF investment vehicles do not have this facility. In the absence of this Investment advisers are left in the lurch as to how to provide clients these products.

Comment 5 : Provide a clause for Investment Advisers to undertake discretionary advise. This gives Investment Advisers more teeth. It will enable clients to empanel Investment Advisers who can act on their behalf in a discretionary ADVISORY capacity while the broking, transfer, debit/credit of funds/securities functions continue to be undertaken by the Broker/ RTA. It will smoothen the investment process while keeping fiduciary responsibility with the Investment Adviser. To ensure safety, this clause can be restricted to body corporates with a minimum net-worth.